-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AEpqS/v+fr3/HWN/66oE4sFQzlAGPjKCZQgQYV3blfiDDZsRk657uKq+AuZrRtTL n5BKhmNWJOBxTOVBSLMQmw== 0000950153-96-000413.txt : 19960625 0000950153-96-000413.hdr.sgml : 19960625 ACCESSION NUMBER: 0000950153-96-000413 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 54 FILED AS OF DATE: 19960624 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JT STORAGE INC CENTRAL INDEX KEY: 0000941167 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-06643 FILM NUMBER: 96584297 BUSINESS ADDRESS: STREET 1: 166 BAYPOINTE PAEKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4084681800 S-4 1 FORM S-4 REGISTRATION STATEMENT 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ JTS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3573 77-0364572 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) ORGANIZATION)
166 Baypointe Parkway, San Jose, CA 95134, Telephone: (408) 468-1800 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DAVID T. MITCHELL Chief Executive Officer JTS Corporation 166 Baypointe Parkway, San Jose, CA 95134, (408) 468-1800 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------ With Copies to: JEFFREY D. SAPER, ESQ. ANDREI M. MANOLIU, ESQ. J. ROBERT SUFFOLETTA, ESQ. MATTHEW W. SONSINI, ESQ. Wilson Sonsini Goodrich & Rosati, P.C. Cooley Godward Castro Huddleson & Tatum 650 Page Mill Road Five Palo Alto Square Palo Alto, California 94304 Palo Alto, California 94306
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The proposed sale will take place upon the merger (the "Merger") of Atari Corporation, a Nevada Corporation ("Atari"), with and into JTS Corporation (the "Registrant"). If any of the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE - --------------------------------------------------------------------------------------------------- Common Stock, $.001 par value............ 63,735,718 Shares(1) $6.46875 $412,290,425 $142,170(2)
- -------------------------------------------------------------------------------- (1) Represents the estimated maximum number of shares of the Common Stock of the Registrant which may be issued to former stockholders of Atari pursuant to the Merger described herein. (2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f) under the Securities Act of 1933, as amended, on the basis of the market value of Atari Common Stock to be received by the Registrant in the proposed merger, calculated in accordance with Rule 457(f) on the basis of the average of the high and low sales prices reported for such securities by the American Stock Exchange on June 17, 1996. ------------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 JTS CORPORATION CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS - ------------------------------------------------- -------------------------------------------- (Information about the Transaction) 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus.... Facing Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus................................ Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information............. Summary; Risk Factors; Introduction 4. Terms of the Transaction.................... Summary; Introduction; The Proposed Merger and Related Transactions; Description of Capital Stock of Atari and JTS; Comparison of Rights of Stockholders of Atari and JTS 5. Pro Forma Financial Information............. Unaudited Pro Forma Condensed Combined Financial Information 6. Material Contacts with the Company being Acquired.................................. The Proposed Merger and Related Transactions 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters........................ Not Applicable 8. Interests of Named Experts and Counsel...... Legal Matters; Experts 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... Not Applicable (Information about the Registrant) 10. Information with Respect to S-3 Registrants............................... Not Applicable 11. Incorporation of Certain Information by Reference................................. Not Applicable 12. Information with Respect to S-2 or S-3 Registrants............................... Not Applicable 13. Incorporation of Certain Information by Reference................................. Not Applicable 14. Information with Respect to Registrants other than S-2 or S-3 Registrants......... Summary; Risk Factors; Introduction; Voting and Proxies; The Proposed Merger and Related Transactions; Stock Price and Dividend Information; Unaudited Pro Forma Condensed Combined Financial Statements; Information Regarding JTS Corporation; Description of Capital Stock of Atari and JTS; Index to Financial Statements
3
FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS - ------------------------------------------------- -------------------------------------------- (Information about the Company being Acquired) 15. Information with Respect to S-3 Companies... Summary; Risk Factors; Introduction; Voting and Proxies; The Proposed Merger and Related Transactions; Stock Price and Dividend Information; Unaudited Pro Forma Condensed Combined Financial Statements; Information Regarding Atari; Description of Capital Stock of Atari and JTS; Index to Financial Statements 16. Information with Respect to S-2 or S-3 Companies................................. Not Applicable 17. Information with Respect to Companies other than S-2 or S-3 Companies................. Not Applicable (Voting and Management Information) 18. Information, if Proxies, Consents or Authorizations are to be Solicited........ Summary; Introduction; Voting and Proxies, The Proposed Merger and Related Transactions; Information Regarding Atari Corporation; Information Regarding JTS Corporation; Description of Capital Stock of Atari and JTS. 19. Information, if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer...................... Not Applicable
4 ATARI CORPORATION 455 SOUTH MATHILDA AVENUE SUNNYVALE, CALIFORNIA 94086 (408) 328-0900 Dear Stockholder: A Special Meeting of Stockholders (the "Special Meeting") of Atari Corporation ("Atari") will be held at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari, on Thursday, July , 1996, at 9:00 a.m. At the Special Meeting, you will be asked to consider and vote upon the approval of an Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 (the "Merger Agreement"), between Atari and JTS Corporation ("JTS") and the merger of Atari with and into JTS (the "Merger"). Pursuant to the Merger Agreement, upon consummation of the Merger, all outstanding shares of Atari Common Stock will be converted into an aggregate of 63,735,718 shares of JTS Common Stock and all outstanding options to acquire Atari Common Stock will become options to acquire JTS Common Stock. Following consummation of the Merger (assuming no exercise of outstanding options to purchase Atari Common Stock or JTS Common Stock after May 22, 1996), Atari stockholders immediately prior to the Merger will hold approximately 62% of the outstanding capital stock of JTS. Atari's Board of Directors has unanimously approved the Merger and the Merger Agreement and has determined that they are fair to, and in the best interests of, Atari and its stockholders. The Board of Directors recommends a vote FOR the Merger and the Merger Agreement. In the material accompanying this letter, you will find a Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken at the Special Meeting and a proxy card. The Joint Proxy Statement/Prospectus provides more detailed information regarding the proposed Merger and related matters, includes information about Atari and JTS and discusses the Board's reasons for recommending the Merger. ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL MEETING. June , 1996 Sincerely, Sam Tramiel President 5 ATARI CORPORATION 455 SOUTH MATHILDA AVENUE SUNNYVALE, CALIFORNIA 94086 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY , 1996 To the Stockholders of Atari Corporation: NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special Meeting") of Atari Corporation, a Nevada corporation ("Atari"), will be held on Thursday, July , 1996, at 9:00 a.m. at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari. A Proxy Card and Joint Proxy Statement/Prospectus for the Special Meeting are enclosed. The Special Meeting is for the purpose of considering and acting upon: 1. A proposal to approve (a) the Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 (the "Merger Agreement") between Atari and JTS Corporation, a Delaware corporation ("JTS"), and (b) the merger of Atari with and into JTS (the "Merger"). Pursuant to the terms of the Merger Agreement, each outstanding share of Atari Common Stock will be converted into one share of JTS Common Stock, and each outstanding option to acquire Atari Common Stock will become an option to acquire JTS Common Stock. 2. To transact such other business as may properly come before the Special Meeting or any adjournment thereof. The Merger is more fully described in, and the Merger Agreement is attached in its entirety to, the Joint Proxy Statement/Prospectus accompanying this Notice. Only stockholders of record at the close of business on May 22, 1996 (the "Record Date") are entitled to notice of, and to vote at, the Special Meeting or at any postponement(s) or adjournment(s) thereof. Approval of the Merger and the Merger Agreement will require the affirmative vote of the holders of a majority of the shares of Atari Common Stock outstanding on the Record Date. IMPORTANT WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON. June , 1996 By Order of the Board of Directors Sam Tramiel President 6 JTS CORPORATION 166 BAYPOINTE PARKWAY SAN JOSE, CALIFORNIA 95134 (408) 468-1800 Dear Stockholder: A Special Meeting of Stockholders (the "Special Meeting") of JTS Corporation ("JTS") will be held at JTS' offices located at 166 Baypointe Parkway, San Jose, California on Thursday, July , 1996 at 9:00 a.m. At the Special Meeting, you will be asked to consider and vote upon the approval of an Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 (the "Merger Agreement"), between JTS and Atari Corporation ("Atari"), and the merger of Atari with and into JTS (the "Merger"). Pursuant to the Merger Agreement, upon consummation of the Merger, all outstanding shares of Atari Common Stock will be converted into shares of JTS Common Stock. Following consummation of the Merger (assuming no exercise of outstanding options to purchase JTS Common Stock or Atari Common Stock after May 22, 1996), the former stockholders of Atari will hold approximately 62% of the outstanding capital stock of JTS. JTS' Board of Directors has unanimously approved the Merger and the Merger Agreement and has determined that they are fair to, and in the best interests of, JTS and its stockholders. The Board of Directors recommends a vote FOR the Merger and the Merger Agreement. In the materials accompanying this letter, you will find a Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken at the Special Meeting and a proxy card. The Joint Proxy Statement/Prospectus provides more detailed information regarding the proposed Merger and related matters, includes information about JTS and Atari and discusses the Board's reasons for recommending the Merger. YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN. IN ORDER TO ENSURE THAT YOUR VOTE WILL BE COUNTED, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON. IF YOU ATTEND THE SPECIAL MEETING IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON. June , 1996 Sincerely, David T. Mitchell Chief Executive Officer and President 7 JTS CORPORATION 166 BAYPOINTE PARKWAY SAN JOSE, CALIFORNIA 95134 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY , 1996 To the Stockholders of JTS Corporation: NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special Meeting") of JTS Corporation, a Delaware corporation ("JTS"), will be held on Thursday, July , 1996, at 9:00 a.m., at JTS' offices located at 166 Baypointe Parkway, San Jose, California. The Special Meeting is for the purpose of considering and acting upon: 1. A proposal to approve (a) the Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 (the "Merger Agreement") between JTS and Atari Corporation, a Nevada Corporation ("Atari"), and (b) the merger of Atari with and into JTS (the "Merger"). Pursuant to the terms of the Merger Agreement, each outstanding share of Atari Common Stock will be converted into one share of JTS Common Stock, and each outstanding option to acquire Atari Common Stock will become an option to acquire JTS Common Stock. 2. To transact such other business as may properly come before the Special Meeting or any adjournment thereof. The Merger is more fully described in, and the Merger Agreement is attached in its entirety to, the Joint Proxy Statement/Prospectus accompanying this Notice. Only stockholders of record of JTS Common Stock and JTS Series A Preferred Stock at the close of business on June 18, 1996 (the "Record Date") are entitled to notice of, and to vote at, the Special Meeting, or at any postponement(s) or adjournment(s) thereof. Approval of the Merger and the Merger Agreement will require the affirmative vote of the holders of (a) a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on the Record Date, voting together, and (b) at least two-thirds of the shares of JTS Series A Preferred Stock outstanding on the Record Date, voting separately as a class. If the Merger is consummated, stockholders of JTS who do not vote in favor of the Merger and the Merger Agreement and who otherwise comply with Section 262 of the Delaware General Corporation Law or Chapter 13 of the California General Corporation Law will be entitled to statutory appraisal or dissenters' rights. See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters' Rights" and Appendices D-1 and D-2 to the accompanying Joint Proxy Statement/Prospectus. IMPORTANT WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON. June , 1996 By Order of the Board of Directors David T. Mitchell Chief Executive Officer and President 8 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE , 1996 JTS CORPORATION PROSPECTUS ------------------------------------ JOINT PROXY STATEMENT ATARI CORPORATION SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY , 1996 JTS CORPORATION SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY , 1996 ------------------------------------ This Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus") of Atari Corporation ("Atari") and JTS Corporation ("JTS") is being used (a) to solicit proxies on behalf of Atari from holders of the outstanding Common Stock of Atari (the "Atari Common Stock") in connection with the Special Meeting of Stockholders of Atari to be held on July , 1996 (the "Atari Special Meeting"), and (b) to solicit proxies on behalf of JTS from holders of the outstanding JTS Common Stock (the "JTS Common Stock") and JTS Series A Preferred Stock (the "JTS Series A Preferred Stock") in connection with the Special Meeting of Stockholders of JTS to be held on July , 1996 (the "JTS Special Meeting"). At the meetings referred to above, the stockholders of Atari and JTS will be asked to consider and vote upon the approval of (a) the Amended and Restated Agreement and Plan of Reorganization between Atari and JTS dated as of April 8, 1996 (the "Merger Agreement"), a copy of which is attached hereto as Appendix A and incorporated herein by reference, and (b) the merger of Atari with and into JTS (the "Merger"). Upon consummation of the Merger, Atari will be merged with and into JTS, the separate existence of Atari will cease, JTS will remain as the surviving corporation and all of the rights, privileges, powers, franchises, properties, assets, liabilities and obligations of Atari will be vested in JTS. At the effective time of the Merger, each outstanding share of Atari Common Stock will be converted into one share of JTS Common Stock. See "The Proposed Merger and Related Transactions--Summary of the Merger Agreement--Manner and Basis of Converting Atari Common Stock." This Joint Proxy Statement/Prospectus also constitutes the prospectus of JTS under the Securities Act of 1933, as amended (the "Securities Act"), for the offering of up to 63,735,718 shares of JTS Common Stock in connection with the Merger. This prospectus does not cover resales of the JTS Common Stock to be issued in connection with the Merger and no person is authorized to use this prospectus in connection with any resale. The information set forth in this Joint Proxy Statement/Prospectus regarding Atari has been furnished by Atari and the information set forth in this Joint Proxy Statement/Prospectus regarding JTS has been furnished by JTS. This Joint Proxy Statement/Prospectus is being mailed to stockholders of Atari and JTS on or about June , 1996. THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. ------------------------------------ NEITHER THIS TRANSACTION NOR THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------------ THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JUNE , 1996. 9 TABLE OF CONTENTS
PAGE ------ SUMMARY............................................................................. 6 The Parties to the Proposed Merger................................................ 6 Atari Special Meeting of Stockholders............................................. 6 JTS Special Meeting of Stockholders............................................... 7 The Merger........................................................................ 7 Market Price of Common Stock...................................................... 11 Risk Factors...................................................................... 11 Atari Historical Selected Consolidated Financial Data............................. 12 JTS and Moduler Electronics Unaudited Selected Financial Data..................... 13 Atari and JTS Unaudited Selected Pro Forma Combined Financial Data................ 14 Comparative Per Share Data........................................................ 15 RISK FACTORS........................................................................ 16 Risk Factors Related to the Business of Atari..................................... 16 Risk Factors Related to the Business of JTS....................................... 18 Other Risk Factors Related to the Merger.......................................... 24 INTRODUCTION........................................................................ 27 VOTING AND PROXIES.................................................................. 28 Date, Time and Place of Special Stockholder Meetings.............................. 28 Record Date and Outstanding Shares................................................ 28 Voting and Revocability of Proxies................................................ 28 Stockholder Votes Required........................................................ 29 Solicitation of Proxies; Expenses................................................. 30 Appraisal and Dissenters' Rights.................................................. 30 THE PROPOSED MERGER AND RELATED TRANSACTIONS........................................ 31 Background and Board Recommendations.............................................. 31 Summary of the Merger Agreement................................................... 39 Certain Other Items Related to the Merger......................................... 46 Related Transactions.............................................................. 48 Appraisal and Dissenters' Rights.................................................. 49 Certain Federal Income Tax Considerations......................................... 53 STOCK PRICE AND DIVIDEND INFORMATION................................................ 55 JTS' ACQUISITION OF THE DISK DRIVE DIVISION OF MODULER ELECTRONICS.................. 56 JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....................... 57 ATARI CORPORATION AND JTS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.............................................................. 61 MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA COMBINED FINANCIAL CONDITION AND PRO FORMA COMBINED RESULTS OF OPERATIONS OF THE COMBINED COMPANY FOR THE QUARTER ENDED MARCH 31, 1996.............................................................. 67 INFORMATION REGARDING ATARI CORPORATION............................................. 68 Business of Atari................................................................. 68 Selected Consolidated Financial Data of Atari..................................... 73 Management's Discussion and Analysis of Financial Condition and Results of Operations of Atari............................................................ 74 Management of Atari............................................................... 79 Principal Stockholders of Atari................................................... 80 INFORMATION REGARDING JTS CORPORATION............................................... 82 Business of JTS................................................................... 82 JTS and Moduler Electronics Unaudited Selected Financial Data..................... 91 Management's Discussion and Analysis of Financial Condition and Results of Operations of JTS.............................................................. 92 Management of JTS................................................................. 96
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PAGE ------ Certain Transactions................................................................ 103 Principal Stockholders of JTS....................................................... 106 DESCRIPTION OF CAPITAL STOCK OF ATARI AND JTS....................................... 108 Atari Capital Stock............................................................... 108 JTS Capital Stock................................................................. 108 COMPARISON OF RIGHTS OF STOCKHOLDERS OF ATARI AND JTS AND THE COMBINED COMPANY...... 111 LEGAL MATTERS....................................................................... 116 EXPERTS............................................................................. 116 STOCKHOLDER PROPOSALS............................................................... 117 INDEX TO FINANCIAL STATEMENTS....................................................... F-1 APPENDICES A Amended and Restated Agreement and Plan of Reorganization...................... A-1 B-1 Form of Atari Voting Agreement................................................ B-1-1 B-2 Form of JTS Voting Agreement.................................................. B-2-1 C Montgomery Securities Fairness Opinion......................................... C-1 D-1 Section 262 of the Delaware General Corporation Law........................... D-1-1 D-2 Chapter 13 of the California General Corporation Law.......................... D-2-1
3 11 AVAILABLE INFORMATION Atari is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the Public Reference Room of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of such material may also be obtained from the Commission at prescribed rates by writing to the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, material filed by Atari can be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006. Under the rules and regulations of the Commission, the solicitation of proxies from stockholders of Atari and JTS to approve the Merger and the Merger Agreement constitutes an offering of the JTS Common Stock to be issued in connection with the Merger. Accordingly, JTS has filed with the Commission a Registration Statement on Form S-4 (the "Registration Statement") under the Securities Act with respect to such offering. This Joint Proxy Statement/Prospectus constitutes the prospectus of JTS that is filed as part of the Registration Statement. Other parts of the Registration Statement are omitted from this Joint Proxy Statement/Prospectus in accordance with the rules and regulations of the Commission. Copies of the Registration Statement, including exhibits thereto, may be inspected, without charge, at the offices of the Commission referred to above, or obtained at prescribed rates from the Public Reference Section of the Commission at the address set forth above. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF JTS COMMON STOCK TO BE ISSUED IN THE MERGER, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. 4 12 TRADEMARKS This Joint Proxy Statement/Prospectus contains registered and other trademarks and tradenames of Atari, JTS and other companies. ------------------ FORWARD-LOOKING STATEMENTS This Joint Proxy Statement/Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below. Reference is made to the particular discussions set forth under "Information Regarding Atari Corporation -- Management's Discussion and Analysis of Financial Condition and Results of Operations of Atari" and "Information Regarding JTS Corporation -- Management's Discussion and Analysis of Financial Condition and Results of Operations of JTS." In connection with forward-looking statements that appear in these disclosures, stockholders of Atari and JTS should carefully review the factors set forth in the Joint Proxy Statement/Prospectus including, but not limited to, those discussed under "Risk Factors -- Risk Factors Related to the Business of Atari -- Significant Operating Losses; Disappointing Sales of Jaguar Products," "-- Risk of Substantial Inventory Write-Downs," "-- Risk of Potential Liabilities," "-- Intellectual Property," "-- Competition," "-- Risks of Bridge Loan to JTS," "-- Reduction in Voting Control; Loss of Management Control," "-- Risk Factors Related to the Business of JTS -- Limited Operating History; Working Capital Deficit; Independent Accountants' Report and Explanatory Paragraph," "-- Need for Additional Financing," "-- Highly Competitive Market," "-- Uncertainty of Market Acceptance; Lengthy Sales Cycle," "-- Rapid Technological Change," "Recent Significant Appreciation in Price of Atari Common Stock," "-- Availability of Components and Materials; Dependence on Suppliers," "-- Cyclical Nature of Disk Drive and Computer Industries," "-- Dependence on Compaq Relationship; Customer Concentration," "-- Reliance on Licensed Technology," "-- Intellectual Property and Proprietary Rights," "-- Expansion of Manufacturing Capacity," "-- Production Yields; Product Quality," "-- Management of Growth," "-- Variability of Operating Results," "-- Dependence on Single Manufacturing Facility," "Risks of International Sales and Manufacturing," "-- Dependence on Key Management Personnel," "-- Other Risk Factors Related to the Merger," "-- Utilization of Net Operating Losses," "-- Control by Affiliates; Anti-takeover Effects" and "-- Diversion of Management Attention." Certain statements contained within this Joint Proxy Statement/Prospectus have been specifically identified as forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. However, the failure to specifically identify other statements as forward-looking statements shall not be construed to imply that such statements do not necessarily qualify as such within the meaning of the applicable Securities Act and Exchange Act provisions. 5 13 SUMMARY This Joint Proxy Statement/Prospectus relates to the proposed merger (the "Merger") of Atari Corporation, a Nevada corporation ("Atari"), with and into JTS Corporation, a Delaware corporation ("JTS"), and certain related matters. Upon consummation of the Merger, the separate existence of Atari will cease and JTS will remain as the surviving corporation. Such corporation is sometimes referred to herein as the "Combined Company." Unless otherwise indicated, all references herein to Atari include Atari and its subsidiaries, and all references herein to JTS include JTS and its subsidiaries, including Moduler Electronics (India) Pvt. Ltd. ("Moduler Electronics"). The following is intended as a summary of the information contained in this Joint Proxy Statement/Prospectus, is not intended to be a complete statement of all material features of the proposals to be voted on, and is qualified in its entirety by the more detailed information appearing elsewhere in this Joint Proxy Statement/Prospectus and attached Appendices, including the Amended and Restated Agreement and Plan of Reorganization attached hereto as Appendix A (the "Merger Agreement") and the forms of Voting Agreement attached hereto as Appendix B-1 and B-2 (the "Voting Agreements"), all of which are important and should be carefully reviewed. In May 1996, the JTS stockholders approved, subject to the closing of the Merger, (i) an amendment and restatement of the JTS Certificate of Incorporation to, among other things, increase the authorized shares of JTS Common Stock, and (ii) an amendment and restatement of the JTS Bylaws. In addition, the holders of the JTS Series A Preferred Stock elected to convert all outstanding shares of JTS Series A Preferred Stock into shares of JTS Common Stock immediately prior to the closing of the Merger. Unless otherwise indicated, all information contained herein reflects the foregoing changes to the Certificate of Incorporation and Bylaws of JTS and the conversion of all outstanding shares of JTS Series A Preferred Stock into shares of JTS Common Stock. This Joint Proxy Statement/Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth in this Joint Proxy Statement/Prospectus. THE PARTIES TO THE PROPOSED MERGER Atari Corporation. Atari markets video game consoles, related software and peripheral products and multimedia entertainment software for various platforms. Atari's principal products are its Jaguar 64-bit interactive multimedia entertainment system, Jaguar software and Jaguar peripherals. Due to disappointing sales of Jaguar and related products, in late 1995 Atari significantly downsized its Jaguar operations, and decided to focus its efforts on selling its inventory of Jaguar and related products and to emphasize its licensing and development activities related to multimedia entertainment software for various platforms. Atari was incorporated in Nevada in May 1984. Atari maintains its executive offices at 455 South Mathilda Avenue, Sunnyvale, California 94086, and its telephone number is (408) 328-0900. JTS Corporation JTS designs, manufactures and markets hard disk drives for the personal computer industry. JTS has developed two product families of hard disk drives: the 3-inch form factor Nordic product family for notebook computers and the 3.5-inch form factor Palladium product family for desktop personal computers. In addition, JTS is developing a 5.25-inch form factor disk drive for desktop personal computers. JTS was incorporated in Delaware in February 1994. JTS maintains its executive offices at 166 Baypointe Parkway, San Jose, California 95134, and its telephone number is (408) 468-1800. ATARI SPECIAL MEETING OF STOCKHOLDERS Time, Date, and Purpose. The Atari Special Meeting of Stockholders (the "Atari Special Meeting") will be held at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari, on Thursday, July , 1996 at 9:00 a.m. The purpose of the Atari Special Meeting is for Atari stockholders to consider and vote upon a proposal to approve the Merger and the Merger Agreement. 6 14 Record Date; Stockholder Approval. The record date for stockholders of Atari entitled to vote at the Atari Special Meeting is May 22, 1996 (the "Atari Record Date"). Approval of the Merger and the Merger Agreement requires the affirmative vote of holders of a majority of the shares of Atari Common Stock outstanding on the Atari Record Date. JTS SPECIAL MEETING OF STOCKHOLDERS Time, Date and Purpose. The JTS Special Meeting of Stockholders (the "JTS Special Meeting") will be held at the offices of JTS located at 166 Baypointe Parkway, San Jose, California, on Thursday, July , 1996 at 9:00 a.m. The purpose of the JTS Special Meeting is for JTS Stockholders to consider and vote upon a proposal to approve the Merger and the Merger Agreement. Record Date; Stockholder Approval. The record date for stockholders of JTS entitled to vote at the JTS Special Meeting is June 18, 1996 (the "JTS Record Date"). Approval of the Merger and the Merger Agreement requires the affirmative vote of holders of (a) a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on the JTS Record Date, voting together, (b) a majority of the shares of JTS Common Stock outstanding on the JTS Record Date, voting separately as a class, and (c) at least two-thirds of the shares of JTS Series A Preferred Stock outstanding on the JTS Record Date, voting separately as a class. THE MERGER Effect of the Merger. Upon consummation of the Merger, Atari will be merged with and into JTS, the separate existence of Atari will cease, JTS will remain as the surviving corporation and all of the rights, privileges, powers, franchises, properties, assets, liabilities and obligations of Atari will be vested in JTS. At the Effective Time (as such term is defined below), each outstanding share of Atari Common Stock will be converted into one share of JTS Common Stock. See "The Proposed Merger and Related Transactions -- Summary of the Merger Agreement -- Manner and Basis of Converting Atari Common Stock." Immediately after giving effect to the Merger, assuming that no stockholders of JTS perfect appraisal or dissenters' rights and assuming no exercise of outstanding options to purchase Atari Common Stock or JTS Common Stock after May 22, 1996, the shares of JTS Common Stock issued in the Merger upon conversion of the Atari Common Stock will represent approximately 62% of the outstanding shares of the Combined Company. If the Merger does not receive all necessary stockholder approvals or the Merger is not consummated for any other reason, Atari currently intends to continue operating its business as presently conducted and will focus on its existing licensing and software development activities. Atari also expects to evaluate other strategic business opportunities. If the Merger does not receive all necessary stockholder approvals or the Merger is not consummated for any other reason, JTS expects to continue to operate its business as currently planned and to pursue alternative sources of funding to provide necessary working capital and to permit the expansion of its operations. Atari Board of Directors. The Board of Directors of Atari has unanimously approved the Merger Agreement and the Merger and has determined that the Merger is fair to, and in the best interests of Atari and its stockholders. The Atari Board of Directors unanimously recommends approval of the Merger Agreement and the Merger by the Atari stockholders. The primary factors considered and relied upon by the Atari Board of Directors in reaching its recommendation are referred to in "The Proposed Merger and Related Transactions -- Recommendation of the Board of Directors of Atari." JTS Board of Directors. The Board of Directors of JTS has unanimously approved the Merger Agreement and the Merger and has determined that the Merger is fair to, and in the best interests of JTS and its stockholders. The JTS Board of Directors unanimously recommends approval of the Merger Agreement and the Merger by the JTS stockholders. The primary factors considered and relied upon by the JTS Board of 7 15 Directors in reaching its recommendation are referred to in "The Proposed Merger and Related Transactions -- Recommendation of the Board of Directors of JTS." Stockholder Votes Required. To approve the Merger, a majority of the shares of Atari Common Stock must approve the Merger. It is expected that all of the shares of Atari Common Stock owned by directors and executive officers of Atari and their affiliates will be voted for approval of the Merger. These shares constitute approximately 44% of the total number of outstanding shares of Atari Common Stock. Approval of the Merger also requires the vote of holders of a majority of the JTS Common Stock and Series A Preferred Stock (voting together), a majority of the JTS Common Stock (voting separately as a class) and at least two-thirds of the JTS Series A Preferred Stock (voting separately as a class). It is expected that all of the shares of JTS Common Stock and Series A Preferred Stock owned by directors and executive officers of JTS and their affiliates will be voted for approval of the Merger. These shares constitute approximately 96% of the total number of JTS Common Stock and 48% of the total number of JTS Series A Preferred Stock. Opinion of Montgomery Securities. Montgomery Securities ("Montgomery"), financial advisor to Atari, has delivered to the Atari Board of Directors its written opinion, dated February 5, 1996, to the effect that the conversion ratio of Atari Common Stock into JTS Common Stock is fair to Atari from a financial point of view, as of that date. Reference is made to the full text of the opinion, a copy of which is attached hereto as Appendix C. See "The Proposed Merger and Related Transactions -- Background and Board Recommendations -- Atari Financial Advisor." Effective Time. The Merger will be consummated on the date that the Certificate of Merger is filed with the Nevada Secretary of State and the Delaware Secretary of State (the "Effective Time"). The Effective Time is expected to occur as soon as practicable after approval of the Merger and the Merger Agreement at the Atari and JTS Special Meetings and satisfaction or waiver of the conditions precedent to the Merger, as set forth in the Merger Agreement. Listing of Common Stock. The Atari Common Stock is listed on the American Stock Exchange under the symbol "ATC." There is no public market for the JTS Common Stock or the JTS Series A Preferred Stock. Upon consummation of the Merger, it is expected that the JTS Common Stock will be listed on the American Stock Exchange under the symbol "JTS", and that the Atari Common Stock will be delisted from the American Stock Exchange. Exchange of Shares. Exchange of Atari Common Stock certificates for JTS Common Stock certificates will be made upon surrender of Atari Common Stock certificates to Registrar and Transfer Company, Cranford, NJ, as exchange agent. Atari stockholders will be provided with a letter of transmittal and related materials for the exchange of their certificates after the Effective Time. ATARI STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE INSTRUCTIONS AND TRANSMITTAL FORMS AFTER COMPLETION OF THE MERGER. Assumption of Atari Options. Upon consummation of the Merger, each option to purchase Atari Common Stock then outstanding will be assumed by JTS and will be converted automatically into an option to purchase the same number of shares of JTS Common Stock at an exercise price per share equal to the exercise price per share of the Atari option. The other terms of the Atari options, including vesting schedules, will remain unchanged. Registration Statement on Form S-8. Within five days following the closing of the Merger, JTS will file a Registration Statement on Form S-8 with the Commission with respect to the shares of JTS Common Stock issuable upon exercise of the assumed Atari options and JTS options granted or available for grant under the JTS amended and restated 1995 Stock Option Plan (the "Restated Plan"). Assumption of Atari Debentures. Upon consummation of the Merger, all of Atari's obligations under its outstanding 5 1/4% convertible subordinated debentures due April 29, 2002 (the "Atari Debentures") will be assumed by JTS. The Atari Debentures are presently convertible into Atari Common Stock at a conversion 8 16 price of $16.3125 per share, and following the Merger will be convertible into JTS Common Stock at the same conversion price. The other terms of the Atari Debentures will remain unchanged. Conditions to Consummation of the Merger. Consummation of the Merger is subject to various conditions precedent, including Atari and JTS stockholder approvals of the Merger and the Merger Agreement, the receipt of certain consents and approvals from various third parties and governmental agencies, receipt of opinions of counsel regarding certain legal matters, including opinions of tax counsel to the effect that the Merger will qualify as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that stockholders of JTS holding not more than 5% of the JTS capital stock entitled to vote at the JTS Special Meeting shall be entitled to exercise appraisal or dissenters' rights. Each of the parties to the Merger Agreement may, at its option, waive compliance with any condition precedent to its obligation to consummate the Merger. In the event that a condition to consummation of the Merger is not satisfied, each party whose obligation to consummate the Merger is subject to satisfaction of such condition intends to evaluate whether it would be in the best interests of that party and its stockholders to waive the condition and consummate the Merger. In the event that a condition to consummation of the Merger is waived by one of the parties and applicable law requires that party to resolicit stockholder approval, stockholder approval will be resolicited prior to consummation. For example, stockholder approval would be resolicited in the event that such waiver would result in an alteration or change in (a) the amount or kind of consideration to be received by the Atari stockholders in exchange for their shares of Atari Common Stock as a result of the Merger, (b) any term of the Certificate of Incorporation of JTS to be effected by the Merger or (c) any of the terms and conditions of the Merger Agreement if such alteration or change would adversely affect the holders of JTS Common Stock or Atari Common Stock. Neither Atari nor JTS presently has any intention of waiving any terms or conditions of the Merger Agreement. Termination and Amendment of Merger Agreement. The Merger Agreement may be terminated, notwithstanding its approval by the stockholders of Atari or JTS, (a) by mutual written agreement of the parties, (b) by Atari if there has been a breach of any representation, warranty, covenant or agreement in the Merger Agreement on the part of JTS which has or can reasonably be expected to have a material adverse effect on JTS and its subsidiaries, taken as a whole, or upon the occurrence of certain other events, (c) by JTS if there has been a breach of any representation, warranty, covenant or agreement in the Merger Agreement on the part of Atari which has or can reasonably be expected to have a material adverse effect on Atari and its subsidiaries, taken as a whole, or upon the occurrence of certain other events, or (d) by Atari or JTS if (i) the closing of the Merger does not occur by July 31, 1996, (ii) there should be a final nonappealable order of federal or state court preventing consummation of the Merger, (iii) the JTS or Atari stockholders do not approve the Merger at their respective stockholders' meetings, or (iv) the Atari Board of Directors shall have accepted, approved or recommended to the Atari stockholders a superior acquisition proposal. In addition, the Merger Agreement may be amended by the mutual consent of the parties at any time prior to the Effective Time, whether or not the Merger has been approved by the stockholders of Atari or JTS but, after any such approval, no amendment will be made which by law requires further approval by such stockholders without such further approval. See "The Proposed Merger and Related Transactions -- Summary of the Merger Agreement -- Termination, Amendment and Waiver." Availability of Appraisal and Dissenters' Rights. Under Section 262 of the Delaware General Corporation Law ("DGCL"), a copy of which is attached hereto as Appendix D-1, and Chapter 13 of the California General Corporation Law ("CGCL"), a copy of which is attached hereto as Appendix D-2, stockholders of JTS may, under certain circumstances and by following prescribed statutory procedures, have the right to seek appraisal of the "fair value" of such stockholders' shares. The failure of a stockholder choosing to execute such right to follow such procedures may result in termination or waiver of appraisal and dissenters' rights. See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters' Rights." The obligation of Atari to consummate the Merger is subject to the condition that the holders of not more than 5% of the JTS capital stock entitled to vote at the JTS Special Meeting shall have asserted and not effectively withdrawn or lost the right to obtain the fair value of such holders' shares pursuant to the applicable provisions of the DGCL and CGCL. 9 17 The stockholders of Atari are not entitled to statutory appraisal or dissenters' rights pursuant to the applicable provisions of the Nevada General Corporation Law ("NGCL"). Resale of JTS Common Stock. The shares of JTS Common Stock to be issued to former holders of Atari Common Stock in the Merger have been registered under the Securities Act of 1933, as amended (the "Securities Act"), by a Registration Statement on Form S-4, of which this Joint Proxy Statement/Prospectus is a part, thereby allowing such shares of JTS Common Stock to be traded without restriction under the Securities Act by all such holders not deemed to be "affiliates" (as such term is defined for purposes of Rule 145 promulgated under the Securities Act) of Atari prior to the consummation of the Merger. See "The Proposed Merger and Related Transactions -- Certain Other Items Related to the Merger -- Resale of JTS Common Stock." Certain Federal Income Tax Considerations. The obligations of each of Atari and JTS to consummate the Merger are conditioned upon receipt of opinions from their respective legal counsel that the Merger will qualify as a reorganization for federal income tax purposes under Section 368(a) of the Code and that, accordingly, no gain or loss ordinarily will be recognized by JTS or Atari nor by Atari stockholders upon their receipt of shares of JTS Common Stock in exchange for their shares of Atari Common Stock, except to the extent of cash received for fractional shares, if any. Such legal opinions will be subject to certain limitations and qualifications and will be based upon certain factual assumptions and representations. Furthermore, such opinions will not be binding on the Internal Revenue Service. In view of the complexities of federal income and other tax laws, each Atari and JTS stockholder should consult with their own tax advisors as to the specific tax consequences of the Merger, including the applicable federal, state, local and foreign tax consequences to them of the Merger in their specific circumstances. Accounting Treatment. For accounting purposes, the Merger is treated as if Atari acquired JTS. A new basis of accounting will be established for the assets and liabilities of JTS. The new basis reflects the allocation of the purchase price to the JTS assets and liabilities on the basis of their fair values at the time the proposed transaction was announced. The aggregate purchase price to be allocated includes the outstanding common stock of JTS, valued using $2.50 per share which is the representative value of the Atari Common Stock at the time the proposed transaction was announced, as well as the value of JTS options and warrants and direct costs of the acquisition. Subsequent to the Merger, the financial statements of the Combined Company will reflect the combined financial position, results of operations and cash flows of Atari and JTS based on the new basis of accounting for JTS and the historic cost basis of Atari. Pro forma combined condensed financial statements are presented herein giving effect to the Merger as if the transaction occurred, for purposes of the pro forma combined financial position of the Combined Company, on March 31, 1996, and for purposes of the pro forma combined results of operations of the Combined Company, on the first day of each of the periods presented. The allocation of the purchase price in the pro forma statements was based on a preliminary independent appraisal of the fair value of the JTS assets acquired and liabilities assumed which will be revised as updated information becomes available at the Effective Time. Under the purchase accounting method, giving effect to the Merger, existing technology and goodwill in the amount of approximately $22.0 million and $11.7 million, respectively, are expected to be recognized by the Combined Company. It is anticipated that the Combined Company will amortize the resulting existing technology and goodwill over periods of three and seven years, respectively, which will have an adverse effect on its results of operations. In addition, upon the consummation of the Merger, in the third quarter of calendar year 1996, the Combined Company expects to expense approximately $100.0 million of purchased in-process technology. See "Unaudited Pro Forma Combined Condensed Financial Statements." Atari Loan to JTS. In connection with the merger, on February 13, 1996, Atari loaned $25.0 million to JTS pursuant to a Subordinated Secured Convertible Promissory Note (the "Note") which is secured by substantially all of the assets of JTS. Interest accrues on the unpaid principal amount of the Note at the rate of 8.5% per annum. The Note provides that JTS shall repay the outstanding principal and interest under the Note on September 30, 1996 if the Merger has not occurred prior to such time. In the event that the Merger Agreement is terminated, either party may, under certain conditions, elect to convert the outstanding indebtedness under the Note into shares of JTS Series A Preferred Stock. The Note is expressly subordinated 10 18 to outstanding indebtedness in connection with JTS' primary bank loan agreement, up to an amount of $5.0 million at any given time. Related Transactions. In connection with the Merger, the parties have effected or will effect a number of related party transactions, including the grant of certain stock options by JTS. In addition, pursuant to the Voting Agreements, certain stockholders of Atari and JTS have agreed to vote the shares of Atari Common Stock, JTS Common Stock and JTS Series A Preferred Stock held by them for the approval of the Merger and the Merger Agreement. See "The Proposed Merger and Related Transactions -- Related Transactions." Interests of Certain Persons. Certain members of the management of JTS have certain interests in connection with the Merger that are in addition to the interests of stockholders of JTS generally. See "The Proposed Merger and Related Transactions -- Certain Other Items Related to the Merger -- Interests of Certain Persons in the Merger." Differences in Rights of Stockholders. Upon consummation of the Merger, stockholders of Atari will become stockholders of JTS. As a result, their rights as stockholders, which are now governed by the NGCL and the Articles of Incorporation and Bylaws of Atari, will be governed by the DGCL and the Certificate of Incorporation and Bylaws of the Combined Company. Because of certain differences between the provisions of the NGCL and the Articles of Incorporation and Bylaws of Atari, on the one hand, and the DGCL and the Certificate of Incorporation and Bylaws of the Combined Company, on the other hand, the current rights of the stockholders of Atari will change after the Merger. See "Comparison of Rights of Stockholders of Atari and JTS." MARKET PRICE OF COMMON STOCK Atari Common Stock is traded on the American Stock Exchange under the symbol "ATC." There is no public market for the JTS Common Stock or the JTS Series A Preferred Stock. The closing price per share of Atari Common Stock was $1 7/8 at February 12, 1996, the last day of trading before the announcement of the Merger, and $ at June , 1996, the latest trading day before the filing of this Joint Proxy Statement/Prospectus with the Commission. RISK FACTORS The consummation of the Merger and the Merger Agreement and an investment in the shares of JTS Common Stock each involve a high degree of risk. Before voting on the Merger, stockholders of Atari and JTS should carefully consider the information set forth in "Risk Factors." 11 19 ATARI HISTORICAL SELECTED CONSOLIDATED FINANCIAL DATA The following historical selected consolidated financial data of Atari have been derived from the historical consolidated financial statements of Atari and should be read in conjunction with such consolidated financial statements and notes thereto, included elsewhere herein, with the exception of the Atari Consolidated Statement of Operations Data prior to fiscal 1993 and the Atari Consolidated Balance Sheet Data prior to December 31, 1994, which were derived from historical consolidated financial statements not included herein. The unaudited quarterly financial data reflects all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.
QUARTER ENDED MARCH 31, FISCAL YEAR ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- Consolidated Statement of Operations Data: Total revenues................... $ 1,272 $ 4,874 $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992 Cost of revenues................. 6,211 3,846 44,234 35,200 42,768 132,455 189,598 Research and development expenses....................... 201 1,815 5,410 5,775 4,876 9,171 15,333 Marketing and distribution expenses....................... 758 2,576 12,726 14,651 8,980 31,125 48,249 General and administrative expenses....................... 1,251 1,795 5,921 7,169 7,558 16,544 23,495 Restructuring charges............ -- -- -- -- 12,425 17,053 -- Operating loss................... (7,149) (5,158) (53,665) (24,047) (47,499) (79,008) (18,683) Other income (expense), net(1)... 6,343 685 3,507 33,441 (1,631) (4,145) 42,288 Income tax credit................ -- -- -- -- 264 434 54 Income (loss) from continuing operations..................... (806) (4,473) (50,158) 9,394 (48,866) (82,719) 23,659 Discontinued operations.......... -- -- -- -- -- 9,000 -- Income (loss) before extraordinary credit......................... (806) (4,473) (50,158) 9,394 (48,866) (73,719) 23,659 Extraordinary credit............. -- 47 582 -- -- 104 1,960 Net income (loss)................ (806) (4,426) (49,576) 9,394 (48,866) (73,615) 25,619 Earnings (loss) per common share: Income (loss) from continuing operations..................... (0.01) (0.07) (0.79) 0.16 (0.85) (1.44) 0.41 Income (loss) before extraordinary credit......................... (0.01) (0.07) (0.79) 0.16 (0.85) (1.29) 0.41 Net income (loss)................ (0.01) (0.07) (0.78) 0.16 (0.85) (1.28) 0.44
DECEMBER 31, MARCH 31, -------------------------------------------------------- 1996 1995 1994 1993 1992 1991 --------- -------- -------- -------- -------- -------- Consolidated Balance Sheet Data: Current assets...................... $ 55,976 $ 65,126 $113,188 $ 51,388 $109,551 $239,296 Working capital..................... 47,200 55,084 92,670 33,896 75,563 159,831 Total assets........................ 68,406 77,569 131,042 74,833 138,508 253,486 Current liabilities................. 8,776 10,042 20,518 17,492 33,988 79,465 Long-term obligations............... 42,354 42,354 43,454 52,987 53,937 48,492 Shareholders' equity................ 17,276 25,173 67,070 4,354 50,583 125,529
- --------------- (1) Includes a gain from the sale of marketable securities of $6.3 million in 1996, a gain from the settlement of patent litigation of $32.1 million in 1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9 million in 1991. 12 20 JTS AND MODULER ELECTRONICS UNAUDITED SELECTED FINANCIAL DATA The following unaudited selected pro forma combined financial data of JTS and Moduler Electronics presents the pro forma combined financial position and results of operations of JTS and Moduler Electronics as of and for the year ended January 28, 1996 and for the three months ended April 28, 1996 and April 30, 1995. These unaudited selected pro forma financial data combine JTS and Moduler Electronics giving effect to the JTS and Moduler Electronics combination, which was accounted for as a purchase. The April 28, 1996 balance sheet reflects the acquisition of Moduler Electronics which took place on April 4, 1996. Intercompany balances and transactions have been eliminated in the presentation. This financial data should be read in conjunction with the Unaudited Pro Forma Condensed Combined Financial Statements and related notes and the historical financial statements and related notes of JTS and Moduler Electronics which are included elsewhere herein. All amounts are stated in thousands, except per share amounts. Statement of Operations Data: Year Ended January 28, 1996 (Pro forma) -- Net revenues........................................................ $ 18,777 Gross margin (deficit).............................................. (14,849) Research and development............................................ 13,375 Selling, general and administrative expenses........................ 5,777 Operating loss...................................................... (34,001) Net loss............................................................ (35,170) Loss per common share(1)............................................ (7.63)
THREE MONTHS ENDED ------------------------------- APRIL 28, 1996 APRIL 30, 1995 Quarters ended April 28, 1996 and April 30, 1995 (Pro forma) -- Total revenues.............................................. $ 17,581 $2,077 Operating loss.............................................. (12,098) (1,203) Net loss.................................................... (12,820) (1,143) Net loss per share(1)....................................... (1.47) (.26)
APRIL 28, 1996 JANUARY 28, 1996 (ACTUAL) (PRO FORMA) -------------- ---------------- Balance Sheet Data: Current assets.......................................... $ 30,474 $ 12,722 Equipment and leasehold improvements, net............... 16,212 14,795 Total assets............................................ 46,871 28,111 Current liabilities..................................... 61,669 30,615 Long-term debt.......................................... 6,381 6,248 Redeemable Series A Preferred Stock..................... 29,697 29,696 Stockholders' deficit................................... (50,876) (38,448)
- --------------- (1) Excludes JTS Series A Preferred Stock, warrants and options as their effect would be antidilutive. 13 21 ATARI AND JTS UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA The following table sets forth the unaudited selected pro forma combined financial data for the periods and as of the date indicated which are derived from the Unaudited Pro Forma Combined Condensed Financial Statements (the "Pro Forma Financial Statements") which present the pro forma combined condensed financial position and results of operations of Atari and JTS. The unaudited pro forma condensed combined balance sheet has been prepared as if the Merger, which will be accounted for as a purchase of JTS by Atari, was consummated as of March 31, 1996. The unaudited pro forma condensed combined statements of operations give effect to the Merger as if the acquisition were completed at the beginning of the periods presented. The Pro Forma Financial Statements combine the historical results of operations of Atari for the year ended December 31, 1995 with the JTS and Moduler Electronics unaudited pro forma combined results of operations for the year ended January 28, 1996 and the historical financial position and results of operations of Atari as of and for the quarter ended March 31, 1996 with the historical financial position and results of operations of JTS as of and for the quarter ended April 28, 1996. The unaudited selected pro forma combined financial data is provided for illustrative purposes only and is not necessarily indicative of the combined financial position or combined results of operations that would have been reported had the Merger occurred on the dates indicated, nor do they represent a forecast of the combined financial position or results of operations for any future period. No pro forma adjustments have been included herein which reflect potential effects of (a) efficiencies which may be obtained by combining Atari and JTS operations or (b) costs of restructuring, integrating or consolidating their operations. The unaudited selected pro forma combined financial data should be read in conjunction with the Pro Forma Financial Statements and related notes, and the historical financial statements and related notes of Atari and JTS which are included elsewhere herein. All amounts are stated in thousands, except for per share amounts.
QUARTER ENDED FISCAL YEAR ENDED MARCH 31, 1996 DECEMBER 31, 1995 -------------- ----------------- Pro Forma Combined Statement of Operations Data: Net revenues.................................................. $ 18,853 $33,403 Cost of revenues.............................................. 27,725 86,177 Selling, marketing, general and administrative expenses....... 5,530 26,097 Research and development expenses............................. 7,607 18,785 Operating loss................................................ (22,009) (97,656) Net loss before extraordinary credit.......................... (22,506) (95,318) Loss per common share before extraordinary credit............. (0.22) (0.92)
MARCH 31, 1996 -------------- Pro Forma Combined Balance Sheet Data: Current assets................................................ $ 61,450 Working capital............................................... 14,805 Total assets.................................................. 126,756 Current liabilities........................................... 46,645 Long-term debt................................................ 48,735 Stockholders' equity.......................................... 31,376
14 22 COMPARATIVE PER SHARE DATA The following table sets forth certain historical per share data of Atari and pro forma combined per share data giving effect to the JTS and Moduler Electronics combination and the Atari and JTS Merger as if the combination and Merger were effective January 1, 1995 for the loss per common share data for the year ended December 31, 1995 and January 1, 1996 for the loss per common share data for the quarter ended March 31, 1996, and March 31, 1996 for book value per common share data using the purchase method of accounting. The pro forma combined per share data are derived from financial information in the Pro Forma Financial Statements. The pro forma data are not necessarily indicative of amounts which would have been achieved had the Merger been consummated at the beginning of the period presented and should not be construed as representative of future operations. This data should be read in conjunction with the Pro Forma Financial Statements and notes thereto included elsewhere herein, and the separate historical financial statements and notes thereto of Atari, JTS and Moduler Electronics, also included elsewhere herein.
PRO FORMA PRO FORMA COMBINED COMBINED ATARI, JTS AND JTS AND ATARI MODULER MODULER HISTORICAL ELECTRONICS(1) ELECTRONICS(2) ---------- -------------- -------------- Loss per common share before extraordinary credit for the year ended December 31, 1995................... $(0.79) $(7.63) $(0.92) Loss per common share for the quarter ended March 31, 1996............................................... $(0.01) $(1.47) $(0.22) Book value per common share at March 31, 1996........ $ 0.27 $(5.40) $ 0.30 Tangible book value per common share at March 31, 1996..................................... $ 0.26 $(5.42) $(0.03)
- --------------- (1) For purposes of this table, the period presented for the unaudited pro forma combined net loss per share of JTS and Moduler Electronics is the fiscal year ended January 28, 1996 and the quarter ended April 28, 1996 and the book values are as of April 28, 1996. Outstanding JTS options, warrants and JTS Series A Preferred Stock are excluded as their effect would be antidilutive. (2) The unaudited pro forma combined per share data assumes conversion of all JTS Series A Preferred Stock outstanding into JTS Common Stock at the effective date. 15 23 RISK FACTORS The following factors should be considered carefully in evaluating the proposals to be voted on at the Atari Special Meeting and the JTS Special Meeting. For periods following the Merger, references to the products, business, results of operations or financial condition of JTS should be considered to refer to JTS and Atari, unless the context otherwise requires. RISK FACTORS RELATED TO THE BUSINESS OF ATARI Significant Operating Losses; Disappointing Sales of Jaguar Products. Atari has incurred significant operating losses for the past five fiscal years. Most recently, Atari incurred an operating loss of $53.7 million for fiscal 1995 and $24.0 million for fiscal 1994. Over the past several years, Atari has undergone significant change. In 1992 and 1993, Atari significantly downsized its operations, decided to exit the computer products business and focused its efforts on its video game business. While restructuring, Atari developed its 64-bit Jaguar interactive multimedia entertainment system, which was introduced in the fourth quarter of 1993. For 1995 and 1994, net sales of Jaguar and related software and accessories were $9.9 million and $29.3 million, respectively, and were substantially below Atari's expectations. Atari attributes the poor performance of Jaguar products to a number of factors including (i) extensive delays in development of software for Jaguar which resulted in reduced orders due to consumer concern as to when titles for the platform would be released and how many titles would ultimately be available, and (ii) the introduction of competing products by Sega Enterprises, Ltd. ("Sega") and Sony Corporation ("Sony") in May 1995 and September 1995, respectively. Due to disappointing sales and competitive pricing pressures, Atari reduced the suggested retail price of the Jaguar console from its original price of $249.99 to its current price of $99.99. As a result of Jaguar price reductions, the substantial curtailment of sales and marketing activities for the Jaguar and the substantial curtailment of efforts by Atari and independent software developers to develop additional software titles for the Jaguar, Atari expects sales of Jaguar and related products to decline substantially in 1996 and thereafter. The failure of Jaguar to achieve commercial acceptance has had a severe financial impact on Atari. In this regard, Atari reported a net loss of $49.6 million for 1995 compared to net income of $9.4 million in 1994, and Atari's net revenues declined from $38.7 million in 1994 to $14.6 million in 1995. Accelerated amortization and write-offs of software development costs in the amount of $16.6 million and inventory write-downs of $12.6 million contributed significantly to the 1995 loss. The net loss for the first quarter of 1996 was $800,000 compared to a net loss of $4.4 million for the first quarter of 1995 and Atari's net revenues declined from $4.9 million for the first quarter of 1995 to $1.3 million for the comparable period in 1996. The net loss in the first quarter of 1996 was impacted by the $6.3 million gain from sale of marketable securities offset by a $5.0 million inventory write-down in the quarter. In response to these losses, the number of employees at Atari was reduced from 101 at December 31, 1994 to 73 at December 31, 1995 and to 31 at March 31, 1996. In addition to reductions in the Atari workforce, this downsizing resulted in significant curtailment of research and development and sales and marketing activities for Jaguar and related products. Accordingly, Atari has decided to focus its efforts on selling its inventory of Jaguar and related products and to emphasize its existing licensing and development activities related to multimedia entertainment software for various platforms. See "Information Regarding Atari Corporation -- Business of Atari." Risk of Additional Inventory Write-Downs. From the introduction of Jaguar in late 1993 through May 1996, Atari sold approximately 135,000 units of Jaguar. As of December 31, 1995, Atari had approximately 100,000 units of Jaguar in inventory and the value of Jaguar inventory and related software was approximately $9.9 million. Due to disappointing sales of Jaguar and increased competition from products introduced by Sega and Sony, Atari reduced the suggested retail price of Jaguar to $99.99 and recorded an inventory write-down of $12.6 million in 1995. Despite the introduction of four additional game titles in the first quarter of 1996, sales of Jaguar and related software have remained disappointing due to uncertainty about Atari's commitment to the Jaguar platform, increased price competition and pending competitive product introductions. As a result of continued disappointing sales, management revised estimates and wrote-down inventory by an additional $5.0 million in the first quarter of 1996. As of the end of May 1996, Atari had approximately 90,000 units of Jaguar in inventory. 16 24 Volume sales of Jaguar and related software in 1996 have consisted primarily of a large order from a new European customer. Atari is also pursuing wholesale sales channels in the U.S. as well as licensing opportunities. There can be no assurance that Atari's substantial unsold inventory of Jaguar and related software can be sold at current or reduced prices, if at all. In addition, any further decrease in the value of such inventory could result in additional inventory write-downs by Atari. Risk of Potential Liabilities. In connection with the restructuring of Atari's business in 1992 and 1993 and Atari's decision in late 1995 to significantly downsize its Jaguar operations, Atari has terminated and plans to terminate numerous contracts and business relationships, including several related to software development activities. Although Atari does not regard any of such contracts or business relationships as material, the termination of contracts and relationships has, from time to time, resulted in litigation, diverting management and financial resources. There can be no assurance that the parties to such contracts will not commence or threaten to commence litigation related to such contracts. Any such litigation or threatened litigation would further divert management and financial resources and could have a material adverse effect on Atari's business, operating results and financial condition. In addition, Atari holds several properties for sale, some of which are currently being leased. The ownership and use of such properties subjects Atari to numerous risks, including risks of environmental and personal injury liabilities. Although Atari is attempting to sell certain of such properties, such sales are not expected to eliminate all the risks associated with Atari's ownership of such properties, including potential environmental liabilities and ongoing indemnification and other contractual obligations. At present, Atari has no such indemnification obligations and is not aware of any such environmental liability. Intellectual Property. Atari has exclusive use of its "Atari" name and "Fuji" logo in all areas other than coin-operated arcade video game use. Atari also has a portfolio of other intellectual properties including patents, trademarks, and copyrights associated with its video game and computer businesses. Atari believes its patents, trademarks and other intellectual property are important assets. As of May 31, 1996, Atari held over 150 patents in the United States and other jurisdictions which expire from 1996 to 2010 and had applications pending for three additional patents. There can be no assurance that any of these patent rights will be upheld in the future or that Atari will be able to preserve any of its other intellectual property rights. Atari has in the past received communications from third parties asserting rights to certain of its intellectual property. Atari has also been involved in several major lawsuits regarding its intellectual property, including a suit with Nintendo of America, Inc. and its affiliates ("Nintendo.") which was settled in March 1994 and a suit with Sega which was settled in September 1994. In the event any third party were to make a valid claim with respect to Atari's intellectual property and a license were not available on commercially reasonable terms, Atari's business, financial condition and results of operations would be materially and adversely affected. Litigation, which has in the past resulted and could in the future result in substantial costs and diversion of resources, may also be necessary to enforce Atari's patents or other intellectual property rights or to defend against third party infringement claims. The occurrence of litigation relating to patent infringement or other intellectual property matters, regardless of the outcome, could have a material adverse effect on Atari's business, financial condition and results of operations. Competition. The video game business is intensely competitive. Since its introduction in late 1993, the Jaguar, Atari's principal product, has failed to achieve broad market acceptance. Atari does not expect that the Jaguar, even at its substantially reduced price, will ever become a broadly accepted video game console, or that Jaguar technology will be broadly adopted by software title developers. The video game industry is also characterized by unpredictable and rapid shifts in the popularity of certain platforms, by severe price competition, and by frequent new technology and product introductions. In this regard, numerous companies have introduced or have developed and are expected to introduce video game consoles that are or may become competitive with Jaguar. In addition, an increasing number of entertainment titles are being developed for or ported to the PC platform. Most of Atari's competitors have greater experience and expertise in 3D graphics and multimedia technology and have substantially greater engineering, marketing and financial resources than Atari. 17 25 Risks of Bridge Loan to JTS. In February 1996, Atari loaned $25.0 million to JTS in connection with the Merger. The loan is due to be repaid by JTS in September 1996 and is secured by substantially all of the assets of JTS. Atari's security interest in such assets is junior to existing security interests in favor of a bank and certain equipment lessors. In the event the Merger is not consummated, there can be no assurance that Atari's security interest in such assets will adequately protect Atari in the event JTS is unable to repay the loan. In addition, the loan is convertible into shares of JTS Series A Preferred Stock at the option of Atari or JTS upon the occurrence of certain conditions, including a breach of the Merger Agreement by the other party. In the event such conversion occurs, Atari would hold a significant percentage of JTS' outstanding equity securities and would be subject to the numerous risks associated with JTS' business. There can be no assurance that such securities would be freely tradeable at the time of conversion, if ever. See "Risk Factors Related to the Business of JTS." Reduction in Voting Control; Loss of Management Control. Upon the closing of the Merger, the stockholders of JTS prior to the Merger will own approximately 38% of the outstanding voting securities of the Combined Company (assuming no exercise of options or warrants after May 22, 1996). In addition, it is anticipated that the executive officers of JTS prior to the Merger will continue to serve as executive officers of the Combined Company and that none of the executive officers of Atari prior to the Merger will serve as executive officers of the Combined Company. Further, the Board of Directors of the Combined Company will include five current JTS directors and two current Atari directors. The current JTS officers and directors and their affiliates will own approximately 23% of the outstanding voting securities of the Combined Company (assuming no exercise of options or warrants after May 22, 1996). As a result, such stockholders, acting together, could exert significant influence over matters requiring approval of the stockholders of the Combined Company. Such matters include the election of the members of the Combined Company's Board of Directors, proxy contests, mergers involving the Combined Company, tender offers or other transactions that could afford stockholders of the Combined Company the opportunity to realize a premium over the then prevailing market price of the Common Stock of the Combined Company. RISK FACTORS RELATED TO THE BUSINESS OF JTS Limited Operating History; History of Operating Losses; Working Capital Deficit; Independent Accountants' Report with Explanatory Paragraph. JTS was incorporated in February 1994 and did not commence production of hard disk drives until October 1995. JTS experienced operating losses for its fiscal years ended January 29, 1995 and January 28, 1996 of $5.2 million and $31.6 million, respectively, which have resulted from the substantial costs associated with the design, development and marketing of new products, the establishment of manufacturing operations and the development of a supplier base. At January 28, 1996, JTS had a working capital deficit of $15.2 million and a negative net worth of $38.6 million. JTS has yet to generate significant revenues and cannot assure that any level of future revenues will be attained or that JTS will achieve or maintain successful operations in the future. Such factors have raised substantial doubt about the ability of JTS to continue its operations without achieving successful future operations or obtaining financing to meet its working capital needs, neither of which can be assured. The report of independent public accountants on JTS' financial statements includes an explanatory paragraph describing uncertainties concerning the ability of JTS to continue as a going concern. See "Notes to JTS Financial Statements." Need For Additional Financing; Current Financing Plans. The hard disk drive business is extremely capital intensive, and JTS anticipates that it will need significant additional financing resources in the near term for facilities expansion, capital expenditures, working capital, research and development and vendor tooling. In this regard, JTS has held discussions with investment banking firms regarding the possibility of raising additional capital through the issuance of debt or equity securities. In June 1996, JTS signed an engagement letter with an investment banking firm regarding the private issuance of debt securities convertible into JTS Common Stock. JTS intends for such financing to close as soon as practicable after the closing of the Merger. However, there can be no assurance that JTS will be able to consummate such financing on terms acceptable to JTS or at all. The issuance of equity or convertible debt securities, upon conversion, would result in dilution of the voting control of existing stockholders, could result in dilution to earnings per share and would provide to the holders of convertible debt securities seniority over the holders of 18 26 JTS Common Stock issued in the Merger. There can be no assurance that additional funding will be available on terms acceptable to JTS or at all. The failure to fund its capital requirements with additional financing would have a material adverse effect on JTS' business, operating results and financial condition. Furthermore, certain equipment and receivables financing as well as term loans made to JTS and Moduler Electronics are contingent on JTS' ability to comply with stringent financial covenants. There can be no assurance that JTS will be able to maintain its current financing facilities or obtain additional financing as needed on acceptable terms or at all. If JTS is unable to obtain sufficient capital, it would be required to curtail its facilities expansion, capital expenditures, working capital, research and development and vendor tooling expenditures, which would materially adversely affect JTS' business, operating results and financial condition. See "Information Regarding JTS Corporation -- Management's Discussion and Analysis of Financial Condition and Results of Operations of JTS -- Liquidity and Capital Resources." Uncertainty of Market Acceptance; Lengthy Sales Cycle. Since its inception in February 1994, JTS has primarily engaged in research and development of its core technology for hard disk drives. JTS' marketing strategy depends significantly on its ability to establish distribution, licensing, product development and other strategic relationships with major computer OEMs and on the willingness and ability of these companies to utilize and to promote JTS' hard disk drive technology and products. JTS' first commercial product line, the Palladium family of hard disk drives, was introduced in September 1995 and is targeted at the desktop personal computer market. JTS' second product line, the Nordic family of hard disk drives, has been designed for notebook computers. See "Information Regarding JTS Corporation -- Business of JTS -- Products." There can be no assurance that any significant market for either product family will develop. In particular, the Nordic drives use a 3-inch form factor, which JTS has only recently introduced to the industry. At present, only a limited number of computer manufacturers are developing or have plans to develop computers that may accommodate Nordic drives. If additional computer manufacturers do not modify their existing products or develop new products that are capable of accommodating 3-inch form factor disk drives, sales of Nordic disk drives and, hence, JTS' business, operating results and financial condition would be materially adversely affected. Qualifying hard disk drives for incorporation into a new computer product requires JTS to work extensively with the customer and the customer's other suppliers to meet product specifications. Customers often require a significant number of product presentations and demonstrations, as well as substantial interaction with JTS' senior management, before making a purchasing decision. Accordingly, JTS' products typically have a lengthy sales cycle during which JTS may expend substantial financial resources and management time and effort with no assurance that a sale will result. Highly Competitive Market. The hard disk drive industry is intensely competitive and dominated by a small number of large companies, including Quantum Corporation ("Quantum"), Seagate Technology, Inc. ("Seagate"), Western Digital Corporation ("Western Digital") and Maxtor Corporation ("Maxtor"). In addition, a number of computer companies, such as Hewlett-Packard Co. ("Hewlett-Packard"), International Business Machines, Inc. ("IBM") and Toshiba Corporation ("Toshiba"), have in-house or "captive" disk drive manufacturing operations that produce disk drives for incorporation into their own computers as well as for sale to other OEMs. Many of JTS' competitors have broader product lines than JTS, and all have significantly greater financial, technical and marketing resources. Furthermore, JTS has licensed key 3-inch form factor technology to Western Digital, a potential competitor in the personal computer disk drive market. See "Information Regarding JTS Corporation -- Business of JTS -- Western Digital Arrangement." There can be no assurance that JTS will develop and manufacture products on a timely basis with the quality and features necessary to compete effectively. High volume hard disk drive users typically will only utilize from two to four suppliers. As a result, it may be necessary for JTS to displace competitors in many circumstances to increase its net sales. In addition, JTS faces competition from the manufacturing operations of its current and potential OEM customers, which could initiate or increase internal production of hard disk drives and reduce or cease purchasing from independent hard disk drive suppliers such as JTS. Moreover, the hard disk drive industry is characterized by price erosion and resulting pressure on gross margins. JTS expects that hard disk drive prices will continue to decline in the future and that competitors will offer products which meet or exceed the performance capabilities of JTS products. Due to such pricing pressures, JTS' future gross margins 19 27 will be substantially dependent upon its ability to control manufacturing costs, improve manufacturing yields and introduce new products on a timely basis. Any increase in price competition would have a material adverse effect on JTS' business, operating results and financial condition. JTS may also experience competition from other forms of data storage, including optical storage, flash memory and holographic storage. If JTS' current and prospective customers and end users were to adopt such data storage products as an alternative to JTS' products, JTS' business, operating results and financial condition would be adversely affected. See "Information Regarding JTS Corporation -- Business of JTS -- Competition." Rapid Technological Change; Short Product Life Cycles; Price Erosion. The hard disk drive industry is characterized by rapid technological change, short product life cycles and price erosion. As a result, JTS must continually anticipate change and adapt its products to meet demand for increased storage capacity. Although JTS intends to engage in a continuous process of developing new products and production techniques, there can be no assurance that JTS will anticipate advances in hard disk drive technology and develop products incorporating such advances in a timely manner to compete effectively against its competitors' new products. Due to the rapid technological change and frequent development of new hard disk drive products, it is common in the industry for the relative mix of customers and products to change rapidly, even from quarter to quarter. For example, in the first half of 1996, the demand for 1 gigabyte 3.5-inch form factor hard disk drives decreased dramatically due to increased availability of and demand for larger capacity disk drives. As a result, pricing pressure on such disk drives increased and gross margins decreased. Generally, new products have higher average selling prices than more mature products. Therefore, JTS' ability to introduce new products in a timely fashion is an important factor in achieving growth and profitability. In addition, JTS anticipates continued changes in the requirements of its customers in the computer industry. There can be no assurance that JTS will be able to develop, manufacture and sell products that respond adequately to such changes or that future technological innovations will not reduce demand for hard disk drives. JTS' business, operating results and financial condition would be materially adversely affected if its development efforts are not successful, if the technologies that JTS has chosen not to develop prove to be competitive alternatives or by trends toward technology that would replace hard disk drives as a storage medium, such as optical storage, flash memory and holographic storage. As JTS increases its production and shipment of hard disk drives and expands its product line, JTS' inventory levels will increase. Due to the rapid rate of change in JTS' business, a large inventory poses the risk of inventory obsolescence which could have an adverse effect on JTS' business, operating results and financial condition. In this regard, JTS anticipates incurring future inventory allowances, the level of which will depend upon a number of factors, including manufacturing yields, new product introductions, maturity or obsolescence of product designs, inventory levels and competitive pressures. Recent Significant Appreciation in Price of Atari Common Stock. The closing price per share of Atari Common Stock was $1.875 at February 12, 1996, the last day of trading before announcement of the agreement between JTS and Atari to merge the two companies. The price of Atari Common Stock has appreciated significantly since then, notwithstanding the absence of any significant publicly available information regarding the financial results or business operations of JTS or the Combined Company and the absence of any material positive developments in the financial results or business operations of Atari. See "Price Range of Common Stock." There can be no assurance that the recent price appreciation of Atari Common Stock is indicative of the price that will prevail for the JTS Common Stock following completion of the Merger. Availability of Components and Materials; Dependence on Suppliers. JTS relies on a limited number of suppliers for many components and materials used in its manufacturing processes, including recording disks, head stack components and integrated circuits. At present, JTS does not have multiple suppliers for all of its materials and component requirements, and there can be no assurance that JTS will secure more than one source for all of its requirements in the future or that its suppliers will be able to meet its requirements on a timely basis or on acceptable terms. Furthermore, JTS does not have contractual arrangements with any of its sole source suppliers. In particular, JTS presently relies on sole source suppliers for controller application specific integrated circuits ("ASICs"), spindle motors, certain head stack components and disk media. Delays in the receipt of certain components and materials have occurred in the past, and there can be no assurance that delays will not occur in the future or that suppliers will not extend lead times. Moreover, changing 20 28 suppliers for certain materials, such as spindle motors, could require requalification of JTS' products with some or all of its customers. Requalification could prevent early design-in wins or could prevent or delay continued participation in hard disk drive programs for which JTS' products have been qualified. In addition, long lead times are required to obtain many materials, such as integrated circuits utilized in JTS' printed circuit board assemblies ("PCBAs"). Regardless of whether these materials are available from established or new sources of supply, these lead times could impede JTS' ability to quickly respond to changes in demand and product requirements. Any limitations on, or delays in, the supply of materials could disrupt JTS' production volume and could have a material adverse effect on JTS' business, operating results and financial condition. In this regard, in the fourth quarter of fiscal 1996, JTS experienced delays in obtaining certain integrated circuits required in the assembly of PCBAs due to the supplier's production problems, which resulted in a significant reduction in production volume during such period. Such production problems were corrected, but there can be no assurance that production problems of this type or otherwise will not occur again in the future. Furthermore, a significant increase in the price of one or more of these components or materials could adversely affect JTS' business, operating results and financial condition. In addition, there are only a limited number of providers of hard disk drive manufacturing equipment, such as servo-writers, burn-in equipment and final test equipment, and ordering additional equipment for replacement or expansion involves long lead times, which limit the rate and flexibility of capacity expansion. Failure to obtain such manufacturing equipment on a timely basis could limit JTS' production of hard disk drives and adversely affect JTS' business, operating results and financial condition. See "Information Regarding JTS Corporation -- Business of JTS -- Manufacturing." Cyclical Nature of Hard Disk Drive and Computer Industries. JTS' operating results are dependent on the demand for hard disk drives, which in turn depends on the demand for notebook and desktop personal computers. The hard disk drive industry is cyclical and has experienced periods of oversupply, resulting in significantly reduced demand for hard disk drives, as well as pricing pressures and reduced production levels. The effect of these cycles has been magnified by computer manufacturers' practice of ordering components, including hard disk drives, in excess of their needs during periods of rapid growth. In recent years, the disk drive industry has experienced significant growth, and JTS intends to expand its capacity based on current and anticipated demand. There can be no assurance that such growth will continue or that the level of demand will not decline. A decline in demand for hard disk drives would have a material adverse effect on JTS' business, operating results and financial condition. Additionally, in the past some computer manufacturers have experienced substantial financial difficulties due to the cyclical nature of the computer industry and other factors. In this regard, certain personal computer manufacturers have recently announced reductions in anticipated revenue growth. Any increased price pressure in the personal computer industry could be passed through to personal computer component suppliers, including manufacturers of hard disk drives.To date, JTS has not incurred significant bad debt expense. However, there can be no assurance that JTS will not face difficulty in collecting receivables or be required to offer more liberal payment terms in the future, particularly in a period of reduced demand. Any failure to collect or delay in collecting receivables could have a material adverse effect on JTS' business, operating results and financial condition. Dependence on Compaq Computer Relationship; Customer Concentration. JTS' strategy to commercialize its products and achieve market acceptance has focused in large part on the development of distribution, licensing, product development and other strategic relationships with leading computer companies, other manufacturers of computer peripherals and recognized distribution organizations. Through these relationships, JTS seeks to establish its products and technologies as industry standards. In this regard, JTS has entered into a Development Agreement with Compaq Computer Corporation ("Compaq") pursuant to which Compaq has agreed to design JTS' Nordic disk drives into at least one of Compaq's products and to purchase a minimum number of hard disk drives from JTS within two years following Compaq's acceptance of the first of such products. In return, JTS has granted certain licensing rights to Compaq that include a royalty on the sale of JTS' products to third parties during the term of the agreement. In order to provide a second source of JTS' products, JTS has entered into a Technology Transfer and License Agreement with Western Digital pursuant to which Western Digital has the right to manufacture and sell Nordic disk drives to Compaq. If either of these agreements were to terminate prematurely, JTS' efforts to establish market acceptance of its products and, consequently its business, operating results and financial condition would be 21 29 adversely affected. See "Information Regarding JTS Corporation -- Business of JTS -- Relationship With Compaq" and "-- Western Digital Arrangement." In fiscal 1996, Olidata S.p.A, Connexe Peripherals, Ltd., Liuski International, Inc. and Aashima Technology, B.V. accounted for 34%, 12%, 11% and 10%, respectively, of JTS' total revenue. In the quarter ended April 28, 1996, Peacock Systems GmbH, Markvision International S.A. and Future Tech accounted for 43%, 18% and 14%, respectively, of JTS' total revenues. JTS expects that sales to a relatively small number of OEMs will account for a substantial portion of its net revenues for the foreseeable future, although the companies that comprise JTS' largest customers may change from period to period. The loss of, or decline in orders from, one or more of JTS' key customers would have a material adverse effect on JTS' business, operating results and financial condition. See "Information Regarding JTS Corporation -- Business of JTS -- Patents and Licenses." Reliance on Licensed Technology. JTS owns no patents and has licensed in a substantial portion of the technology used in its hard disk drives pursuant to license agreements with Pont Peripherals Corporation, TEAC Corporation and Western Digital. If such license agreements were prematurely terminated or if JTS were enjoined from relying upon such licenses due to JTS' alleged or actual breach of such agreements, JTS would be prevented from manufacturing hard disk drives incorporating technology subject to such licenses. As a result, JTS' business, operating results and financial condition would be materially adversely affected. See "Information Regarding JTS Corporation -- Business of JTS -- Patents and Licenses." Intellectual Property and Proprietary Rights. Although JTS attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that JTS will be able to protect its technology adequately or that competitors will not be able to develop similar technology independently. There can be no assurance that patents will be issued with respect to JTS' pending patent applications or that any future patents will be sufficiently broad to protect JTS' technology. There can be no assurance that any patent issued to JTS will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide adequate protection to JTS' products. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate JTS' products or, if patents are issued to JTS, design around the patents issued to JTS. In addition, the laws of certain foreign countries may not protect JTS' intellectual property rights to the same extent as do the laws of the United States. In recent years, the hard disk drive industry has experienced an increase in litigation to enforce intellectual property rights. Thus, litigation may be necessary to enforce JTS' patents, copyrights or other intellectual property rights, to protect JTS' trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or claims for indemnification resulting from infringement claims. Such litigation, even if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on JTS' business, operating results and financial condition. Alternatively, if any claims are asserted against JTS, JTS may seek to obtain a license under the third party's intellectual property rights or to seek to design around such claims. There can be no assurance, however, that a license will be available on reasonable terms or at all, and it could be expensive and time consuming or prove impossible for JTS to design around such claims. Any of such alternatives could materially and adversely affect JTS' business, results of operations and financial condition. Expansion of Manufacturing Capacity. JTS' competitive position will depend substantially on its ability to expand its manufacturing capacity. Accordingly, JTS is continuing to make significant investments to expand such capacity, particularly through the acquisition of capital equipment, facilities expansion and the hiring and training of new personnel. JTS currently plans to add new production lines at its existing manufacturing facility in Madras, India during calendar year 1996 that will utilize all available floor space at this facility. There can be no assurance that JTS will be able to expand such capacity in a timely manner, that the cost of such expansion will not exceed management's current estimates, that such capacity will not exceed the demand for JTS products or that such additional capacity will achieve satisfactory levels of manufacturing efficiency in a timely manner or at all. In addition, the expansion of manufacturing capacity will significantly increase JTS' fixed costs. JTS' profitability will depend on its ability to utilize its manufacturing capacity in an effective manner, and JTS' inability to fully utilize its capacity would have a material adverse effect on JTS' business, operating results and financial condition. See "Information Regarding JTS Corporation -- Business of JTS -- Manufacturing." 22 30 Dependence on Single Manufacturing Facility. In fiscal 1996, substantially all of JTS' manufacturing operations took place at Moduler Electronics in Madras, India. Because JTS does not currently operate multiple facilities in different geographic areas, a disruption of JTS' manufacturing operations resulting from various factors, including sustained process abnormalities, human error, government interventions or a natural disaster such as fire or flood, could cause JTS to cease or limit its manufacturing operations and consequently would have a material adverse effect on JTS' business, operating results and financial condition. Risks of International Sales and Manufacturing. In fiscal 1996 and the three months ended April 30, 1996, substantially all of JTS' net sales consisted of products sold to customers in Europe, Asia and Latin America, and JTS anticipates that a substantial percentage of its products will be sold to customers outside of the United States for the foreseeable future. Furthermore, JTS expects to conduct substantially all of its manufacturing operations in India, although JTS may evaluate alternative or additional locations from time to time. Accordingly, JTS' operating results are subject to the risks of doing business in a foreign country, including compliance with, or changes in, the law and regulatory requirements of a foreign country, political instability, local content rules, taxes, tariffs or other barriers, and transportation delays and other interruptions. For example, the Indian government has granted JTS a five year "tax holiday," and its subsidiary, Moduler Electronics, is located in the Madras Export Processing Zone where it currently enjoys an exemption from Indian taxes on export profits. Such exemption may be terminated at any time, in which event JTS would become subject to significantly greater taxes on sales of disk drives outside of India. Other benefits associated with conducting business in India, which historically has experienced considerable political instability, are subject to the vagaries of the Indian government and may be withdrawn at any time. Although all of JTS' sales presently are made in U.S. dollars, there can be no assurance that future international sales will not be denominated in foreign currencies. Regardless of whether JTS' sales are denominated in foreign currencies, JTS is, and will continue to be, subject to risks related to foreign currency fluctuations. Production Yields; Product Quality. The hard disk drive manufacturing process is complex, and low production yields may result from a variety of factors, including the introduction of new products, increased complexity in product specifications, human error, the introduction of contaminants in the manufacturing environment, equipment malfunction, use of defective materials and components and inadequate testing. From time to time, JTS has experienced lower than anticipated production yields as a result of such factors. Furthermore, while JTS has implemented procedures to monitor the quality of the materials received from its suppliers, there can be no assurance that materials will meet JTS' specifications or that substandard materials will not adversely impact production yields or cause other production problems. JTS' failure to maintain high quality production standards or acceptable production yields would result in loss of customers, delays in shipments, increased costs, cancellation of orders and product returns for rework, any of which could have a material adverse effect on JTS' business, operating results and financial condition. For example, JTS' cost of sales for fiscal 1996 included a $4.3 million provision for inventory allowances principally due to the costs for return of defective products, scrapped material associated with unrepairable damage caused during the assembly process and estimates of physical loss of inventory associated with high volume manufacturing activities. Variability of Operating Results. JTS' operating results are expected to be subject to significant quarterly and annual fluctuations based upon a variety of factors including market acceptance of JTS' products, timing of significant orders, changes in pricing by JTS or its competitors, the timing of product announcements by JTS, its customers or its competitors, changes in product mix, manufacturing yields, order cancellations, modifications and quantity adjustments and shipment reschedulings, the level of utilization of JTS' production capacity, increases in production and engineering costs associated with initial manufacture of new products, changes in the cost of or limitations on availability of components and materials and customer returns. The impact of these and other factors on JTS' revenues and operating results in any future period cannot be predicted with certainty. JTS' expense levels are based, in large part, on its expectations as to future revenues. Substantial advance planning and commitment of financial and other resources is necessary for expansion of manufacturing capacity, while JTS' sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reductions or rescheduling without significant penalties. Furthermore, because the hard disk drive industry is capital intensive and requires a high level of fixed costs, 23 31 operating results are extremely sensitive to changes in volume. Accordingly, if revenue levels do not meet expectations, operating results and net income, if any, are likely to be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of JTS." Management of Growth. JTS has recently experienced and may continue to experience substantial growth in the number of its employees and the scope of its operations. Such growth would further strain JTS' managerial, financial, manufacturing and other resources. In addition, in order to manage its growth effectively, JTS must implement additional operating, financial and management information systems and hire and train additional personnel. In particular, JTS must hire and train a significant number of additional personnel to operate the highly complex capital equipment required by its manufacturing operations. There can be no assurance that JTS will successfully implement additional systems in a timely or efficient manner, to hire and properly train a sufficient number of qualified personnel or to effectively manage such growth, and JTS' failure to do so could have a material adverse effect on its business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of JTS" and "Information Regarding JTS Corporation -- Business of JTS -- Employees." Dependence on Key Management Personnel. JTS' operating results will depend in significant part upon the continued contributions of its key management and technical personnel, including Sirjang L. Tandon, its Chairman and Corporate Technical Strategist, David T. Mitchell, its President and Chief Executive Officer, Kenneth D. Wing, its Executive Vice President, Research and Development Quality/Reliability, W. Virginia Walker, its Executive Vice President, Finance and Administration, Chief Financial Officer and Secretary, and Steven L. Kaczeus, its Chief Technical Officer, each of whom would be difficult to replace. See "Information Regarding JTS Corporation -- Management of JTS." JTS does not have an employment agreement with any of these individuals. The loss of any of these key personnel could have a material adverse effect on the business, operating results and financial condition of JTS. In addition, JTS' future operating results depend in part upon its ability to attract, train, retain and motivate other qualified management, technical, manufacturing, sales and support personnel for its operations. Competition for such personnel is intense, and there can be no assurance that JTS will be successful in attracting or retaining such personnel. The loss of the services of existing personnel as well as the failure to recruit additional personnel could materially adversely affect JTS' business, operating results and financial condition. See "Information Regarding JTS Corporation -- Business of JTS -- Employees." Purchase Orders Subject to Cancellation, Modification and Rescheduling. JTS' sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reductions or rescheduling without significant penalties. Changes in forecasts, cancellations, rescheduling and quantity reductions may result in excess inventory costs, inventory losses and under-utilization of production capacity and could have a material adverse effect on JTS' business, operating results and financial condition. As a result of the foregoing, JTS' backlog as of any particular date may not be representative of actual sales for any succeeding period. Reduction in Voting Control. Upon the closing of the Merger, the Atari stockholders immediately prior to the Merger will own approximately 62% of the outstanding voting securities of the Combined Company (assuming no exercise of options after May 22, 1996). As a result, such stockholders, acting together, could determine the outcome of matters requiring approval of the stockholders of the Combined Company. Such matters include the election of the members of the Combined Company's Board of Directors, proxy contests, mergers involving the Combined Company, tender offers or other transactions that could afford stockholders of the Combined Company the opportunity to realize a premium over the then prevailing market price of the Common Stock of the Combined Company. Furthermore, following the Merger, members of the Tramiel family will own approximately 27% of the outstanding voting securities of the Combined Company (assuming no exercise of options after May 22, 1996). Jack Tramiel will also be a member of the Combined Company's Board of Directors. As a result, the members of the Tramiel family, acting together, could exert significant influence over matters requiring approval of the stockholders of the Combined Company. 24 32 OTHER RISK FACTORS RELATED TO THE MERGER Utilization of Net Operating Losses. As of December 31, 1995, Atari had federal net operating losses ("NOLs") and tax credit carryforwards in the amount of approximately $166.8 million, and as of January 28, 1996, JTS had federal NOLs of approximately $27.0 million. Under the Internal Revenue Code of 1986, as amended (the "Code"), certain changes in the ownership or business of a corporation that has NOLs or tax credit carryforwards will result in the inability to use or the imposition of significant restrictions on the use of such NOLs or tax credit carryforwards to offset future income and tax liability of such corporation, its subsidiaries or its successors. The Merger will constitute a change in ownership with respect to JTS, and the Merger or subsequent events may constitute an event with respect to Atari which results in the imposition of restrictions on the ability of the Combined Company to utilize NOLs and tax credit carryforwards of Atari or JTS. There can be no assurance that the Combined Company will be able to utilize all or any NOLs or tax credit carryforwards of Atari or JTS. The ability of the Combined Company to utilize Atari's accumulated NOLs and tax carryforwards was a factor considered by the boards of directors of Atari and JTS in concluding to approve the Merger and the Merger Agreement and to recommend that the stockholders of Atari and JTS approve the Merger and the Merger Agreement. See "The Proposed Merger and Related Transactions -- Background and Board Recommendations -- Recommendation of the Board of Directors of Atari" and "--Recommendation of the Board of Directors of JTS." Control by Affiliates; Anti-takeover Effects. Upon completion of the Merger, directors, officers and holders of 10% or more of the outstanding JTS Common Stock will own approximately 35% of the outstanding shares of the Combined Company (assuming no exercise of options or warrants after May 22, 1996). As a result, these affiliates of the Combined Company, acting together, will have the ability to exert significant influence over the election of directors and other corporate actions affecting the Combined Company. Certain provisions of the Certificate of Incorporation and Bylaws of the Combined Company and certain provisions of the DGCL, including Section 203 thereof, may also discourage certain transactions involving a change in control of the Combined Company. In addition to the foregoing, the ability of the Board of Directors of the Combined Company to issue additional "blank check" preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a change in control of the Combined Company. See "Information Regarding Atari Corporation -- Principal Stockholders of Atari," "Information Regarding JTS Corporation -- Principal Stockholders of JTS" and "Description of Capital Stock of Atari and JTS." Shares Eligible for Future Sale. Sales of substantial amounts of JTS Common Stock in the public market after the consummation of the Merger could adversely affect prevailing market prices. Following the Merger, the Combined Company will have approximately 102,687,204 shares of Common Stock outstanding (assuming no exercise of options or warrants after May 22, 1996). All of the 63,735,718 shares of JTS Common Stock to be issued to the former stockholders of Atari in the Merger will be eligible for sale in the public market upon the closing of the Merger. Of such shares, approximately 23,935,000 shares held by affiliates of Atari will be subject to volume and other restrictions under Rule 145 of the Securities Act. In addition, 90 days following the consummation of the Merger, approximately 3,900,000 shares of JTS Common Stock will become eligible for sale in the public market pursuant to Rule 701 under the Securities Act. In addition, in February and August 1997, approximately 16,200,000 shares and 12,500,000 shares of JTS Common Stock, respectively, will become eligible for sale in the public market pursuant to Rule 144 of the Securities Act upon expiration of the two-year holding periods from the dates such shares were issued. In addition, the holders of approximately 57,200,000 shares of JTS Common Stock outstanding as of the closing of the Merger will be entitled to certain rights with respect to registration of such shares under the Securities Act. JTS also intends to register for sale on a Form S-8 Registration Statement under the Securities Act an aggregate of approximately 8,985,000 shares of JTS Common Stock reserved for issuance under JTS' Restated Plan, 500,000 shares of JTS Common Stock reserved for issuance under JTS' Non-Employee Directors' Plan, and approximately 900,000 shares of JTS Common Stock reserved for issuance pursuant to the exercise of options granted under Atari's 1986 Stock Option Plan which will be assumed by JTS in the Merger. Former stockholders of JTS have not previously had the opportunity to sell their shares in the public market. Substantial sales of JTS Common Stock after the Merger could have a negative impact on the market price and liquidity of the JTS Common Stock. 25 33 Diversion of Management Attention. Following the Merger, Atari and JTS will operate as separate divisions of the Combined Company and the current management of JTS will serve as the management of the Combined Company. The Combined Company's management is expected to devote substantially all of its time to the affairs of JTS following the Merger. If the management of the Combined Company were unable to effectively manage the separate businesses, the operating results and financial condition of the Combined Company could be materially adversely affected. No Prior Market; Liquidity; Stock Price Volatility. Prior to the Merger there was no public market for JTS' capital stock. Although it is expected that the JTS Common Stock will be listed on the American Stock Exchange upon the closing of the Merger, there can be no assurance that an active public market for the JTS Common Stock will develop or be sustained. The trading price of the JTS Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by JTS or its competitors, general conditions in the hard disk drive, computer or video game industries, changes in earnings estimates or recommendations by analysts, or other events or factors. In addition, the public stock markets have experienced extreme price and trading volume volatility in recent months. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the JTS Common Stock. 26 34 INTRODUCTION This Joint Proxy Statement/Prospectus is furnished in connection with the solicitation by Atari and JTS of proxies to be voted at the Atari Special Meeting and the JTS Special Meeting, respectively. This Joint Proxy Statement/Prospectus is being mailed to stockholders of Atari and JTS on or about June , 1996. The purpose of the Atari and JTS Special Meetings is to consider and vote upon a proposal to approve the Merger and the Merger Agreement. Upon consummation of the Merger, Atari will be merged with and into JTS, the separate existence of Atari will cease, JTS will remain as the surviving corporation and all of the rights, privileges, powers, franchises, properties, assets, liabilities and obligations of Atari will be vested in JTS. At the Effective Time (as such term is defined below), each outstanding share of Atari Common Stock will be converted into one share of JTS Common Stock and each outstanding option to purchase Atari Common Stock will become an option to purchase JTS Common Stock. Based on the number of shares of outstanding Atari Common Stock, JTS Common Stock and JTS Series A Preferred Stock as of May 22, 1996 (assuming no exercise of outstanding options after such date), immediately after consummation of the Merger (assuming the conversion of all outstanding shares of JTS Series A Preferred Stock into shares of JTS Common Stock and that none of the holders of JTS Common Stock or JTS Series A Preferred Stock perfects appraisal or dissenters' rights), a total of 102,687,204 shares of JTS Common Stock would be issued and outstanding, of which 63,735,718 shares, or 62%, would represent shares issued in the Merger upon conversion of Atari Common Stock. THE BOARDS OF DIRECTORS OF EACH OF ATARI AND JTS HAVE UNANIMOUSLY DETERMINED THAT THE MERGER AND THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, ITS RESPECTIVE CORPORATION AND ITS RESPECTIVE STOCKHOLDERS. THE BOARDS OF DIRECTORS OF EACH OF ATARI AND JTS UNANIMOUSLY RECOMMEND THAT THE STOCKHOLDERS OF ITS RESPECTIVE CORPORATION APPROVE THE MERGER AND THE MERGER AGREEMENT. This Joint Proxy Statement/Prospectus also constitutes the prospectus of JTS under the Securities Act for the offering of JTS Common Stock in connection with the Merger. This Joint Proxy Statement/Prospectus does not cover resales of the securities of JTS to be received in connection with the Merger and no person is authorized to use this prospectus in connection with any resale. The principal offices of Atari are located at 455 South Mathilda Avenue, Sunnyvale, California 94086, and its telephone number is (408) 328-0900. The principal offices of JTS are located at 166 Baypointe Parkway, San Jose, California 95134, and its telephone number is (408) 468-1800. 27 35 VOTING AND PROXIES DATE, TIME AND PLACE OF SPECIAL STOCKHOLDER MEETINGS Atari. The Atari Special Meeting will be held at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari, on July , 1996 at 9:00 a.m. JTS. The JTS Special Meeting will be held at JTS's offices at 166 Baypointe Parkway, San Jose, California 95134, on July , 1996 at 9:00 a.m. RECORD DATE AND OUTSTANDING SHARES Atari. Stockholders of record of Atari Common Stock at the close of business on May 22, 1996 (the "Atari Record Date") are entitled to notice of and to vote at the Atari Special Meeting. At the Atari Record Date, there were approximately 2,600 holders of record of Atari Common Stock and 63,735,718 shares of Atari Common Stock were issued and outstanding. Except for the stockholders identified below under "Information Regarding Atari Corporation -- Principal Stockholders of Atari," there were no persons known to the management of Atari to be the beneficial owners of more than 5% of the outstanding shares of Atari Common Stock. JTS. Stockholders of record of JTS Common Stock and JTS Series A Preferred Stock at the close of business on June 18, 1996 (the "JTS Record Date") are entitled to notice of and to vote at the JTS Special Meeting. At the JTS Record Date, there were 16 holders of record of JTS Common Stock and 52 holders of record of JTS Series A Preferred Stock and 9,255,116 shares of JTS Common Stock and 29,696,370 shares of JTS Series A Preferred Stock were issued and outstanding. Except for the stockholders identified below under "Information Regarding JTS Corporation -- Principal Stockholders of JTS," there were no persons known to the management of JTS to be the beneficial owners of more than 5% of the outstanding shares of any class of JTS capital stock. VOTING AND REVOCABILITY OF PROXIES All properly executed proxies that are not revoked will be voted at the respective Atari and JTS Special Meetings and any postponement or adjournment thereof, in accordance with the instructions contained therein. Proxies containing no instructions regarding the proposals specified in the form of proxy will be voted for approval of the Merger and the Merger Agreement at the Atari and JTS Special Meetings, as the case may be. Each record holder of Atari Common Stock as of the Atari Record Date is entitled to cast one vote per share, exercisable in person or by properly executed proxy, on each matter properly submitted for the vote of the stockholders at the Atari Special Meeting. Each record holder of JTS Common Stock and JTS Series A Preferred Stock as of the JTS Record Date is entitled to cast one vote per share, exercisable in person or by properly executed proxy, on each matter properly submitted for the vote of the stockholders at the JTS Special Meeting. If an executed proxy card is returned and a stockholder has abstained from voting on any matter, the shares represented by such proxy will be considered present at the applicable special meeting for purposes of determining a quorum and for purposes of calculating the vote, but will not be considered to have been voted in favor as to such matter. In the case of the Atari Special Meeting, if an executed proxy is returned by a broker holding shares in street name which indicates that the broker does not have discretionary authority as to certain shares to vote on one or more matters, such shares will be considered represented at the Atari Special Meeting for purposes of determining a quorum, but will not be considered to be represented at the Atari Special Meeting for purposes of calculating the vote with respect to such matter ("broker non-votes"). Because approval of the Merger and the Merger Agreement requires, in the case of Atari, the affirmative vote of a majority of the total number of outstanding shares of Atari Common Stock entitled to vote at the Atari Special Meeting, and in the case of JTS, the affirmative vote of a majority of the total number of outstanding shares of JTS Common Stock and JTS Series A Preferred Stock (voting together) and at least two thirds of the total number of outstanding shares of JTS Series A Preferred Stock (voting as a separate class) entitled to 28 36 vote at the JTS Special Meeting, abstentions and, in the case of Atari, broker non-votes, will have the same effect as a vote against the proposal. The presence of a stockholder at the applicable special meeting for which such stockholder has executed a proxy will not automatically revoke such stockholder's proxy. A stockholder may, however, revoke a proxy at any time prior to its exercise by filing a written notice of revocation with, or by delivering a duly executed proxy bearing a later date to, the Corporate Secretary at the address of the principal executive offices of the company to which such proxy relates, or by attending the special meeting to which such proxy relates and voting in person. STOCKHOLDER VOTES REQUIRED Atari. The presence, in person or by proxy, of a majority of the shares of Atari Common Stock outstanding on the Atari Record Date is necessary to constitute a quorum at the Atari Special Meeting. Approval of the Merger and the Merger Agreement requires the affirmative vote of holders of a majority of the shares of Atari Common Stock outstanding on the Atari Record Date. It is expected that all of the 23,453,129 shares of Atari Common Stock (excluding shares subject to stock options) beneficially owned by directors and executive officers of Atari and their affiliates at the Atari Record Date (37% of the total number of outstanding shares of Atari Common Stock) will be voted for approval of the Merger and the Merger Agreement. As of the Atari Record Date, JTS and its directors and executive officers and their affiliates beneficially owned no shares of Atari Common Stock (excluding shares of Atari Common Stock subject to the Voting Agreements). See "Information Regarding Atari - -- Principal Stockholders of Atari." JTS. The presence, in person or by proxy, of a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on the JTS Record Date is necessary to constitute a quorum at the JTS Special Meeting. Approval of the Merger and the Merger Agreement requires the affirmative vote of holders of (a) a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on the JTS Record Date, voting together, (b) a majority of the shares of JTS Common Stock outstanding on the JTS Record Date, voting separately as a class, and (c) at least two thirds of the shares of JTS Series A Preferred Stock outstanding on the JTS Record Date, voting separately as a class. It is expected that all of the 9,068,020 shares of JTS Common Stock (excluding shares subject to stock options) and 14,122,107 shares of JTS Series A Preferred Stock beneficially owned by directors and executive officers of JTS and their affiliates at the JTS Record Date (96% of the total number of outstanding shares of JTS Common Stock and 48% of the total number of outstanding shares of JTS Series A Preferred Stock) will be voted for approval of the Merger and the Merger Agreement. As of the JTS Record Date, Atari and its directors and executive officers and their affiliates beneficially owned no shares of JTS Common Stock or JTS Series A Preferred Stock (except for shares of JTS capital stock subject to the Voting Agreements). See "Information Regarding JTS Corporation -- Principal Stockholders of JTS." Voting Agreements. Pursuant to the Voting Agreements, certain stockholders of Atari and JTS have agreed to vote all shares held by them in favor of the Merger and the Merger Agreement. Specifically, holders of approximately 43% of the shares of Atari Common Stock, 91% of the shares of JTS Common Stock and 70% of the shares of JTS Series A Preferred Stock entitled to vote at the respective stockholder meetings have entered into Voting Agreements and irrevocable proxies. As a result, it is expected that the Merger and the Merger Agreement will be approved by the holders of a majority of the shares of Atari Common Stock outstanding on the Atari Record Date and by the holders of a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on the JTS Record Date (voting together), a majority of the shares of JTS Common Stock outstanding on the JTS Record Date (voting as a separate class) and at least two-thirds of the shares of JTS Series A Preferred outstanding on the JTS Record Date (voting as a separate class). See "The Proposed Merger and Related Transactions -- Related Transactions -- Voting Agreements." 29 37 SOLICITATION OF PROXIES; EXPENSES Atari and JTS will equally bear the costs of solicitation of proxies from their stockholders, all printing and mailing costs in connection with the preparation and mailing of this Joint Proxy Statement/Prospectus to Atari and JTS stockholders, all Commission filing fees with respect to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part, and all costs of qualifying the shares of JTS Common Stock under state blue sky laws. In addition to solicitation by mail, the directors, officers and employees of Atari and JTS may solicit proxies from stockholders by telephone, telegram or letter or in person, but will not be specially compensated for such activities. Brokers, nominees, fiduciaries and other custodians have been requested to forward solicitation material to the beneficial owners of Atari Common Stock held of record by them. Such custodians will be reimbursed by Atari for their reasonable expenses incurred in that connection. If the Merger is consummated, all costs and expenses incurred in connection with the Merger not previously paid will be paid by the Combined Company. APPRAISAL AND DISSENTERS' RIGHTS Stockholders of record of JTS Common Stock and JTS Series A Preferred Stock may under certain circumstances and by following procedures prescribed by Section 262 of the DGCL or Chapter 13 of the CGCL, exercise either appraisal or dissenters' rights and receive cash for their respective shares of capital stock of JTS. The failure of any dissenting stockholder of JTS to follow the appropriate procedures may result in the termination or waiver of such rights. See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters' Rights." The stockholders of Atari are not entitled to appraisal or dissenters' rights under the NGCL. 30 38 THE PROPOSED MERGER AND RELATED TRANSACTIONS BACKGROUND AND BOARD RECOMMENDATIONS BACKGROUND OF THE MERGER By the second half of 1995, Atari and its Board of Directors recognized that despite the significant financial resources that had been devoted to the Jaguar product, it was unlikely that Jaguar would ever become a broadly accepted video game console or that Jaguar technology would be broadly adopted by software title developers. As a result, at its meeting on October 13, 1995, the Atari Board of Directors determined to substantially reduce the resources devoted to the Jaguar and related products, and to change Atari's strategic focus by devoting its resources to PC software publishing and strategic opportunities. In particular, the Atari Board of Directors directed management to focus on evaluating strategic opportunities for Atari including potential investments and acquisitions. As part of Atari's efforts to pursue strategic opportunities, during the fourth quarter of 1995, Atari management contacted various individuals and investment advisors with respect to potential strategic investments or acquisitions. These efforts resulted in Atari's evaluation of several strategic opportunities, including a potential investment in or merger with an entertainment software company, a video game software company, a computer video game peripherals company and a potential investment or merger with JTS. Since its inception in February 1994, JTS has continually sought to identify new sources of financing to support the expansion of its manufacturing facilities, capital expenditures and research and development activities. In late 1995, JTS recognized the need for a significant infusion of capital within the next three to four months to fund the growth of JTS' operations. Accordingly, at a meeting held on October 30, 1995, the JTS Board of Directors instructed members of management to explore various financing sources, including the private placement of equity securities to one or more institutional investors. In early November 1995, Sam Tramiel contacted JTS to set up a meeting with Sirjang L. "Jugi" Tandon, the Chairman of JTS, and David T. Mitchell, JTS' President and Chief Executive Officer, to discuss possible strategic opportunities between the companies. On November 16, 1995, Sam Tramiel and Mr. Tandon met at the Las Vegas airport following the Comdex show. At the meeting, Mr. Tandon stated that JTS was pursuing additional sources of financing, and Sam Tramiel indicated that Atari was evaluating various strategic opportunities, including potential investments and acquisitions. A follow-up meeting was scheduled for early December to further discuss a possible investment in JTS by Atari. At a meeting held on November 29, 1995, the JTS Board of Directors instructed Messrs. Tandon and Mitchell to accelerate their efforts to identify new sources of financing. In this regard, JTS initiated discussions with two investment banks (one of which was Montgomery) in December 1995 to explore the possibility of a private placement to institutional investors which would result in a substantial infusion of capital to JTS. On December 14, 1995, Jack Tramiel and Sam Tramiel met with Messrs. Tandon and Mitchell at JTS. At this meeting, the parties discussed a potential investment by Atari in JTS and the possibility that Jack Tramiel would become a director of JTS. Later that day, the Executive Committee of the Atari Board of Directors (consisting of Jack Tramiel, Sam Tramiel and August J. Liguori) held a special meeting to discuss the proposed transaction with JTS. At the meeting, the Atari Executive Committee directed Mr. Liguori, Atari's former Chief Financial Officer, to contact JTS to initiate due diligence. On December 22, 1995, Mr. Liguori met with Mr. Mitchell and W. Virginia Walker, JTS' Chief Financial Officer, at JTS to conduct an initial due diligence review of JTS' business and financial condition. On January 4, 1996, the Executive Committee of the Atari Board of Directors held a special meeting to discuss Mr. Liguori's due diligence investigation of JTS. At this meeting, the Atari Executive Committee authorized Jack Tramiel to continue discussions with JTS regarding a potential investment or other strategic business relationship between Atari and JTS and instructed Mr. Liguori to continue due diligence activities. The Atari Executive Committee also instructed Jack Tramiel to contact the other members of the Atari Board to update them on the potential business opportunity involving JTS. 31 39 On January 8, 1996, Jack Tramiel, Sam Tramiel and Mr. Mitchell met at Jack Tramiel's home to further discuss a possible strategic transaction between Atari and JTS. At this meeting, the parties considered a significant investment by Atari in JTS and a merger of Atari and JTS. Mr. Mitchell indicated that JTS would be interested in securing a bridge loan from Atari if a merger agreement were signed. The parties also generally discussed that, if a merger were to occur, the consideration would be common stock of the acquiring company and the exchange ratio would be one-for-one. On January 9, 1996, the JTS Board of Directors held a telephonic meeting at which a possible investment by or merger with Atari was discussed. At the meeting, the merits of such a transaction, including the general terms of a possible merger, were considered and the JTS Board instructed members of management to initiate a due diligence review of Atari. In addition, the JTS Board agreed to retain the law firm of Cooley Godward Castro Huddleson & Tatum ("Cooley Godward") to assist in the evaluation of a possible business combination with Atari. On January 10, 1996, Mr. Mitchell and Ms. Walker met with Jack Tramiel and Mr. Liguori at Atari to conduct a due diligence review of Atari. From January 11 through January 16, Ms. Walker and Mr. Liguori had numerous meetings and phone calls and exchanged due diligence information and materials. On January 17, 1996, a meeting was held at JTS to discuss the proposed transaction. Present at the meeting were Jack Tramiel, Sam Tramiel and Mr. Liguori of Atari and Mr. Tandon, Mr. Mitchell and Ms. Walker of JTS. Also present were representatives from Wilson Sonsini Goodrich & Rosati, P.C., counsel to Atari, and a representative of Cooley Godward. At the meeting, there was substantial discussion regarding a proposed merger of Atari and JTS. The meeting focused on the business opportunities, business risks and financial positions of Atari and JTS. The parties first discussed the general terms of the proposed merger including that the Combined Company would be managed by the current members of JTS management, that at the time the merger agreement was signed Atari would extend to JTS a $25.0 million bridge loan, that the bridge loan would be convertible into JTS Series A Preferred Stock, and that JTS would issue warrants to Atari in connection with the bridge loan if the merger were not consummated. The parties further discussed the proposed one-for-one exchange ratio for the Atari Common Stock, JTS Common Stock and JTS Series A Preferred Stock. The proposal to issue common stock of the surviving company in exchange for the outstanding stock of the corporation to be acquired was based upon a number of factors, including tax considerations, the preservation of the surviving company's working capital and the desire to give the JTS and Atari stockholders an opportunity to participate as equity holders in the surviving company. The proposed one-for-one exchange ratio of JTS and Atari stock, as well, was based upon numerous factors, including the valuation assigned to JTS in its most recent round of preferred stock financing the financial forecasts of JTS furnished to Atari, the due diligence review of the two companies, the relative ownership interests of the JTS and Atari stockholders in the surviving company and the historic and current trading prices of Atari Common Stock. At the end of the meeting, Atari and JTS agreed to present the proposed transaction to their respective boards of directors. Following the meeting, the Executive Committee of the Atari Board of Directors met separately and considered the advisability of obtaining a fairness opinion from an investment banking firm with respect to the proposed merger, and Sam Tramiel was instructed to initiate discussions with respect to obtaining such an opinion. On January 19, 1996, Mr. Mitchell, Ms. Walker and representatives of Cooley Godward reported to the JTS Board of Directors on the status of the negotiations with Atari and the preliminary results of the JTS due diligence review of Atari. The JTS Board discussed in substantial detail the merits and the risks of a possible business combination with Atari, as well as the alternative sources of financing then available to the company. Following discussion, the JTS Board of Directors instructed management to continue to pursue all financing alternatives, including a private equity placement and a possible transaction with Atari. Between January 20 and January 29, 1996, Atari's and JTS' management and legal counsel continued their negotiations and due diligence reviews of the two companies. In addition, counsel for Atari and JTS began preparation of a merger agreement and bridge loan financing documentation. On January 30, 1996, the JTS Board of Directors met to consider the results of management's further due diligence review of Atari and the merits of a merger between the two companies. The JTS Board discussed the 32 40 terms of the proposed merger with representatives of Cooley Godward and reviewed a draft of the merger agreement. In particular, the JTS Board considered the possibility of obtaining bridge financing from Atari, the condition of Atari's business and the JTS stockholders' interest in the combined company. The JTS Board also discussed with management the status of a possible private equity placement to meet the company's immediate capital requirements. The JTS Board noted, among other factors, that a private equity placement would require three months or longer to complete and that a business combination with Atari represented an immediate source of financing. After further discussion, the JTS Board of Directors unanimously approved the principal terms of the merger and authorized management and Cooley Godward to proceed with the finalization of the merger agreement and bridge loan documentation substantially on the terms discussed by the JTS Board. A more detailed discussion of certain matters considered by the JTS Board of Directors at this meeting is included under the caption "-- Recommendation of the Board of Directors of JTS." On January 30, 1996, JTS notified Montgomery that it was no longer considering a private placement to institutional investors and that it was engaged in merger discussions with Atari, and introduced Montgomery to Atari. Atari informed Montgomery that it wished to retain Montgomery to render a fairness opinion, and negotiations commenced between Atari and Montgomery regarding the terms of that engagement. On January 31, 1996, Atari and Montgomery entered into a written engagement letter, the terms of which are summarized below under "-- Opinion of Montgomery Securities." On February 1, 1996, the Atari Board of Directors held a telephonic meeting to discuss the terms of the proposed merger with JTS. At the meeting, Jack Tramiel, Sam Tramiel and Mr. Liguori reviewed with the Board the proposed terms of the merger which had been discussed with JTS on January 17. Mr. Liguori also presented the results of Atari's due diligence investigation of JTS. At the meeting, the Atari Board instructed Jack Tramiel to proceed with merger negotiations and due diligence pending further deliberations by the Atari Board. On February 5, 1996, the Atari Board of Directors met at Atari's offices beginning at 1:00 p.m. Present were the Atari directors, representatives of Wilson Sonsini Goodrich & Rosati, P.C., legal counsel to Atari, and representatives from Montgomery, Atari's financial advisor. The Atari Board reviewed the status of the negotiations regarding the proposed merger of Atari and JTS. In particular, the Board considered the one-for-one exchange ratio, closing conditions and termination provisions. Mr. Liguori also reported on the results of Atari's due diligence investigation of JTS. At the meeting, Montgomery presented the results of its review of the transaction and delivered its oral and written opinion that the conversion ratio of Atari Common Stock into JTS Common Stock is fair to Atari from a financial point of view, as of February 5, 1996. Following the Montgomery presentation, the Board conducted substantial deliberations regarding the proposed transaction including the future prospects for Atari's business and the risks and prospects associated with the JTS business. At the end of the meeting, the Atari Board instructed Mr. Liguori to conduct further due diligence with respect to JTS' transaction with Moduler Electronics and other matters. The Board deferred a final decision on the merger pending the results of Mr. Liguori's additional due diligence. The meeting was adjourned at 7:00 p.m. on February 5 and continued for several hours on the morning of February 6. As the merger discussions continued, it became apparent that JTS' acquisition of Moduler Electronics would not be completed prior to the signing of the Merger Agreement. Accordingly, JTS agreed that the closing of JTS' acquisition of Moduler Electronics would be a condition to Atari's obligation to close the Merger. JTS also agreed not to effect the acquisition of Moduler Electronics without the consent of Atari. Subsequent to the signing of the merger agreement, JTS and Moduler Electronics negotiated the final documentation related to the terms of their merger. As part of Atari's due diligence, Atari was provided copies of the interim and definitive acquisition agreements. From February 5, 1996 to February 12, 1996, Jack Tramiel, Sam Tramiel and Mr. Liguori held a series of telephonic conversations and meetings with Mr. Tandon, Mr. Mitchell and Ms. Walker regarding the proposed transaction and due diligence matters. There were also numerous telephone calls among Jack Tramiel, Sam Tramiel, Michael Rosenberg (an Atari director) and Leonard Schreiber (an Atari director) regarding the proposed transaction and the results of the ongoing due diligence review. Similarly, JTS 33 41 management held a number of informal meetings with certain JTS Board members to discuss the results the ongoing due diligence review. On February 12, 1996, the Atari Board of Directors held two telephonic meetings to discuss the final terms of the merger agreement and the additional due diligence materials. Prior to the meeting, each member of the Board had been provided with a draft of the proposed merger agreement and related documents, including disclosure schedules provided by Atari and JTS. Based on such information and further discussions, the Atari Board of Directors unanimously approved the merger agreement and the transactions contemplated thereby. The merger agreement and related documents were executed by the parties on February 12, 1996, and a press release was issued on February 13, 1996. On April 8, 1996, JTS and Atari amended and restated the merger agreement to modify the legal structure of the Merger from a consolidation of JTS and Atari into a newly-formed Delaware corporation to a merger of Atari with and into JTS, with JTS as the surviving company. This change in the legal structure of the Merger did not materially modify the economic terms of the merger. The merger agreement, as so amended and restated, is attached hereto as Annex A. On June 21, 1996, the Atari Board of Directors met to review the status of the Merger. Jack Tramiel, who had attended recent JTS Board meetings, updated the other members of the Board on the business prospects of JTS including the financial targets discussed at the JTS Board meeting on June 18, 1996 and the recent acceptance by Compaq of the Nordic 3-inch disk drive. See "-- Forward-Looking Financial Information Provided by JTS." Based on such information and further discussions, the Atari Board of Directors unanimously affirmed its approval of the Merger. RECOMMENDATION OF THE BOARD OF DIRECTORS OF ATARI The Atari Board of Directors has determined that the Merger is fair to, and in the best interests of, Atari and Atari's stockholders and unanimously recommends that the Atari stockholders vote in favor of approval of the Merger and the Merger Agreement. The Atari Board held a series of meetings at which a business combination with or an investment in JTS was discussed. Individual members of the Board were updated from time to time on developments. In reaching its conclusion to approve the Merger and the Merger Agreement and to recommend that the stockholders approve the Merger and the Merger Agreement, the Atari Board considered a number of factors, including, without limitation, the following: - The level of working capital required to support Atari's future business which was significantly downsized in late 1995 and early 1996 as Atari focused on licensing and software development activities. - The future prospects for Atari's financial performance, taking into consideration the substantial decrease in net sales from 1994 to 1995 and the substantial operating losses sustained in the past several years among other things. - The prospects of the business of JTS, based partly upon financial forecasts, including cash flow, gross margin and unit shipment projections, and related assumptions of JTS provided by JTS management. - The intense competition in the video game industry. - The significant equity position that the former stockholders of Atari would have in the Combined Company. - The risks associated with the businesses of Atari and JTS. - The treatment of the Merger as a tax-free reorganization under Section 368(a) of the Code. - The opinion of Montgomery that the conversion ratio of Atari Common Stock into JTS Common Stock is fair to Atari, from a financial point of view, as of February 5, 1996. 34 42 - The anticipated ability of the Combined Company to utilize Atari's accumulated NOLs and tax carryforwards (although the Board of Directors did not assign material value to the NOLs and tax carryforwards due to the inherent limitations on the survival of such carryovers and the complexity of applicable tax laws). - The results of the due diligence review of JTS by management of Atari, Deloitte & Touche LLP and Wilson, Sonsini, Goodrich & Rosati, P.C., counsel to Atari. The Atari Board did not attempt to prioritize the foregoing factors in any manner. RECOMMENDATION OF THE BOARD OF DIRECTORS OF JTS The JTS Board of Directors has determined that the Merger is fair to, and in the best interests of, JTS and JTS' stockholders and unanimously recommends that the JTS stockholders vote in favor of approval of the Merger and the Merger Agreement. The JTS Board of Directors held a series of formal and informal meetings in January and February 1996 at which a business combination with Atari was discussed. During this period, an extensive financial and legal due diligence review of Atari was conducted by members of JTS management and accountants and legal counsel retained by JTS. Individual members of the JTS Board of Directors were updated regularly on developments and certain members of the Board participated actively in negotiations and discussions with Atari and the due diligence review of Atari. In reaching its conclusion to approve the Merger and the Merger Agreement and to recommend that the stockholders approve the Merger and the Merger Agreement, the JTS Board considered a number of factors, including, without limitation, the following: - JTS' need for working capital to maintain and expand its manufacturing operations and research and development activities and the immediate and significant source of capital to fund such operations and activities that the merger with Atari would provide. - The availability to JTS of alternative sources of capital and the time required to obtain such capital. - The benefits to the stockholders of JTS resulting from the expected trading market for JTS Common Stock following the Merger, which would provide a means of liquidity for such stockholders' stock. - The opportunity for JTS stockholders to continue to participate in the potential growth of JTS. - The diminished equity position that the former stockholders of JTS will have in the Combined Company. - The risks associated with the businesses of Atari and JTS. - The treatment of the Merger as a tax-free reorganization under section 368(a) of the Code. - The anticipated ability of the Combined Company to utilize Atari's accumulated NOLs and tax carryforwards (although the Board of Directors did not assign material value to the NOLs and tax carryforwards due to the inherent limitations on the survival of such carryovers and the complexity of applicable tax laws). - The results of the due diligence review of Atari by management of JTS and Cooley Godward, counsel to JTS. The JTS Board did not attempt to prioritize the foregoing factors in any manner. OPINION OF MONTGOMERY SECURITIES Pursuant to an engagement letter dated January 31, 1996, Atari retained Montgomery to render an opinion with respect to the fairness from a financial point of view of the consideration to be paid by Atari in connection with the acquisition of JTS. Montgomery is a nationally recognized firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with merger transactions and other types of acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Atari selected Montgomery to render a fairness opinion on the basis of Montgomery's experience 35 43 and expertise in transactions similar to the Merger and its reputation in the computer peripherals and investment communities. On February 5, 1996, Montgomery delivered its oral and written opinion that the conversion ratio of Atari Common Stock into JTS Common Stock was fair to Atari, from a financial point of view, as of that date. The amount of such consideration was determined pursuant to negotiations between Atari and JTS and not pursuant to recommendations of Montgomery. No limitations were imposed by Atari on Montgomery with respect to the investigations made or procedures followed in rendering its opinion. THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO ATARI IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY OF MONTGOMERY'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. MONTGOMERY'S OPINION IS DIRECTED TO THE ATARI BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF ATARI OR JTS AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER. IN FURNISHING ITS OPINION, MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, OR THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE SECURITIES ACT, AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN THE TEXT OF MONTGOMERY'S WRITTEN OPINION. In connection with its opinion, Montgomery, among other things: (i) reviewed certain publicly available financial and other data with respect to Atari, including the consolidated financial statements for recent years and interim periods to September 30, 1995, and certain other relevant financial and operating data relating to Atari and JTS made available to Montgomery from published sources and from the internal records of Atari and JTS, including the consolidated financial statements of JTS for recent years and interim periods to November 30, 1995; (ii) reviewed the February 2, 1996 draft of the Merger Agreement provided to Montgomery by Atari; (iii) reviewed certain historical market prices and trading volumes of Atari Common Stock as reported on the American Stock Exchange; (iv) compared Atari and JTS from a financial point of view with certain other companies in the computer peripherals industry that Montgomery deemed to be relevant; (v) considered the financial terms, to the extent publicly available, of selected recent business combinations of companies in the computer peripherals industry that Montgomery deemed to be comparable, in whole or in part, to the Merger; (vi) reviewed and discussed with representatives of the management of Atari and JTS certain information of a business and financial nature regarding Atari and JTS, furnished to Montgomery by them, including the number of shares to be issued by JTS in connection with the acquisition of Moduler Electronics; (vii) reviewed and discussed with representatives of the management of Atari and JTS financial forecasts, including cash flow, gross margin and unit shipment projections, and related assumptions of JTS, provided to Montgomery by JTS management, which forecasts and assumptions included the estimated contribution of Moduler Electronics to JTS' financial performance; (viii) made inquiries regarding and discussed the Merger and the draft of the Merger Agreement and other matters related thereto with Atari's counsel; and (ix) performed such other analyses and examinations as Montgomery deemed appropriate. In connection with its review, Montgomery assumed and relied upon the accuracy and completeness of the foregoing information and did not assume any responsibility for independent verification of such information. With respect to the financial forecasts provided to it as described above, Montgomery assumed for purposes of its opinion that such forecasts had been reasonably prepared on bases reflecting the best available estimates and judgments of the management of JTS at the time of preparation as to the future financial performance of JTS, and, except as described below, that they provided a reasonable basis upon which Montgomery could form its opinion. For purposes of its opinion and with the agreement of management of Atari, Montgomery adjusted the financial forecasts for JTS provided to Montgomery by the management of JTS to reflect more conservative assumptions regarding future results of operations. Such forecasts were based upon numerous variables and assumptions that are inherently uncertain, including, without limitation, factors related to general economic and competitive conditions. Accordingly, actual results could vary significantly from those set forth in such forecasts. Montgomery has assumed no liability for such forecasts. Montgomery also assumed that there had been no material changes in Atari's or JTS' assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statements made available to Montgomery, and that there had occurred no material changes in the terms of JTS' proposed acquisition of 36 44 Moduler Electronics. Montgomery relied on advice of counsel and independent accountants to Atari as to all legal and financial reporting matters with respect to Atari, the Merger and the draft of the Merger Agreement. In addition, Montgomery did not assume responsibility for making an independent evaluation, appraisal or physical inspection of the assets or individual properties of Atari or JTS, nor was Montgomery furnished with any such appraisals. Finally, Montgomery's opinion is based on economic, monetary and market and other conditions as in effect on, and the information made available to Montgomery as of, February 5, 1996. Montgomery further assumed, with the consent of Atari's management, that the Merger would be consummated in accordance with the terms described in the draft of the Merger Agreement without any amendments thereto, and without waiver by Atari or JTS of any of the conditions to their respective obligations thereunder. Set forth below is a brief summary of the report presented by Montgomery to Atari's Board of Directors on February 5, 1996 in connection with its opinion. Discounted Cash Flow Analysis. Montgomery applied a discounted cash flow analysis to JTS financial forecasts for 1996, 1997 and 1998, prepared by JTS's management and provided to Montgomery, and for 1999 and 2000, prepared by Montgomery using assumptions more conservative than those underlying the JTS management forecasts. JTS did not provide Montgomery with any financial forecasts for periods beyond 1998. As described above, with Atari's consent Montgomery adjusted the forecasts prepared by JTS management, and the extensions thereof prepared by Montgomery, to reflect more conservative assumptions regarding future results of operations. In conducting its review, Montgomery adjusted JTS' financial projections by reducing JTS' forecasted revenues and earnings before interest and taxes ("EBIT") by approximately 45% and 68%, respectively. The unadjusted forecasts are referred to as the "Base Case Forecasts," and the Base Case Forecasts as so adjusted by Montgomery are referred to as the "Alternative Case Forecasts." In conducting its discounted cash flow analysis, Montgomery first calculated the estimated future streams of free cash flows that JTS would produce through the year 2000. Montgomery then estimated JTS's aggregate value at the end of 2000 by applying multiples ranging from 7.0x to 8.0x to JTS' estimated EBIT in 2000. Finally, Montgomery discounted such cash flow streams and aggregate values to present values using discount rates ranging from 25.0% to 35.0%, chosen to reflect different assumptions regarding Atari's cost of capital, and reduced such present values by JTS' net debt as of December 31, 1995. This analysis indicated an imputed equity value (defined as aggregate value minus net debt) of JTS of between $449.3 million and $725.9 million based on the Base Case Forecasts, and of between $106.1 million an $192.5 million based on the Alternative Case Forecasts. By contrast, the consideration to be provided by Atari in the Merger, based on the Exchange Ratio and the February 2, 1996 closing sale price of Atari Common Stock on the American Stock Exchange of $2.00 per share, equals approximately $75.7 million. Comparable Company Analysis. Using public and other available information, Montgomery calculated the imputed equity value of JTS based on the multiples of estimated 1996 revenue, EBIT and net income at which three publicly traded disk drive companies were trading on February 2, 1996. The February 2, 1996 stock prices of the comparable companies reflected the following median multiples: 0.3x estimated 1996 revenues; 4.8x estimated 1996 EBIT; and 8.5x estimated 1996 net income. Montgomery applied the foregoing median multiples to the analogous forecasted 1996 statistics for JTS, made applicable adjustments to reflect JTS' net debt (defined as debt minus cash) at December 31, 1995, narrowed the resulting range of data to exclude valuations that Montgomery deemed to be unrealistically high, and applied a private company illiquidity discount to the resulting totals. This analysis indicated an imputed equity value of JTS of between $70.0 million and $175.0 million based on the Base Case Forecasts, and of between $49.0 million and $105.0 million based on the Alternative Case Forecasts. By contrast, the consideration to be provided by Atari in the Merger, based on the Exchange Ratio and the February 2, 1996 closing sale price of Atari Common Stock on the American Stock Exchange of $2.00 per share, equals approximately $75.7 million. Comparable Transactions Analysis. Montgomery reviewed the consideration paid in the following twelve acquisitions of comparable disk drive and other computer storage companies that were announced since 1989 (target/acquiror): Micropolis (disk drive business)/Singapore Technologies Industrial; Maxtor/Hyundai Electronics Industries (two separate transactions); Conner Peripherals Inc./Seagate; Digital 37 45 Equipment Corporation (disk drive business)/Quantum; Sunward Technologies Inc./Read-Rite Corporation; Archive Corporation/Conner Peripherals Inc.; Dastek Inc./Komag Inc.; MiniScribe Corporation (assets)/Maxtor; Cipher Data Products Inc./Archive Corporation; Imprimis Technology Inc./Seagate; and Irwin Magnetic Systems Inc./Cipher Data Products Inc. Montgomery analyzed the consideration paid in such transactions as a multiple of the target companies' revenue, EBIT and net income for the latest twelve months ("LTM"). Such analysis yielded median multiplies of 0.5x LTM revenue, 17.6x LTM EBIT and 18.4x LTM net income. Montgomery applied the foregoing median multiples to the analogous forecasted 1996 statistics for JTS and made applicable adjustments to reflect JTS' net debt at December 31, 1995. The foregoing process yielded a range of imputed equity values of JTS as of December 31, 1996. Montgomery then discounted that range to present values using a discount rate of 40%, a rate generally considered to reflect the standard venture capital return hurdle, and narrowed the resulting range of data to exclude valuations that Montgomery deemed to be unrealistically high. This analysis indicated an imputed equity value of JTS of between $150.0 million and $300.0 million based on the Base Case Forecasts, and of between $100.0 million and $250.0 million based on the Alternative Case Forecasts. By contrast, the consideration to be provided by Atari in the Merger, based on the Exchange Ratio and the February 2, 1996 closing sale price of Atari Common Stock on the American Stock Exchange of $2.00 per share, equals approximately $75.7 million. No other company or transaction used in the comparable transactions analysis as a comparison is identical to JTS or the Merger. Accordingly, an analysis of the results of the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading value of the companies to which JTS and the Merger are being compared. Contribution Analysis. Montgomery compared the percentage interest in the Combined Company that will be held by present stockholders of Atari and JTS immediately following the Merger -- approximately 62% and 38%, respectively -- to the relative contributions of the two companies to various operating statistics of the merged entity. Montgomery compared Atari's revenues for the twelve months ended September 30, 1995 (the last date for which revenue statistics for Atari were available) to JTS's revenues for the twelve months ended January 15, 1996, which comparison indicated a relative contribution of approximately 66% and 34%, respectively, for Atari and JTS. Montgomery also compared Atari's estimated 1996 revenues (which Montgomery assumed would be equal to Atari's revenues for the twelve months ended September 30, 1995) to JTS' backlog of approximately $25.2 million as of January 15, 1996, to JTS's 1996 run rate revenues (defined as JTS' actual revenues for January 1 through 15, 1996, which equaled approximately $3.1 million, on an annualized basis) and to JTS's forecasted 1996 revenues (based on the Base Case Forecasts). Such comparisons indicated relative contributions of approximately 52% and 48%, 26% and 74%, and 6% and 94%, respectively, for Atari and JTS. The summary set forth above does not purport to be a complete description of the presentation by Montgomery to Atari or of the analyses performed by Montgomery. The preparation of a fairness opinion necessarily is not susceptible to partial analysis or summary description. Montgomery believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses and of the factors considered, without considering all analyses and factors, would create an incomplete view of the process underlying the analyses set forth in its presentation to Atari. In addition, Montgomery may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Montgomery's view of the actual value of JTS. Although Montgomery did not consider any of the foregoing analyses in isolation for purposes of rendering its opinion, Montgomery does not believe that any of such analyses is inconsistent with its opinion. In performing its analyses, Montgomery made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Atari and JTS. The analyses performed by Montgomery are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those suggested by such analyses. Such analyses were prepared solely as part of Montgomery's analysis of the fairness of the Merger to Atari and were provided to Atari in connection with the delivery of Montgomery's opinion. The analyses do not purport 38 46 to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities may trade at any time in the future. Montgomery used in its analyses various projections of future performance prepared by the managements of Atari and JTS. The projections are based on numerous variables and assumptions which are inherently unpredictable and must be considered not certain of occurrence as projected. Accordingly, actual results could vary significantly from those set forth in such projections. As described above, Montgomery's opinion and presentation to Atari were among the many factors taken into consideration by Atari in making its determination to approve, and to recommend that its stockholders approve, the Merger. Pursuant to a letter agreement dated January 31, 1996 (the "Engagement Letter"), Atari engaged Montgomery to render an opinion with respect to the fairness from a financial point of view of the consideration to be paid by Atari in connection with the acquisition of JTS. The Engagement Letter provides for Atari to pay Montgomery a fee of $325,000, which was paid upon delivery of Montgomery's opinion. The fee is not conditioned on the outcome of Montgomery's opinion or whether or not such opinion was deemed to be favorable for any party's purposes. The Engagement Letter also calls for Atari to reimburse Montgomery for its reasonable out-of-pocket expenses. Pursuant to a separate letter agreement, Atari has agreed to indemnify Montgomery, its affiliates, and their respective partners, directors, officers, agents, consultants, employees and controlling persons against certain liabilities, including liabilities under the federal securities laws. Montgomery has not performed investment banking services for JTS, except that Montgomery was contacted in connection with a potential private placement of JTS securities. The Atari Board of Directors does not intend to obtain an updated fairness opinion with respect to the Merger. FORWARD-LOOKING FINANCIAL INFORMATION PROVIDED BY JTS* As a matter of course, JTS does not intend to publicly disclose forward-looking financial information. Nevertheless, in connection with the due diligence review of JTS' business, the Atari Board of Directors and Montgomery reviewed preliminary financial targets furnished by JTS in January 1996. Such financial targets indicated revenues of $445 million, gross profit of $100 million and net income of $53 million for fiscal 1997. These financial targets were based on certain assumptions including assumptions that JTS would develop and introduce new products on a timely basis, that Indian bank funding would be available on a timely basis for facility expansion at Moduler Electronics, that the notebook computer systems designed to accept the Nordic disk drive would be released within a certain time frame, that competitive conditions within the disk drive industry would not undergo material adverse change, that the market for computer systems, storage upgrades to computer systems and multimedia applications, such as digital video and video on demand and hence the market for hard disk drives, would remain strong, and that there would be no material adverse change in JTS' operations or business. Such assumptions involve judgments with respect to, among other things, future economic conditions, financial market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of JTS. In June 1996, JTS management provided to the Board of Directors of Atari and JTS updated preliminary financial targets for the Combined Company, based on the assumption that the Merger would be consummated in June 1996. Such financial targets for the Combined Company indicated revenues of $238 million, gross profit of $31 million and a net loss of $113 million for fiscal 1997. The decline in targeted revenues and gross profit and the increase in net loss in the June 1996 targets compared to the January 1996 targets resulted primarily from a five month delay in the scheduled release of a notebook computer which - --------------- * The statements contained in this section regarding JTS' preliminary financial targets constitute "forward- looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and are subject to the safe harbors created thereby. 39 47 would incorporate JTS' Nordic drives. JTS' manufacturing schedule was changed to reflect this delay in expected shipments of its Nordic products. As a result of the delay in production and sales of Nordic disk drives, Palladium disk drives, on which JTS earns a lower gross margin than Nordic drives, are expected to comprise a greater proportion of total revenues for fiscal 1997. Accordingly, JTS' targeted gross margin decreased from January 1996 to June 1996. Additionally, expected funding from an Indian bank, for facilities expansion and capital equipment for Moduler Electronics was delayed three months resulting in a decrease in targeted production capacity. The net loss in the June 1996 updated preliminary financial targets includes expenses associated with the Merger, including a write-off of approximately $100 million of purchased in- process research and development in addition to goodwill amortization, Atari general and administrative expenses and interest expense related to the Atari convertible debentures. While JTS believes that the assumptions underlying the preliminary financial targets are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking financial information will prove to be accurate. In addition, as disclosed elsewhere in this Joint Proxy Statement/Prospectus under "Risk Factors," the business and operations of JTS are subject to substantial risks which increase the uncertainty inherent in such preliminary financial targets. Any of the factors disclosed under "Risk Factors" could cause the actual revenues, operating income and net income of JTS to differ materially from the preliminary financial targets described above. Accordingly, for these reasons it is expected that there will be differences between the actual and targeted results, and actual results may be materially higher or lower than those indicated above. In light of the significant uncertainties inherent in forward-looking financial information of any kind, the inclusion of such information herein should not be regarded as a representation by JTS, Atari or any other person that the preliminary financial targets will be achieved. Investors are cautioned that these preliminary financial targets should not be regarded as fact and should not be relied upon as an accurate representation of future results. Further, the preliminary financial targets furnished by JTS were not prepared with a view to public disclosure or in compliance with the established guidelines concerning financial projections promulgated by the American Institute of Certified Public Accountants. In addition, such preliminary financial targets do not purport to present operations in accordance with generally accepted accounting principles and have not been audited, compiled or otherwise examined by Arthur Andersen LLP, JTS' independent auditors, or by any other independent auditor. Accordingly, neither Arthur Andersen LLP nor any other independent auditor assumes any responsibility for the preliminary financial targets disclosed herein. The preliminary financial targets are being presented solely because they were furnished to the Atari Board of Directors and Montgomery, and they should not be interpreted as suggesting that the Atari Board or Montgomery relied solely upon such targets or placed any particular emphasis upon such targets in evaluating any proposed transaction. JTS has advised Atari and Montgomery that its preliminary financial targets were prepared solely for internal use and capital budgeting and other management decisions, and are subjective in many respects and thus susceptible to interpretations and periodic revision based on actual experience and business developments. None of Atari, JTS or any of their financial advisors or any of their respective directors or officers assumes any responsibility as a result of the inclusion of such preliminary financial targets in this Joint Proxy Statement/Prospectus for the accuracy of such information. JTS does not intend publicly to update or otherwise publicly to revise the preliminary financial targets disclosed above to reflect circumstances existing after the date hereof. SUMMARY OF THE MERGER AGREEMENT The detailed terms of, and conditions to, the Merger and certain related transactions are contained in the Merger Agreement, a copy of which is attached hereto as Appendix A. The statements made in this Joint Proxy Statement/Prospectus with respect to the terms of the Merger and such related transactions are qualified in their entirety by reference to the more complete information set forth in the Merger Agreement. 40 48 EFFECTIVE TIME The Merger will become effective at such time as the Certificate of Merger has been duly filed with the Secretary of State of the State of Nevada in accordance with the NGCL and with the Secretary of State of the State of Delaware in accordance with the DGCL, or at such later time as is specified in the Certificate of Merger (the "Effective Time"). See "-- Conditions to the Merger." It is anticipated that, if the Merger and the Merger Agreement are approved at the respective stockholder meetings of Atari and JTS and all other conditions to the Merger have been fulfilled or waived, the Effective Time will occur as soon as practicable following the approval of the Merger and the Merger Agreement by the stockholders of Atari and JTS. MANNER AND BASIS OF CONVERTING ATARI COMMON STOCK Conversion of Atari Stock. At the Effective Time, each outstanding share of Atari Common Stock will be automatically converted into one share of JTS Common Stock. Shares of Atari Common Stock held as treasury stock and shares of Atari Common Stock held directly or indirectly by JTS shall not be converted into JTS Common Stock. Based on the number of shares of Atari Common Stock, JTS Common Stock and JTS Series A Preferred Stock outstanding as of May 22, 1996, immediately after consummation of the Merger (assuming the conversion of all outstanding shares of JTS Series A Preferred Stock into shares of JTS Common Stock and that none of the holders of JTS Common Stock or JTS Series A Preferred Stock perfect appraisal or dissenters' rights), a total of 102,687,204 shares of JTS Common Stock would be issued and outstanding, of which 63,735,718 shares, or 62%, would represent shares issued in the Merger upon conversion of Atari Common Stock. Fractional Shares. No fractional shares of JTS Common Stock will be issued as a result of the Merger. In lieu thereof, each holder of Atari Common Stock shall receive cash (without interest) in an amount equal to the fraction of a share of JTS Common Stock otherwise issuable to such holder multiplied by the last sale price per share of Atari Common Stock for the trading day preceding the date of the Effective Time as reported in The Wall Street Journal. Exchange of Certificates. Registrar and Transfer Company, Cranford, NJ has been designated to act as Exchange Agent for the purpose of exchanging Atari Common Stock certificates for JTS Common Stock certificates. As promptly as practicable after the Effective Time, instructions will be mailed to all holders of Atari Common Stock regarding treatment of their stock certificates. After the Effective Time, there will be no further registration of transfers of Atari Common Stock. Upon the surrender of a certificate representing shares of Atari Common Stock to the Exchange Agent, together with a duly executed letter of transmittal, the holder of such certificate will be entitled to receive in exchange therefor the number of shares of JTS Common Stock to which the holder of Atari Common Stock is entitled pursuant to the provisions of the Merger Agreement. Until outstanding certificates formerly representing shares of Atari Common Stock are properly surrendered to the Exchange Agent, no dividend or distribution payable to holders of record of JTS Common Stock shall be paid to any holder of such outstanding certificates, but upon surrender of such outstanding certificates by such holder there shall be paid to such holder the amount of any dividends or distributions (without interest) theretofore paid with respect to such whole shares of JTS Common Stock, but not paid to such holder, and which dividends or distributions had a record date occurring on or subsequent to the Effective Time. Until a certificate representing shares of Atari Common Stock has been surrendered to the Exchange Agent, each such certificate shall be deemed at any time after the Effective Time to represent the right to receive upon such surrender the number of shares of JTS Common Stock to which the stockholder is entitled under the Merger Agreement. ATARI STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE INSTRUCTIONS TO DO SO AFTER COMPLETION OF THE MERGER. 41 49 REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various representations and warranties by each of the parties to the effect that, subject to certain exceptions, among other things: (a) such party is duly organized and in good standing, and has the requisite corporate power to own its properties and carry on its business; (b) each subsidiary of JTS and each significant subsidiary of Atari has been duly organized and is in good standing, and all issued and outstanding capital stock of such subsidiary is owned by its respective parent company; (c) such party has a certain number of authorized shares, issued and outstanding shares, and shares reserved for issuance; (d) such party has all requisite corporate power and authority to enter into the Merger Agreement and to consummate the Merger, the execution and delivery of the Merger Agreement has been duly authorized, and the Merger Agreement constitutes the valid and binding obligation of such party; (e) the execution, delivery and consummation of the Merger will not conflict with such party's Certificate of Incorporation or Bylaws, or violate any material agreement or law to which such party or its assets are bound; (f) the financial statements of such party have been prepared in accordance with generally accepted accounting principles and fairly present its financial condition, results of operations and cash flows; (g) such party has operated its business in the ordinary course consistent with past practice since certain dates (January 28, 1996, in the case of JTS, and December 31, 1995, in the case of Atari (respectively, such party's "Balance Sheet Date")), and, since such Balance Sheet Date, there have been no actions or events that have materially adversely affected such party; (h) such party has no material obligations or liabilities other than those adequately provided for in such party's balance sheet as of the Balance Sheet Date, or those incurred in the ordinary course of business; (i) there is no litigation pending or, to the best of such party's knowledge threatened against such party that, if determined or resolved adversely, would have a material adverse effect on such party; (j) there is no agreement or order binding upon such party which has or could have the effect of prohibiting or impairing such party's business; (k) such party has obtained each governmental license or permit required for the operation of such party's business; (l) such party has good and marketable title to all of its properties and assets reflected in its balance sheet or acquired after such party's Balance Sheet Date, except for such liens as do not materially impair such party's business or are reflected on such party's balance sheet; (m) such party owns certain intellectual property, has no knowledge of material unauthorized use, disclosure infringement or misappropriation of any such intellectual property, and has not entered into any agreement to indemnify any other person against a charge of infringement of such intellectual property; (n) to the knowledge of such party, no hazardous material is present on such party's property and such party has materially complied with certain laws and regulations relating to such hazardous materials; (o) such party has timely filed all required tax returns or statements, and such party has provided adequate accruals in its financial statements for any taxes not yet paid; (p) such party has complied with the provisions of the Employment Retirement Income Security Act of 1974, as amended, with respect to each "employee benefit plan" maintained by it; (q) execution of the Merger Agreement will not result in extraordinary payments to or the acceleration of benefits to such party's employees; (r) such party is in material compliance with applicable laws and regulations regarding employment, discrimination, and other terms and conditions of employment, and such party has no pending or, to its knowledge threatened material controversy with any of its employees. In addition to the foregoing mutual representations and warranties, Atari has made certain representations and warranties to JTS to the effect that: (a) Atari has furnished to JTS copies of each report, registration statement, proxy statement and other document filed with the Commission by Atari since January 1, 1993, such reports as of the dates they were filed do not contain an untrue statement or omit to state a material fact, and such reports complied in all material respects, when filed, with the then applicable requirements of the Commission and (b) Atari has obtained an opinion from Montgomery Securities to the effect that the Merger is fair, from a financial point of view, to Atari. The foregoing summary of the various representations and warranties is qualified in its entirety by the full text of the representations and warranties of Atari and JTS set forth in Articles III and IV of the Merger Agreement attached to the Joint Proxy Statement/Prospectus as Appendix A. 42 50 CONDUCT OF BUSINESS PRIOR TO THE MERGER Under the terms of the Merger Agreement, and for the period from the date of the Merger Agreement and continuing until the earlier of the termination of the Merger Agreement or the Effective Time of the Merger, each of Atari and JTS has agreed (except to the extent expressly contemplated by the Merger Agreement or as consented to in writing by the other), to carry on its and its subsidiaries' business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay and to cause its subsidiaries to pay debts and taxes when due subject to good faith disputes over such debts or taxes and to pay or perform other obligations when due. Each of Atari and JTS has also agreed to promptly notify the other of any event or occurrence not in the ordinary course of its or its subsidiaries' business, and of any event which could have a material adverse effect on it and its subsidiaries, taken as a whole. In addition, each of Atari and JTS has agreed that it will not, among other things, do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of the other: (a) cause or permit any amendments to its Certificate of Incorporation or Bylaws; (b) issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or, options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than the issuance of shares of its Common Stock pursuant to the exercise of stock options, warrants or other rights therefor outstanding as of the date of the Merger Agreement (provided, however, that JTS may, in the ordinary course of business consistent with past practice, grant options to purchase up to 250,000 shares of Common Stock under its 1995 Stock Option Plan, and that Atari may issue securities under certain existing benefit plans); (c) declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service to it or its subsidiaries; (d) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its and its parent's/subsidiaries' business, taken as a whole; (e) other than in the ordinary course of business, make or change any material election in respect of taxes, adopt or change any accounting method in respect of taxes, file any material return or any amendment to a material return, enter into any closing agreement, settle any claim or assessment in respect of taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of taxes; (f) accelerate, amend or change the period of exercisability of options, warrants or other rights granted under its employee stock plans or authorize cash payments in exchange for any options, warrants or other rights granted under any of such plans; or (g) take, or agree in writing or otherwise to take, any of the actions described in (a) through (f) above, or any action which would make any of its representations or warranties contained in the Merger Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants thereunder. In addition, under the terms of the Merger Agreement, each of Atari and JTS has agreed that, during the period from the date of the Merger Agreement and continuing until the earlier of the termination of the Merger Agreement or the Effective Time, and except as expressly contemplated by the Merger Agreement, it will not, among other things, do, cause or permit any of the following, or allow cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of the other party: (a) enter into any material contract or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its material contracts, other than in the ordinary course of business consistent with past practice; (b) transfer to any person or entity any rights to its intellectual property other than in the ordinary course of business consistent with past practice; (c) sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material, individually or in the aggregate, to its and its subsidiaries' business, taken as a whole, except in the ordinary course of business consistent with past practice; (d) incur any indebtedness for borrowed money (except amounts borrowed under such party's existing revolving credit line or drawdowns of existing credit facilities for working capital or construction purposes only) or guarantee 43 51 any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others; (e) revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and other than as disclosed in such party's disclosure schedule; (f) pay, discharge or satisfy in an amount in excess of $50,000 in any one case or $250,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in such party's financial statements; (g) terminate or waive any right of substantial value, other than in the ordinary course of business; (h) adopt or amend any employee benefit or stock purchase or option plan; (i) commence a lawsuit other than (i) for the routine collection of bills, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with the other party prior to the filing of such a suit, or (iii) for a breach of the Merger Agreement; (j) take, or agree in writing or otherwise to take, any of the actions described in (a) through (i) above, or any action which would make any of its representations or warranties contained in the Merger Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants thereunder. In addition, Atari has agreed that, during the period from the date of the Merger Agreement and continuing until the earlier of the termination of the Merger Agreement or the Effective Time, it shall not, without the prior written consent of JTS, make any capital expenditures, capital additions or capital improvements except in the ordinary course of business and consistent with past practice, and in any event not to exceed $25,000 per quarter. Each of the parties has further agreed that from and after the date of the Merger Agreement until the earlier of the effective time of the Merger or the termination of the Merger Agreement in accordance with its terms, it will not, directly or indirectly (i) solicit, initiate discuss or engage in negotiations with any person (whether such negotiations are initiated by such party or otherwise) or take any other action intended or designed to facilitate the efforts of any person, other than the other party, relating to the possible acquisition of such party or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets of otherwise) or any material portion of its or their capital stock or assets (with any such efforts by any such person, including a firm proposal to make such an acquisition, being referred to as an "Acquisition Proposal"), (ii) provide non-public information with respect to such party or any of its subsidiaries to any person relating to a possible Acquisition Proposal by any person, other than the other party, (iii) enter into an agreement with any person, other than the other party, providing for a possible Acquisition Proposal, or (iv) make or authorize any statement, recommendation or solicitation in support of any possible Acquisition Proposal by any person other than the other party. If either party receives any unsolicited offer or proposal to enter into negotiations relating to an Acquisition Proposal, such party shall immediately notify the other party thereof, including information as to the identity of the party making any such offer and the specific terms of such offer. Each party agrees that the issuance of an injunction or other equitable remedy is an appropriate remedy for any breach of such agreements. Notwithstanding the foregoing, nothing contained in the Merger Agreement prevents the Board of Directors of Atari (or its agents pursuant to its instructions) from taking any of the following actions: (i) informing any third party of the foregoing conditions or providing a copy of the Merger Agreement (other than the JTS Disclosure Schedule) to any third party and (ii) considering, negotiating, approving and recommending to the stockholders of Atari an unsolicited, bona fide, written Acquisition Proposal which the Board of Directors of Atari determines in good faith (after consultation with its financial advisors and after consultation with outside counsel as to whether the Board of Directors is required to do so in order to discharge properly its fiduciary duties to stockholders under applicable law) would result in a transaction more favorable to Atari's stockholders from a financial point of view than the Merger (a "Superior Atari Proposal"). However, in the event Atari were to accept a Superior Atari Proposal, JTS would be entitled to convert the Atari loan into shares of JTS Series A Preferred Stock. ADDITIONAL AGREEMENTS Each of Atari and JTS shall afford the other with reasonable access prior to the Effective Time to (a) all of such party's properties, books, contracts, commitments and records and (b) all other information 44 52 concerning the business, properties and personnel of such party as the other party may reasonably request. Each party shall promptly apply for or otherwise seek, and use its best efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the Merger, and shall use its best efforts to obtain all necessary consents, waivers and approvals under any of its material contracts in connection with the Merger for the assignment thereof. Each person or entity who holds one percent (1%) or more of the outstanding shares of JTS capital stock and each person or entity who holds more than five percent (5%) of the outstanding shares of Atari capital stock shall execute and deliver a "continuity of interest certificate" (the "Continuity of Interest Certificate") prior to the Closing. The Continuity of Interest Certificate shall contain certain representations relating to such stockholders' intention to sell or dispose of their respective holdings of Atari or JTS capital stock. The Combined Company shall be entitled to place appropriate legends on the certificates evidencing any JTS Common Stock to be received by such persons or entities pursuant to the terms of the Merger Agreement. Such legends shall refer to, among other things, restrictions on disposition of JTS Common Stock pursuant to Rule 145 under the Securities Act. Certain stockholders of Atari and JTS, prior to the execution of the Merger Agreement, executed and delivered a Voting Agreement pursuant to which such stockholders agreed to: (a) refrain from selling or otherwise disposing of any shares of Atari or JTS capital stock, as applicable, prior to the Effective Time or the date of termination of the Merger Agreement; (b) vote such shares in favor of the Merger Agreement, the Merger and any matter that could reasonably be expected to facilitate the Merger; and (c) deliver to Atari or JTS, as applicable, an irrevocable proxy to vote such shares in favor of the Merger Agreement and the Merger. At the Effective Time, each outstanding option to purchase shares of Atari Common Stock under the Atari Stock Option Plan, whether vested or unvested, will be assumed by JTS. Each such option so assumed by JTS under the Merger Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Atari Stock Option Plan. After the Effective Time, JTS shall (to the extent not prohibited by law) indemnify and hold harmless, and pay in advance expenses, costs, damages, settlements and fees to each director or officer of Atari serving as such as of the date of the Merger Agreement as provided under Nevada law or the Articles of Incorporation or Bylaws of Atari, or any indemnification agreement to which Atari and such officer or director is a party, in each case as in effect at the date of the Merger Agreement, which provisions shall survive the Merger and shall continue in full force and effect after the Effective Time. BOARD OF DIRECTORS AND OFFICERS FOLLOWING MERGER At the Effective Time, the directors of the Combined Company will be Sirjang L. Tandon, David T. Mitchell, Alain L. Azan, Jean D. Deleage, Roger Johnson, Lip-Bu Tan, Jack Tramiel and Michael Rosenberg. Messrs. Tandon, Mitchell, Azan, Deleage, Johnson and Tan are currently directors of JTS, and Messrs. Tramiel and Rosenberg are currently directors of Atari. The executive officers of JTS immediately prior to the effective time will be the executive officers of the Combined Company. The parties have also agreed that Jack Tramiel or a person designated by Jack Tramiel shall be a member of each committee of the Board of Directors of the Combined Company. CONDITIONS TO THE MERGER Each party's respective obligation to effect the Merger is subject to, among other things, the approval of the Merger Agreement and the Merger by the requisite votes of the stockholders of Atari and JTS, the Commission having declared this Joint Proxy Statement/Prospectus effective, and the satisfaction prior to the Effective Time of the Merger of the additional following conditions: (a) the absence of any injunction or other legal action or regulatory restraint or prohibition preventing the consummation of the Merger or rendering the consummation of the Merger illegal; (b) all government approvals, waivers and consents, if any, necessary for consummation of or in connection with the Merger and the several transactions contemplated thereby, including such approvals, waivers and consents as may be required under the Securities Act, under state Blue Sky laws, and under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR 45 53 Act") having been received; (c) Atari and JTS having received substantially identical written opinions of their respective counsel to the effect that, based upon certain representations and assumptions and subject to certain qualifications, the Merger will constitute a tax-free reorganization; (d) the JTS Common Stock shall have been approved for listing on the Nasdaq National Market or the American Stock Exchange; (e) no more than five percent (5%) of the shareholders of JTS shall have exercised appraisal or dissenter's rights with respect to the Merger; (f) certain significant stockholders of each party shall have executed Continuity of Interest Certificates; and (g) JTS shall have assumed the Atari Debentures. The obligations of JTS to effect the Merger are subject to, among other things, the satisfaction prior to the Effective Time of the Merger of the following conditions, unless waived by JTS: (a) the representations and warranties of Atari in the Merger Agreement shall be true and correct in all respects on and as of the Effective Time as though such representations and warranties were made on and as of such time, except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a material adverse effect on Atari and its subsidiaries; (b) Atari shall have performed and complied in all respects with all covenants, obligations and conditions of the Merger Agreement required to be so performed and complied with, except to the extent that the failure to so perform and comply has not had and could not reasonably be expected to have a material adverse effect on Atari and its subsidiaries; (c) JTS shall have received a certificate executed on behalf of Atari by its President and its Chief Financial Officer to the effect that, as of the Effective Time, (i) all representations and warranties made by Atari under the Merger Agreement are true and complete and (ii) all covenants, obligations and conditions of the Merger Agreement to be performed by Atari have been so performed; (d) JTS shall have been furnished with evidence satisfactory to it of the consent or approval of third parties whose consent or approval shall be required in connection with the merger; (e) the absence of any injunction or other legal action or restraint limiting or restricting JTS's conduct or operation of the business of Atari and its subsidiaries following the Merger shall be in effect; (f) JTS shall have received a legal opinion as to certain matters from Wilson Sonsini Goodrich & Rosati, P.C., counsel to Atari; (f) there shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of Atari and its subsidiaries, taken as a whole. The obligations of Atari to effect the Merger are subject to, among other things, the satisfaction prior to the Effective Time of the following conditions, unless waived by Atari: (a) the representations and warranties of JTS in the Merger Agreement shall be true and correct in all respects on and as of the effective time of the Merger as though such representations and warranties were made on and as of such time, except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a material adverse effect on JTS and its subsidiaries; (b) JTS shall have performed and complied in all respects with all covenants, obligations and conditions of the Merger Agreement required to be performed and complied with by it as of the effective time of the Merger, except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a material adverse effect on JTS and its subsidiaries; (c) Atari shall have received a certificate executed on behalf of JTS by its Chief Executive Officer and its Chief Financial Officer to the effect that, as of the Effective Time, (i) all representations and warranties made by JTS under the Merger Agreement are true and complete and (ii) all covenants, obligations and conditions of the Merger Agreement to be performed by JTS have been so performed; (d) Atari shall have been furnished with evidence satisfactory to it of the consent or approval of third parties whose consent or approval shall be required in connection with the Merger; (e) the absence of any injunction or other legal action or restraint limiting or restricting JTS' conduct or operation of the business of Atari and its subsidiaries following the Merger shall be in effect; (f) Atari shall have received a legal opinion as to certain matters from Cooley Godward Castro Huddleson & Tatum, counsel to JTS; (g) there shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of JTS and its subsidiaries, taken as a whole; (h) the outstanding shares of JTS Series A Preferred Stock shall have converted into shares of JTS Common Stock; and (i) that certain Right of First Refusal and Co-Sale Agreement between JTS and certain stockholders of JTS shall have been terminated. 46 54 As promptly as practicable after the satisfaction or waiver of the conditions set forth in the Merger Agreement, (i) JTS will file certificates of merger with the Secretary of State of Delaware and the Recorder of the County in which the registered office of JTS is located and (ii) Atari will file a certificate of merger with the Secretary of State of Nevada. The Merger will become effective upon such filings. TERMINATION, AMENDMENT AND WAIVER The Merger Agreement may be terminated by mutual written agreement of Atari and JTS, or by either Atari or JTS, if (a) as a result of a breach by the other party of a representation, warranty, covenant or agreement set forth in the Merger Agreement which has or can reasonably be expected to have a material adverse effect on such other party which breach is not cured within five days after written notice from the other (except that no cure period is provided for a breach which by its nature cannot be cured), or (b) there shall be any final action taken, or any statute, rule, regulation or order enacted which would prohibit JTS' ownership or operation of all or a material portion of the business of Atari, or which compels JTS or Atari to dispose of or otherwise relinquish all or a material portion of either such party's assets. The Merger Agreement may be terminated by any party if (a) the required approvals of the stockholders of JTS and Atari are not obtained at the respective stockholder meetings, (b) the closing of the Merger has not occurred on or before July 31,1996, (c) there is a final, non-appealable order of a federal or state court in effect preventing consummation of the Merger, or (d) if the Atari Board of Directors accepts, approves or recommends a Superior Atari Proposal to the Atari stockholders. The Merger Agreement may be amended by Atari or JTS at any time before or after approval by the Atari stockholders or the JTS stockholders, provided that an amendment made subsequent to the adoption of the Merger Agreement by the stockholders of JTS and Atari, shall not (a) alter or change the amount or kind of consideration to be received on conversion of the Atari Common Stock, (b) alter or change any term of the Certificate of Incorporation of JTS to be effected by the Merger or (c) alter or change any of the terms and conditions of the Merger Agreement if such alteration or change would adversely affect the holders of JTS Common Stock, JTS Series A Preferred Stock or Atari Common Stock. At any time prior to the Effective Time any party to the Merger Agreement may (a) extend the time for performance of any obligation of the other parties, (b) waive any inaccuracies in the representations and warranties made to such party in the Merger Agreement or any document delivered in connection therewith and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained in the Merger Agreement. MERGER EXPENSES Atari and JTS will equally bear the costs of solicitation of proxies from their stockholders, all printing and mailing costs in connection with the preparation and mailing of this Joint Proxy Statement/Prospectus to Atari and JTS stockholders, all Commission filing fees with respect to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part, and all costs of qualifying the shares of JTS Common Stock under state blue sky laws. In addition to solicitation by mail, the directors, officers and employees of Atari and JTS may solicit proxies from stockholders by telephone, telegram or letter or in person, but will not be specially compensated for such activities. Brokers, nominees, fiduciaries and other custodians have been requested to forward solicitation material to the beneficial owners of Atari Common Stock held of record by them. Such custodians will be reimbursed by Atari for their reasonable expenses incurred in that connection. If the Merger is consummated, all costs and expenses incurred in connection with the Merger not previously paid will be paid by the Combined Company. CERTAIN OTHER ITEMS RELATED TO THE MERGER ACCOUNTING TREATMENT For accounting purposes, the Merger is treated as if Atari acquired JTS. A new basis of accounting will be established for the assets and liabilities of JTS. The new basis reflects the allocation of the purchase price 47 55 to the JTS assets and liabilities on the basis of their fair values at the time the proposed transaction was announced. The aggregate purchase price to be allocated includes the outstanding common stock of JTS, valued using $2.50 per share which is the representative value of the Atari Common Stock at the time the proposed transaction was announced, as well as the value of JTS options and warrants and direct costs of the acquisition. Subsequent to the Merger, the financial statements of the Combined Company will reflect the combined financial position, results of operations and cash flows of Atari and JTS based on the new basis of accounting for JTS and the historic cost basis of Atari. Pro forma combined condensed financial statements are presented herein giving effect to the Merger as if the transaction occurred, for purposes of the pro forma combined financial position of the Combined Company, on March 31, 1996, and for purposes of the pro forma combined results of operations of the Combined Company, on the first day of each of the periods presented. The allocation of the purchase price in the pro forma statements was based on a preliminary independent appraisal of the fair value of the JTS assets acquired and liabilities assumed which will be revised as updated information becomes available at the Effective Time. Under the purchase accounting method, giving effect to the Merger, existing technology and goodwill in the amount of approximately $22.0 million and $11.7 million, respectively, are expected to be recognized by the Combined Company. It is anticipated that the Combined Company will amortize the resulting existing technology and goodwill over periods of three and seven years, respectively, which will have an adverse effect on its results of operations. In addition, upon the consummation of the Merger, in the third quarter of calendar year 1996, the Combined Company expects to expense approximately $100.0 million of purchased in-process technology. See "Unaudited Pro Forma Combined Condensed Financial Statements." RESALE OF JTS COMMON STOCK The shares of JTS Common Stock to be issued to holders of Atari Common Stock in the Merger have been registered under the Securities Act by a registration statement, of which this Joint Proxy Statement/Prospectus is a part, thereby allowing such shares of JTS Common Stock to be traded without restriction under the Securities Act by all such holders, except that such holders who are "affiliates" (as such term is defined for purposes of Rule 145 promulgated under the Securities Act) of Atari will be subject to restrictions on transferability as provided in Rule 145. Notwithstanding the Merger, certain shares of JTS Common Stock will continue to be subject to contractual restrictions on transfer, rights of repurchase and other provisions (and corresponding restrictive legends on certificates issued representing such shares), if any, to the same extent as were applicable immediately prior to the Effective Time, all as set forth in the restricted stock purchase agreements entered into by the holders of such shares of JTS Common Stock upon the purchase of such shares by such holder and any restrictive legends set forth on any certificates representing such shares. See "Information Regarding JTS Corporation -- Management of JTS -- Executive Compensation." CERTIFICATE OF INCORPORATION AND BYLAWS OF COMBINED COMPANY Upon consummation of the Merger, the Certificate of Incorporation and the Bylaws of JTS will be amended and restated as approved by the JTS stockholders in May 1996, and such documents will be the Certificate of Incorporation and the Bylaws of the Combined Company. See "Comparison of Rights of Stockholders of Atari and JTS." ASSUMPTION OF ATARI OPTIONS Upon consummation of the Merger, each option to purchase Atari Common Stock then outstanding will be assumed by JTS and will be converted automatically into an option to purchase the same number of shares of JTS Common Stock at an exercise price per share equal to the exercise price per share of the Atari option. The other terms of the Atari options, including vesting schedules, will remain unchanged. 48 56 ASSUMPTION OF ATARI DEBENTURES Upon consummation of the Merger, all of Atari's obligations under its outstanding 5 1/4% convertible subordinated debentures due April 29, 2002 (the "Atari Debentures") will be assumed by JTS. The Atari Debentures are presently convertible into Atari Common Stock at a conversion price of $16.3125 per share and, following the Merger, will be convertible into JTS Common Stock at the same conversion price. The other terms of the Atari Debentures will remain unchanged. INTERESTS OF CERTAIN PERSONS IN THE MERGER As of May 22, 1996, members of the Board of Directors and executive officers of Atari beneficially owned approximately 23,952,129 shares (37%) of the outstanding Common Stock of Atari. As of the same date, members of the Board of Directors and executive officers of JTS beneficially owned approximately 9,050,000 shares (97%) of the outstanding JTS Common Stock and approximately 14,120,000 shares (48%) of the outstanding JTS Series A Preferred Stock. Following the consummation of the Merger, the executive officers and the members of the Board of Directors of the Combined Company will beneficially own approximately 35,660,000 shares (35%) of the outstanding Common Stock of the Combined Company. See "-- Summary of the Merger Agreement -- Board of Directors and Officers Following the Merger," "Information Regarding Atari Corporation -- Principal Stockholders of Atari" and "Information Regarding JTS Corporation -- Principal Stockholders of JTS." Mr. David T. Mitchell, Chief Executive Officer, President and a director of JTS, Mr. Kenneth D. Wing, Executive Vice President, Research and Development Quality/Reliability of JTS, and Ms. W. Virginia Walker, Executive Vice President, Finance and Administration and Chief Financial Officer of JTS, have purchased 2,000,000 shares, 300,000 shares and 250,000 shares of restricted JTS Common Stock, respectively, pursuant to restricted stock purchase agreements. Each of the agreements provides that such shares of JTS Common Stock shall fully vest over a four year period; provided, however, such shares of JTS Common Stock shall immediately vest in the event that there occurs a change of control of JTS and, within three years thereafter, the holder of such JTS Common Stock is reassigned to a lesser position, terminated without cause or relocated. The Merger constitutes a change of control under such restricted stock purchase agreements. In March 1996, Mr. Mitchell and Mr. Sirjang L. Tandon, JTS' Chairman of the Board and Corporate Technical Strategist, each purchased 1,000,000 shares of JTS Common Stock at a purchase price of $1.00 per share. All of such shares are subject to a right of repurchase at cost in favor of JTS, which repurchase option lapses as to all such shares after five years of service with JTS; provided, however, that with respect to each individual, JTS' right of repurchase will lapse at the rate of one-eighth of the total shares purchased in September 1996 and as to 1/48th of the total shares purchased per month thereafter if the Merger closes. In addition, at the discretion of JTS' Board of Directors, the right of repurchase with respect to Mr. Mitchell's 1,000,000 shares of JTS Common Stock may be caused to lapse as to all such shares at any time. GOVERNMENTAL AND REGULATORY APPROVALS Under the provisions of the HSR Act, certain acquisitions of voting securities may not be consummated unless certain information has been filed with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") and the applicable waiting period under the HSR Act has expired or been terminated. Neither Atari nor JTS is required to file HSR forms under the HSR Act in connection with the Merger, except to the extent that the acquisition of JTS Common Stock by certain Atari stockholders in connection with the Merger may separately be subject to the premerger notification and waiting period requirements of the HSR Act. All necessary filings have been made and the applicable waiting period has terminated with respect to such filings. At any time before or after the Effective Time, and notwithstanding the termination of the HSR Act waiting period, the Antitrust Division, the FTC or a private person could seek under the antitrust laws, among other things, to enjoin the Merger or to cause Atari or JTS to divest itself, in whole or in part, of a portion of its business, or the Combined Company to divest itself, in whole or in part, of any of the businesses of Atari or 49 57 JTS. There can be no assurance that a challenge to the Merger will not be made or that, if such a challenge is made, Atari and JTS will prevail. Other than the waiting period under the HSR Act, Atari and JTS are aware of no governmental or regulatory approvals required for consummation of the Merger, other than compliance with the federal securities laws and applicable securities laws of the various states. RELATED TRANSACTIONS ATARI LOAN TO JTS On February 13, 1996, Atari loaned $25.0 million to JTS pursuant to a Subordinated Secured Convertible Promissory Note (the "Note") which is secured by substantially all of the assets of JTS. Interest accrues on the unpaid principal amount of the Note at the rate of 8.5% per annum. The Note provides that JTS shall repay the outstanding principal and interest under the Note on September 30, 1996 if the Merger has not occurred prior to such time. The Note is expressly subordinated to outstanding indebtedness in connection with JTS' primary bank loan agreement, up to an amount of $5.0 million at any one time. In addition, Atari's security interest in JTS' assets is junior to security interests previously obtained by a bank and certain equipment lessors. The amount of the senior obligations was approximately $9.1 million at January 28, 1996. In addition, the Note provides that JTS may incur (a) indebtedness to trade creditors in the ordinary course of business, (b) contingent obligations consisting of guarantees of the obligations of vendors and suppliers of JTS in respect to transactions entered into in the ordinary course of business, (c) indebtedness with respect to capital lease obligations and indebtedness secured by certain permitted liens, (d) other indebtedness, not exceeding $1.0 million in the aggregate at any time, and (e) obligations with respect to extensions, renewals or refinancings of any of the items in (a)-(d), provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon JTS. Under the terms of the Note, the occurrence of any of the following shall constitute an event of default entitling Atari to declare immediately due and payable all outstanding obligations under the Note: (a) failure by JTS to pay when due any principal or interest payment required under the Note; (b) failure by JTS to observe or perform its agreements regarding prohibitions on certain transactions and on the use of proceeds from the Note; (c) breach of any representation or warranty made in connection with the Note or the Merger Agreement; (d) default by JTS under certain existing loan obligations, the effect of which is to cause indebtedness of JTS in the amount of $250,000 or more to become due prior to its stated date of maturity; (e) involuntary or voluntary bankruptcy proceedings with respect to JTS; (f) a final judgment or order for the payment of money in excess of $250,000 being rendered against JTS in which such judgment or order remains undischarged for a period of 30 days; or (g) the uncured breach by JTS with respect to certain other obligations specified in the Note. In the event that the Merger Agreement is terminated, either party may, under certain conditions, elect to convert the outstanding indebtedness under the Note into shares of JTS Series A Preferred Stock in an amount determined by dividing the aggregate amount of the indebtedness to be converted by the "Conversion Price" then in effect. The initial Conversion Price is $1.00 per share, subject to adjustments for stock splits and similar events. Atari may effect a conversion upon (a) a mutual written consent of JTS and Atari, (b) a breach of any representation, warranty or agreement in the Merger Agreement by JTS, provided that Atari has not materially breached its obligations under the Merger Agreement at such time, (c) the failure of the parties to consummate the Merger by July 31, 1996, or (d) failure by JTS' stockholders to approve the Merger. JTS may effect a conversion of the outstanding indebtedness under the Note in the event that (x) Atari breaches any representation, warranty or agreement contained in the Merger Agreement, provided that JTS has not materially breached its obligations under the Merger Agreement at such time, (y) Atari's stockholders do not approve the Merger, or (z) the Atari Board of Directors shall have accepted, approved or recommended to the Atari Stockholders a Superior Atari Proposal. In the event that either Atari or JTS elects to convert at least $5.0 million of indebtedness outstanding under the Note into shares of JTS Series A Preferred, JTS shall be obligated to issue to Atari warrants to purchase shares of JTS Series A Preferred Stock. Pursuant to the terms of the Note, JTS shall, upon the 50 58 conversion of such outstanding indebtedness, be obligated to issue a warrant to purchase up to 7,500,000 shares of JTS Series A Preferred. Each warrant to be issued by JTS pursuant to the Note shall have an exercise price of $2.00 per share, subject to adjustment on certain events, and a term of five years. The shares of JTS Series A Preferred issuable upon exercise of any warrants issued pursuant to the Note shall be entitled to registration rights on parity with the existing registration rights held by the holders of JTS Series A Preferred Stock. VOTING AGREEMENTS In connection with the Merger, certain stockholders of Atari and JTS have entered into Voting Agreements. The terms of such Voting Agreements provide (i) that such stockholders will not transfer (except as may be specifically required by court order), sell, exchange, pledge (except in connection with a bona fide loan transaction) or otherwise dispose of or encumber their shares of Atari Common Stock, JTS Common Stock or JTS Series A Preferred Stock, as the case may be, beneficially owned by them, or any new shares of such stock they may acquire, at any time prior to the effective time or earlier termination of the Merger, and (ii) that such stockholders will vote all shares of Atari Common Stock, JTS Common Stock or JTS Series A Preferred Stock, as the case may be, beneficially owned by them in favor of the approval of the Merger Agreement and the Merger. Such voting agreements are accompanied by irrevocable proxies whereby the stockholders of Atari provide to JTS, and the stockholders of JTS provide to Atari, the right to vote their shares on the proposals relating to the Merger Agreement and the Merger at the Atari Special Meeting and JTS Special Meeting, respectively. Holders of approximately 43% of the shares of Atari Common Stock, 91% of the shares of JTS Common Stock and 70% of the shares of JTS Series A Preferred Stock entitled to vote at the respective stockholder meetings have entered into such Voting Agreements and irrevocable proxies. APPRAISAL AND DISSENTERS' RIGHTS GENERAL Stockholders of JTS who do not vote in favor of the Merger may, under certain circumstances and by following the procedures prescribed by the DGCL, exercise appraisal rights and receive cash for their shares of JTS Common Stock and JTS Series A Preferred Stock. Alternatively, although JTS is a Delaware corporation and is therefore subject to DGCL, the CGCL provides that JTS may be subject to California law with respect to dissenters' rights. Accordingly, pursuant to Chapter 13 of the CGCL, stockholders of JTS who do not vote in favor of the Merger and who comply with the requirements of the CGCL will have a right to demand payment for, and appraisal of the "fair value" of, their shares ("Dissenting Shares"). Although a dissenting stockholder may choose to proceed under one or both of the states' statutes, the dissenting stockholder must specify which statute the stockholder is proceeding under and must follow the appropriate procedures under either the DGCL or the CGCL or suffer termination or waiver of such rights. DELAWARE APPRAISAL RIGHTS If the Merger is consummated, dissenting holders of JTS Common Stock and JTS Series A Preferred Stock may be entitled to have the "fair value" (exclusive of any element of value arising from the accomplishment or expectation of the Merger) of their shares immediately prior to the Effective Time paid to them by complying with the provisions of Section 262 of the DGCL. The following is a brief summary of Section 262, which sets forth the procedures for dissenting from the Merger and demanding statutory appraisal rights. This summary does not purport to be a complete statement of the provisions of the Delaware Law relating to the rights of JTS stockholders to an appraisal of the value of their shares and is qualified in its entirety by reference to Section 262, the full text of which is attached hereto as Appendix D. Failure to follow these procedures exactly could result in the loss of appraisal rights (if available). This Joint Proxy Statement/Prospectus constitutes notice to holders of JTS Common Stock and JTS Series A Preferred Stock concerning the availability of appraisal rights under Section 262. Under Section 262, a stockholder of record wishing to assert appraisal rights must hold the shares of stock on the date of making a demand for appraisal rights with respect to such shares and must continuously hold such shares through the Effective Time. Stockholders who desire to exercise their appraisal rights (if 51 59 available) must satisfy all of the conditions of Section 262. A written demand for appraisal of shares must be filed with JTS before the taking of the vote on the Merger. This written demand for appraisal of shares must be in addition to and separate from any proxy vote abstaining from or voting against the Merger. Any such abstention or vote against the Merger will not constitute a demand for appraisal within the meaning of Section 262. Stockholders electing to exercise their appraisal rights (if available) under Section 262 must not vote for approval of the Merger. If a stockholder returns a signed proxy but does not specify a vote against approval of the merger or a direction to abstain, the proxy will be voted for approval of the Merger, which will have the effect of waiving that stockholder's appraisal rights (if available). A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder's name appears on the share certificate. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, this demand must be executed by or for the fiduciary. If the shares are owned by or for more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner. A person having a beneficial interest in JTS Common Stock or JTS Series A Preferred Stock held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below and in a timely manner to perfect whatever appraisal rights the beneficial owner may have. A record owner, such as a broker, who holds JTS Common Stock or JTS Series A Preferred Stock as a nominee for others may exercise his or her right of appraisal with respect to the shares for all or less than all of the beneficial owners of shares as to which he or she is the record owner. In such case, the written demand must set forth the number of shares covered by such demand. Where the number of shares is not expressly mentioned, the demand will be presumed to cover all shares outstanding in the name of such record owner. A JTS stockholder who elects to exercise appraisal rights (if available) should mail or deliver his or her written demand to JTS at its address at 166 Baypointe Parkway, San Jose, California 95134, Attention: W. Virginia Walker, Corporate Secretary. The written demand for appraisal should specify the stockholder's name and mailing address, and that the stockholder is thereby demanding appraisal of his or her JTS stock. If appraisal rights are available in connection with the Merger, within ten days after the Effective Time, JTS must provide notice of the Effective Time to all of its stockholders who have complied with Section 262 and have not voted for approval of the Merger. Within 120 days after the Effective Time, any stockholder who has satisfied the requirements of Section 262 may deliver to JTS a written demand for a statement listing the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Within 120 days after the Effective Time (but not thereafter), either JTS or any stockholder who has complied with the required conditions of Section 262 may file a petition in the Delaware Court of Chancery (the "Court") demanding a determination of the fair value of the dissenting shares. If no petition for appraisal is filed with the Court within 120 days after the Effective Time, stockholders' rights to appraisal (if available) will cease and stockholders will be entitled to receive shares of JTS Common Stock as provided in the Merger Agreement. Any stockholder who desires a petition to be filed is advised to file it on a timely basis. JTS has no present intention to file such a petition if demand for appraisal is made. Upon the filing of any petition by a stockholder in accordance with Section 262, service of a copy will be made upon JTS, which will, within 20 days after service, file in the office of the Register in Chancery in which the petition was filed, a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by JTS. If a petition for an appraisal is filed in a timely fashion, after a hearing on the petition, the Court will determine which stockholders are entitled to appraisal rights and will appraise the shares owned by these stockholders, determining the fair value of such shares, exclusive of any element of value arising from the 52 60 accomplishment or expectation of the Merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be fair value. In determining fair value, the Court is to take into account all relevant factors. JTS stockholders considering seeking appraisal of their shares should note that the fair value of their shares determined under Section 262 could be more, the same or less than the consideration they would receive pursuant to the Merger Agreement if they did not seek appraisal of their shares. The costs of the appraisal proceeding may be determined by the Court and taxed against the parties as the Court deems equitable in the circumstances. Any stockholder who has duly demanded appraisal in compliance with Section 262 will not, after the Effective Time, be entitled to vote for any purpose the shares subject to demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the Effective Time. At any time within 60 days after the Effective Time, any stockholder will have the right to withdraw his or her demand for appraisal and to accept the terms offered in the Merger Agreement. After this period, a stockholder may withdraw his or her demand for appraisal and receive payment for his or her shares as provided in the Merger Agreement only with the consent of JTS. No petition demanding appraisal may be dismissed without approval of the Court. Pursuant to the Merger Agreement, JTS will give Atari prompt notice of any demands received by JTS, and Atari will have the right to participate in all negotiations and proceedings with respect to the demands. JTS will not, except with the prior written consent of Atari, make any payment with respect to, or settle or offer to settle, any such demands. Cash received pursuant to the exercise of appraisal rights may be subject to federal or state income tax. See "-- Certain Federal Income Tax Considerations." The foregoing summary of the applicable provisions of Section 262 is not intended to be a complete statement of such provisions and is qualified in its entirety by reference to such Section, the full text of which is attached as Appendix D-1 to this Joint Proxy Statement/Prospectus. CALIFORNIA DISSENTERS' RIGHTS By virtue of Section 2115 of the CGCL, if holders of JTS Common Stock and JTS Series A Preferred Stock exercise dissenters' rights in connection with the Merger under Chapter 13 of the CGCL ("Chapter 13"), any shares of JTS Common Stock and JTS Series A Preferred Stock as to which such dissenters' rights are exercised will be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the laws of the State of California. The following summary of the provisions of Chapter 13 is not intended to be a complete statement of such provisions and is qualified in its entirety by reference to the full text of Chapter 13, a copy of which is attached hereto as Appendix D-2 and is incorporated herein by reference. If the Merger is approved by the required vote of JTS' stockholders, each holder of shares of JTS Common Stock and JTS Series A Preferred Stock who does not vote in favor of the Merger and who follows the procedures set forth in Chapter 13 will be entitled to have shares of JTS Common Stock and JTS Series A Preferred Stock purchased by JTS for cash at their fair market value. Abstention of the stockholder from voting will not waive the stockholders' dissenter's rights. Voting against the proposed Merger will not constitute the written demand on the corporation for purchase of the Dissenting Shares as required under Chapter 13. The fair market value of shares of JTS Common Stock and JTS Series A Preferred Stock will be determined as of the day before the first announcement of the terms of the proposed Merger, excluding any appreciation or depreciation in consequence of the proposed Merger and therefore valuing the shares of JTS Common Stock and Series A Preferred Stock as if the Merger had not occurred. Within ten days after approval of the Merger by JTS' stockholders, JTS must mail a notice of such approval (the "Approval Notice") to all stockholders who have not voted in favor of the Merger, together with a statement of the price determined by JTS to represent the fair market value of the applicable Dissenting 53 61 Shares, a brief description of the procedures to be followed in order for the stockholder to pursue dissenters' rights, and a copy of Sections 1300-1304 of Chapter 13. The statement of price by JTS constitutes an offer by JTS to purchase all Dissenting Shares at the stated amount. A stockholder of JTS electing to exercise dissenters' rights must, within thirty days after the date on which the Approval Notice is mailed to such stockholder, mail or deliver the written demand to JTS stating that such holder is demanding purchase of his or her shares of JTS Common Stock and/or JTS Series A Preferred Stock, stating the number of shares which JTS must purchase, what the stockholder claims to be the fair market value of such shares and enclosing the share certificates for endorsement by JTS. The statement of fair market value constitutes an offer by the stockholder to sell the shares at such price. A dissenting stockholder may not withdraw a demand for payment unless JTS consents to it. If JTS and the stockholder agree that the shares are Dissenting Shares and agree upon the price of the shares, JTS must pay the stockholder the agreed upon price plus interest thereon at the legal rate from the date of the agreement on Dissenting Shares within thirty days from the later of (i) the date of the agreement on Dissenting Shares, or (ii) the date all contractual conditions to the Merger are satisfied. If JTS denies that the shares are Dissenting Shares, or if JTS and the stockholder fail to agree upon the fair market value of shares of capital stock, then within six months after the date the Approval Notice was mailed to stockholders, any stockholder who has made a valid written purchase demand and who has not voted in favor of approval and adoption of the Merger may file a complaint in California superior court requesting a determination as to whether the shares are Dissenting Shares or as to the fair market value of such holder's shares of JTS Common Stock and/or JTS Series A Preferred Stock, or both. 54 62 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material federal income tax consequences of the exchange of shares of Atari capital stock for JTS capital stock pursuant to the Merger. This summary is based upon opinions of counsel (the "Tax Opinions") delivered by Wilson Sonsini Goodrich & Rosati, P.C. and Cooley Godward Castro Huddleson & Tatum (collectively "Counsel") that the Merger will constitute a "reorganization" within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (a "Reorganization"). Atari and JTS stockholders should be aware that this discussion does not deal with all federal income tax considerations that may be relevant to particular stockholders of Atari and JTS in light of their particular circumstances, such as stockholders who are banks, insurance companies, tax-exempt organizations, dealers in securities, foreign persons or who do not hold their Atari or JTS capital stock as capital assets or who acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions. In addition, the following discussion does not address the tax consequences of the Merger under foreign, state or local tax laws or the tax consequences of transactions effectuated prior or subsequent to or concurrently with the Merger (whether or not such transactions are in connection with the Merger), including, without limitation, transactions in which Atari capital stock is acquired or JTS capital stock is disposed of. ACCORDINGLY, ATARI AND JTS STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES. Subject to the limitations and qualifications referred to herein, Counsel is of the opinion that the Merger will qualify as a Reorganization which will result in the following federal income tax consequences: (a) No gain or loss will be recognized by holders of Atari capital stock solely upon their receipt of JTS capital stock solely in exchange for Atari capital stock in the Merger (except to the extent of cash received in lieu of a fractional share of JTS capital stock). (b) The aggregate tax basis of the JTS capital stock received by Atari stockholders in the Merger will be the same as the aggregate tax basis of Atari capital stock surrendered in exchange therefor less the tax basis, if any, allocated to fractional share interests. (c) The holding period of the JTS capital stock received in the Merger will include the period for which the Atari capital stock surrendered in exchange therefor was held, provided that the Atari capital stock is held as a capital asset at the time of the Merger. (d) Cash payments received by holders of Atari capital stock in lieu of a fractional share will be treated as if a fractional share of JTS capital stock had been issued in the Merger and then redeemed by JTS. A stockholder of Atari receiving such cash will generally recognize gain or loss upon such payment, equal to the difference (if any) between such stockholder's basis in the fractional share and the amount of cash received. (e) A shareholder who exercises appraisal or dissenters' rights with respect to a share of JTS capital stock and who receives payment for such stock in cash should generally recognize capital gain or loss (if such share was held as a capital asset at the time of the Merger) measured by the difference between the shareholder's basis in such share and the amount of cash received, provided that such payment is neither essentially equivalent to a dividend nor has the effect of a distribution of a dividend (a "Dividend Equivalent Transaction"). A sale of capital stock of JTS pursuant to an exercise of appraisal or dissenters' rights will generally not be a Dividend Equivalent Transaction if, as a result of such exercise, the shareholder exercising dissenters' rights and all parties related to such Shareholder own no shares of JTS Stock (either actually or constructively with the meaning of Section 318 of the Code) after the Merger. If, however, a stockholder's sale for cash of JTS capital stock pursuant to an exercise of appraisal or dissenters' rights is a Dividend Equivalent Transaction, then such shareholder will generally recognize income for federal income tax purposes in an amount up to the entire amount of cash so received. (f) Neither JTS nor Atari will recognize material amounts of gain solely as a result of the Merger. 55 63 No ruling has been or will be obtained from the Internal Revenue Service (the "IRS") in connection with the Merger. Atari and JTS stockholders should be aware that the Tax Opinions do not bind the IRS and that the IRS is therefore not precluded from successfully asserting a contrary opinion. The Tax Opinions are also subject to certain limitations and qualifications, they are based upon certain factual assumptions, and are subject to the truth and accuracy of certain representations made by Atari and JTS. Of particular importance are certain representations relating to the Code's "continuity of shareholder interest" and "continuity of business enterprise" requirements. To satisfy the continuity of shareholder interest requirement, Atari shareholders must not, pursuant to a plan or intent existing at or prior to the Merger, dispose of or transfer so much of either (i) their Atari capital stock in anticipation of the Merger or (ii) the JTS capital stock to be received in the Merger (collectively, "Planned Dispositions"), such that Atari shareholders, as a group, would no longer have a significant equity interest in the Atari business being conducted by JTS after the Merger. Atari shareholders will generally be regarded as having a significant equity interest as long as the number of shares of JTS capital stock received in the Merger less the number of shares subject to Planned Dispositions (if any) represents, in the aggregate, a substantial portion of the entire consideration received by the Atari shareholders in the Merger. To satisfy the continuity of business enterprise requirement, JTS must either (i) continue the historic business conducted by Atari or (ii) use a significant portion of the historic business assets of Atari in a business. A successful IRS challenge to the Reorganization status of the Merger would result in the Merger being treated as a taxable sale of Atari's assets. Additionally, a successful IRS challenge to such Reorganization status would result in Atari stockholders recognizing taxable gain or loss with respect to each share of Atari capital stock surrendered equal to the difference between the stockholder's basis in such share and the fair market value, as of the Effective Time, of the JTS capital stock received in exchange therefor. In such event, a stockholder's aggregate basis in the JTS capital stock so received would equal its fair market value and the holding period for such stock would begin the day after the Effective Time. 56 64 STOCK PRICE AND DIVIDEND INFORMATION ATARI Atari's Common Stock has traded on the American Stock Exchange under the symbol "ATC" since November 7, 1986. As of the close of business on May 22, 1996, 63,735,718 shares of Atari Common Stock were outstanding and no shares of Preferred Stock were outstanding. As of that date, there were approximately 2,600 stockholders of record of Atari Common Stock. The following table sets forth the high and low sale prices of Atari's Common Stock for the periods indicated as reported on the consolidated transaction system.
HIGH LOW ---- ---- FISCAL YEAR 1996 Second Quarter (through June 19, 1996)......................... $ 9 $ 3 5/8 First Quarter.................................................. 4 1/8 1 5/8 FISCAL YEAR 1995 Fourth Quarter................................................. $ 3 5/16 $ 1 1/8 Third Quarter.................................................. 3 5/8 2 9/16 Second Quarter................................................. 3 1/8 2 1/2 First Quarter.................................................. 4 1/4 2 3/4 FISCAL YEAR 1994 Fourth Quarter................................................. $ 7 3/8 $ 3 9/16 Third Quarter.................................................. 7 3/4 2 7/8 Second Quarter................................................. 6 5/8 2 7/8 First Quarter.................................................. 8 1/8 5 5/8
Atari has never paid cash dividends on its Common Stock and does not anticipate a change in this practice in the foreseeable future. JTS JTS is a privately held company, and there is no public trading market for its stock. As of the close of business on May 15, 1996, 9,255,116 shares of JTS Common Stock and 29,696,370 shares of JTS Series A Preferred Stock were issued and outstanding. There are a total of 52 holders of record of JTS Series A Preferred Stock and 16 holders of record of JTS Common Stock. After the Closing, the JTS Common Stock is expected to be publicly traded on the American Stock Exchange under the symbol "JTS". No cash dividend has ever been paid on any class of JTS capital stock. 57 65 JTS' ACQUISITION OF THE DISK DRIVE DIVISION OF MODULER ELECTRONICS Moduler Electronics is located in Madras, India and was founded in 1986 by members of the family of Sirjang L. Tandon, JTS' Chairman and Corporate Technical Strategist, as a contract manufacturer of power supplies for computers and hard disk drive subassemblies. In December 1994, Moduler Electronics received Indian government approval to manufacture hard disk drives. At approximately the same time, Moduler Electronics discontinued production of hard disk drive subassemblies for customers other than JTS. In March 1995, JTS entered into a verbal agreement to acquire the hard disk drive division of Moduler Electronics for 1,911,673 shares of JTS Series A Preferred Stock and a warrant to purchase 500,000 shares of JTS Common Stock at an exercise price of $.25 per share. JTS subsequently assumed operational and management control of certain portions of the hard disk drive business of Moduler Electronics. The verbal agreement contemplated that prior to JTS' acquisition, Moduler Electronics would divest itself of certain voice coil assembly and other operations not directly involved in its hard disk drive business. In April 1996, following Moduler Electronics' divestiture of its voice coil business and businesses unrelated to its hard disk drive operations, JTS purchased 90% of the outstanding capital stock of Moduler Electronics in consideration for 1,911,673 shares of JTS Series A Preferred Stock and a warrant to purchase 750,000 shares of JTS Common Stock at an exercise price of $0.25 per share. The warrant is immediately exercisable as to 500,000 shares of JTS Common Stock and becomes exercisable with respect to the remaining 250,000 shares when certain borrowings and credit facilities in the amount of $29 million become available to Moduler Electronics. The 250,000 share portion of the warrant related to the credit facilities of Moduler Electronics will be valued and recorded as additional interest expense over the term of the borrowings, if and when such portion of the warrant becomes exercisable. In connection with the acquisition of the hard disk drive business of Moduler Electronics, JTS agreed not to compete in the head stack manufacturing business within India for a period of five years, provided that JTS may manufacture head stacks for its internal requirements. In return, the former owners of Moduler Electronics agreed not to compete in the disk drive manufacturing business within India for a period of five years. In addition, JTS granted certain registration rights with respect to the shares of JTS capital stock issued in the acquisition. JTS has a right of first refusal to purchase the remaining 10% equity interest in Moduler Electronics at 10% of the net book value of Moduler Electronics at the time of the purchase. Since JTS began hard disk drive production in early 1995, JTS has conducted substantially all of its manufacturing operations at the Moduler Electronics facility. As of January 28, 1996, Moduler Electronics employed 1,139 individuals. The Madras facility presently occupies 85,000 square feet in a single building, 4,000 square feet of which are designated a "clean room" environment. At this facility, JTS is adding production lines and expanding its clean room environment. JTS believes that locating its manufacturing operations in India represents an important element of its manufacturing strategy due to the local availability of a high-quality, low-cost technical labor pool. See "Information Regarding JTS Corporation -- Business of JTS -- Manufacturing." 58 66 JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements give effect to the Merger of JTS and Moduler Electronics which was consummated on April 4, 1996 and will be accounted for as a purchase. The accompanying pro forma combined condensed balance sheet as of January 28, 1996 assumes that the acquisition of Moduler Electronics by JTS took place on that date and combines JTS' and Moduler Electronics' balance sheets as of January 28, 1996. The accompanying pro forma combined condensed statement of operations for the year ended January 28, 1996 assumes that the acquisition took place as of the beginning of fiscal 1996, and combines JTS' and Moduler Electronics' statements of operations for the year ended January 28, 1996. The pro forma combined condensed statements of operations do not include the effect of any nonrecurring charges directly attributable to the acquisition. In March 1995, JTS agreed to acquire the hard disk drive division of Moduler Electronics and subsequently assumed operational and management control of certain portions of the hard disk drive business of Moduler Electronics. The purchase price included 1,911,673 shares of JTS Series A Preferred Stock and a warrant to purchase JTS Common Stock at an exercise price of $0.25 per share in exchange for 90% of the outstanding capital stock of Moduler Electronics. Actual statements of the companies will be combined after the consummation date with no retroactive restatements. The accompanying pro forma combined condensed financial statements should be read in conjunction with JTS' and Moduler Electronics' historical financial statements and related notes thereto. 59 67 JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (IN THOUSANDS)
AS OF JANUARY 28, 1996 ------------------------------------------------------ HISTORICAL HISTORICAL MODULER PRO FORMA PRO FORMA JTS ELECTRONICS ADJUSTMENTS COMBINED ---------- ---------- ----------- --------- ASSETS CURRENT ASSETS: Cash, cash equivalents and restricted cash.... $ 547 $ 868 $ 1,415 Trade and other receivable.................... 2,098 -- 2,098 Receivable from Moduler Electronics........... 6,892 -- $(6,892)(a) -- Receivable from related parties............... -- -- 380(a) 380 Inventories................................... 2,093 5,983 8,076 Prepaid and other current assets.............. 240 513 753 ------- ------ ------- Total current assets.................. 11,870 7,364 12,722 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET....... 7,943 5,603 1,249(b) 14,795 GOODWILL........................................ -- -- 594(b) 594 ------- ------ ------- $ 19,813 $ 12,967 $ 28,111 ======= ====== ======= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Bank line of credit and short-term borrowing.................................. $ 4,323 $ 6,085 $ 10,408 Note payable to stockholder................... 1,000 -- 1,000 Accounts payable -- Trade...................................... 7,226 6,268 13,494 Moduler Electronics........................ 9,546 -- (5,734)(a) -- (3,812)(b) Related parties............................ -- 1,168 (778)(a) 390 Accrued liabilities........................... 3,501 197 3,698 Current portion of capitalized lease obligations and long-term debt......................... 1,520 105 1,625 ------- ------ ------- Total current liabilities............. 27,116 13,823 30,615 LONG-TERM LIABILITIES........................... 3,485 2,763 6,248 ------- ------ ------- Total Liabilities..................... 30,601 16,586 36,863 REDEEMABLE SERIES A PREFERRED STOCK............. 27,785 -- 1,911(b) 29,696 STOCKHOLDERS' DEFICIT: Common stock.................................. -- -- -- Warrant for common stock...................... -- -- 125(b) 125 Additional paid-in capital.................... 6,004 -- 6,004 Deferred compensation......................... (4,320) -- (4,320) Notes receivable from stockholders............ (623) -- (623) Accumulated deficit........................... (39,634) (39,634) Liabilities in excess of assets............... -- (3,619) 3,619(b) -- ====== ------- ------- Total stockholders' deficit........... (38,573) (38,448) ------- ------- $ 19,813 $ 28,111 ======= =======
See notes to unaudited pro forma condensed combined financial statements. 60 68 JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED JANUARY 28, 1996 ---------------------------------------------------------- HISTORICAL HISTORICAL MODULER PRO FORMA PRO FORMA JTS ELECTRONICS ADJUSTMENTS COMBINED ---------- ----------- ----------- --------- REVENUE: Product sales.............................. $ 13,502 $15,580 $ (15,580)(c) $ 13,502 Technology license revenue................. 5,275 -- 5,275 ------- ------ ------- 18,777 15,580 18,777 COST OF PRODUCT SALES........................ 28,548 19,160 (15,580)(c) 33,626 ------- ------ ------- (599)(e) 2,097(e) GROSS MARGIN (DEFICIT)....................... (9,771) (3,580) (14,849) OPERATING EXPENSES: Research and development................... 13,375 -- 13,375 Selling, general and administrative........ 5,579 -- 198(d) 5,777 Manufacturing start-up costs............... 3,812 -- (3,812)(f) -- ------- ------ ------- 22,766 -- 19,152 ------- ------ ------- OPERATING LOSS............................... (32,537) (3,580) (34,001) OTHER INCOME (EXPENSE): Interest income............................ 108 141 249 Interest expense........................... (589) (464) (1,053) Other, net................................. (32) (333) (365) ------- ------ ------- NET LOSS..................................... $ (33,050) $(4,236) $ (35,170) ======= ====== ======= NET LOSS PER COMMON SHARE.................... $ (7.17) $ (7.63) ======= ======= SHARES USED IN COMPUTING NET LOSS PER SHARE...................................... 4,611 (g) 4,611
See notes to unaudited pro forma condensed combined financial statements. 61 69 JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS NOTE 1. PURCHASE PRICE ALLOCATION The purchase price of the acquisition of Moduler Electronics is computed as follows (in thousands): Preferred stock..................................... $1,911 Warrants............................................ 125 ------- $2,036 =======
The preferred stock is valued at $1.00 per share, such number of shares and the value per share were agreed to in March 1995. The price per preferred share was identical to the price per preferred share received by the Company in cash sales to unrelated parties in February and September 1995. The warrant to purchase 500,000 shares of common stock at $.25 was valued at $125,000 and reflects the higher value of the preferred stock relative to the common stock. Subsequent to the March 1995 agreement to purchase Moduler Electronics, JTS assumed operational and management control of certain portions of the Disk Drive Unit and funded certain of the start-up losses. Accordingly, JTS expensed 90% of the Unit's loss in its historical financial statements. The purchase price is expected to be allocated as follows (in thousands): Current assets acquired........................... $ 6,628 Property acquired................................. 6,292 Liabilities assumed............................... (11,478) Goodwill.......................................... 594 ------- $ 2,036 =======
NOTE 2. PRO FORMA ADJUSTMENTS Certain pro forma adjustments have been made to the accompanying pro forma combined condensed balance sheet and statement of operations as described below: (a) Eliminates intercompany receivable and payable balances. (b) Reflects the acquisition of 90% ownership of Moduler Electronics for 1,911,673 shares of JTS Series A Preferred Stock valued at $1.00 per share and a warrant to purchase 500,000 shares of JTS Common Stock valued at $125,000. (c) Eliminates intercompany sales. (d) Reflects the amortization of goodwill on a straight-line basis over three years. (e) Reflects the depreciation of the step-up of fixed assets. (f) Eliminates 90% of loss of Moduler Electronics' start-up costs. (g) Pro forma weighted average common shares do not include common stock equivalents as inclusion of these shares would be anti-dilutive. 62 70 ATARI CORPORATION AND JTS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements give effect to the proposed merger of Atari and JTS. The merger is subject to shareholder and regulatory approval and other conditions. The unaudited pro forma condensed combined balance sheet has been prepared as if the acquisition, which will be accounted for as a purchase of JTS by Atari, was consummated as of March 31, 1996. Such pro forma balance sheet combines Atari's balance sheet as of March 31, 1996 and the balance sheet of JTS as of April 28, 1996. Although the business combination will result in Atari merging into the JTS legal entity, the substance of the transaction is that Atari, a public company with substantially greater operating history and net worth, will own approximately 62% of the combined equity at the date of the acquisition. The aggregate purchase price of $112.3 million has been allocated to the acquired assets and liabilities of JTS. Included in the pro forma purchase price are the approximately 40 million shares of outstanding common stock of JTS, assuming conversion of all outstanding preferred stock of JTS, the value of the assumed JTS options and warrants of $11.1 million and the estimated direct transaction costs. The common stock, options and warrants were valued using $2.50 per share which is the representative value of Atari stock at the time the proposed transaction was announced. The allocation of the purchase price was based on a preliminary independent appraisal of the fair value of assets acquired and liabilities assumed. The fair value of JTS assets and liabilities will be revised as updated information becomes available at the Effective Time. Such preliminary appraisal allocated $119.0 million to purchased technology, $97.0 million of which represented in-process research and development. The $97.0 million will be expensed upon the closing of the Merger as the technology had not yet reached technological feasibility and does not have alternative future uses. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 1995 give effect to the proposed merger as if the acquisition was completed at the beginning of the year and combines Atari's statement of operations as of December 31, 1995 with the pro forma combined statement of operations for JTS and Moduler Electronics for the year ended January 28, 1996. The unaudited pro forma condensed combined statements of operations for the quarter ended March 31, 1996 give effect to the proposed merger as if the acquisition was completed at the beginning of the quarter and combines Atari's statement of operations as of March 31, 1996 with the JTS pro forma statement of operations for the quarter ended April 28, 1996. Such statements do not include the effect of the approximately $97.0 million nonrecurring charge for in-process research and development, as such charges will be included in the consolidated statement of operations in the third calendar quarter of 1996. Such statements also exclude Atari's extraordinary gain generated from the Atari Debentures extinguished in 1995 and the $6.3 million gain on sale of marketable securities in the first quarter of 1996. This method of combining historical financial statements for the preparation of the pro forma condensed combined statements is for presentation only. Actual statements of operations of the companies will be combined from the closing date of the acquisition with no retroactive restatements. The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and is not necessarily indicative of the combined financial position or combined results of operations that would have been reported had the Merger occurred on the dates indicated, nor do they represent a forecast of the combined financial position or results of operations for any future period. The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements and accompanying notes for Atari, JTS and Moduler Electronics. 63 71 ATARI AND JTS UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS)
ATARI JTS MARCH 31, APRIL 28, PRO FORMA PRO FORMA 1996 1996 ADJUSTMENTS COMBINED --------- --------- ----------- --------- ASSETS CURRENT ASSETS: Cash and equivalents........................ $ 23,748 $ 5,116 $ 28,864 Accounts receivable......................... 601 9,608 10,209 Other receivables........................... -- 1,182 1,182 Inventories................................. 5,526 12,983 18,509 Subordinated secured convertible note....... 25,000 -- (25,000)(k) -- Other current assets........................ 1,101 1,585 2,686 --------- -------- --------- Total current assets..................... 55,976 30,474 61,450 GAME SOFTWARE DEVELOPMENT COSTS....................................... 861 -- 861 EQUIPMENT AND TOOLING......................... 577 16,212 2,970(d) 19,759 REAL ESTATE HELD FOR SALE..................... 10,468 -- 10,468 INTANGIBLE & OTHER ASSETS..................... 524 -- 21,980(d) 22,504 GOODWILL...................................... -- 185 (185)(c) 11,714 11,714(d) --------- -------- --------- TOTAL.................................... $ 68,406 $ 46,871 $ 126,756 ========= ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Bank borrowings............................. $ -- $ 10,277 $ 10,277 Notes payable to stockholders............... -- 1,965 1,965 Subordinated secured convertible note....... -- 25,000 (25,000)(k) -- Accounts payable............................ 3,295 18,240 1,200(i) 22,735 Accrued liabilities......................... 5,481 4,536 10,017 Current portion of long-term obligations.... -- 1,651 1,651 --------- -------- --------- Total current liabilities................ 8,776 61,669 46,645 LONG-TERM OBLIGATIONS......................... 42,354 6,381 48,735 REDEEMABLE PREFERRED STOCK.................... -- 29,697 (29,697)(c) -- SHAREHOLDERS' EQUITY (DEFICIT): Common stock................................ 637 -- 400(a) 1,037 Additional paid-in capital.................. 196,272 8,088 103,105(a,c) 307,465 Deferred compensation....................... -- (3,990) 3,990(c) -- Common stock warrants....................... -- 125 1,985(b) 2,110 Notes receivable from sale of common stock.................................... -- (2,610) (2,610) Accumulated translation adjustments......... (730) (730) Accumulated deficit......................... (178,903) (52,489) 52,489(c) (275,896) (96,993)(e) --------- -------- --------- Total shareholders' equity (deficit)..... 17,276 (50,876) 31,376 --------- -------- --------- TOTAL............................... $ 68,406 $ 46,871 $ 126,756 ========= ======== =========
See notes to unaudited pro forma condensed combined financial statements. 64 72 ATARI AND JTS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
ATARI JTS QUARTER ENDED QUARTER ENDED PRO FORMA PRO FORMA MARCH 31, 1996 APRIL 28, 1996 ADJUSTMENTS COMBINED -------------- ------------------- ----------- --------- NET REVENUES............................ $ 1,272 $ 17,581 $ 18,853 COST AND EXPENSES: 1,832(f) Cost of revenues and inventory write-downs........................ 6,211 19,434 248(h) 27,725 Research and development.............. 201 7,406 7,607 Sales, marketing, general and administrative..................... 2,009 3,103 418(g) 5,530 -------- -------- -------- Total operating expenses........... 8,421 29,943 40,862 OPERATING LOSS.......................... (7,149) (12,362) (22,009) Gain on sale of marketable securities......................... 6,347 -- (6,347)(1) -- Other income (expense)................ 233 (56) 177 Interest income....................... 332 105 437 Interest expense...................... (569) (542) (1,111) -------- -------- -------- Loss before income taxes........... (806) (12,855) (22,506) Income tax credit....................... -- -- -- -------- -------- -------- NET LOSS................................ $ (806) $ (12,855) (22,506) ======== ======== ======== LOSS PER COMMON SHARE................... $ (0.01) $ (1.47) $ (0.22) Number of shares used in computation.... 63,701 8,732 (j) 103,701
See notes to unaudited pro forma condensed combined financial statements. 65 73 ATARI AND JTS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA COMBINED JTS AND ATARI MODULER ELECTRONICS YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA DEC. 31, 1995 JAN. 28, 1996 ADJUSTMENTS COMBINED ------------- ------------------- ----------- --------- NET REVENUES............................. $ 14,626 $ 18,777 $ 33,403 COST AND EXPENSES: 7,327(f) Cost of revenues....................... 44,234 33,626 990(h) 86,177 Research and development............... 5,410 13,375 18,785 Sales, marketing, general and administrative...................... 18,647 5,777 1,673(g) 26,097 -------- -------- -------- Total operating expenses............ 68,291 52,778 131,059 OPERATING LOSS........................... (53,665) (34,001) (97,656) Other income (expense)................. 2,683 (365) 2,318 Interest income........................ 3,133 249 3,382 Interest expense....................... (2,309) (1,053) (3,362) -------- -------- -------- Loss before income taxes............ (50,158) (35,170) (95,318) Income tax credit........................ -- -- -- -------- -------- -------- NET LOSS BEFORE EXTRAORDINARY CREDIT..... $ (50,158) $ (35,170) (95,318) ======== ======== ======== LOSS PER COMMON SHARE BEFORE EXTRAORDINARY CREDIT................... $ (0.79) $ (7.63) $ (0.92) Number of shares used in computation..... 63,697 4,611 (j) 103,697
See notes to unaudited pro forma condensed combined financial statements. 66 74 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF ATARI AND JTS NOTE 1 -- PURCHASE PRICE The purchase price of the acquisition of JTS is computed as follows: Warrants and employee stock options............................ $ 11,093,000 Common stock to be issued...................................... 100,000,000 Direct transaction costs....................................... 1,200,000 ------------ TOTAL..................................................... $ 112,293,000 ============
The JTS common stock, options and warrants were valued using $2.50 per share which is the representative value of Atari stock at the time the proposed transaction was announced. The purchase price is expected to be allocated as follows: Current assets................................................. $ 30,474,000 Equipment and tooling.......................................... 19,182,000 In-process technology.......................................... 96,993,000 Existing technology............................................ 21,980,000 Liabilities assumed............................................ (68,050,000) Goodwill....................................................... 11,714,000 ------------ TOTAL..................................................... $112,293,000 ============
NOTE 2 -- PRO FORMA ADJUSTMENTS The following pro forma adjustments have been made to the unaudited pro forma condensed combined financial statements: (a) -- Reflects the value of all outstanding JTS common stock and the fair value of JTS options. (b) -- Reflects the fair value of JTS common stock warrants. (c) -- Reflects elimination of JTS common and preferred stock, deferred compensation, goodwill and shareholders' deficit. (d) -- Reflects allocation of purchase price to acquired equipment, existing technology and goodwill. (e) -- Reflects a one-time charge for purchased in-process technology. (f) -- Reflects amortization of purchased existing technology on a straight-line basis over three years. (g) -- Reflects amortization of goodwill on a straight-line basis over seven years. (h) -- Reflects depreciation of the step-up of equipment on a straight-line basis over three years. (i) -- Reflects accrual of direct transaction costs. (j) -- Reflects the outstanding common stock of JTS assuming the conversion of outstanding preferred stock of JTS excluding the impact of stock options and warrants which are antidilutive. (k) -- Reflects elimination of note between Atari and JTS. (l) -- Reflects elimination of nonrecurring gain on sale of a marketable security. No deferred tax adjustments is made as the deferred tax assets, consisting primarily of net operating loss carryforwards, exceed the deferred tax liabilities and the excess of the deferred tax assets over the deferred tax liabilities is offset by a valuation allowance due to the uncertainty surrounding the realization. NOTE 3 -- IN-PROCESS RESEARCH AND DEVELOPMENT The allocation of the purchase price among identifiable intangible assets was based on a preliminary independent appraisal of the fair value of those assets. The fair value of JTS assets and liabilities will be 67 75 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF ATARI AND JTS (CONTINUED) revised as updated information become available at the Effective Time. Such preliminary appraisal allocated $97.0 million to purchased in-process research and development. The $97.0 million will be expensed in the third calendar quarter upon closing as the technology had not yet reached technological feasibility and does not have alternative future uses. The unaudited pro forma condensed combined statements of operations do not include this one-time charge for purchased in-process technology as it represents a material nonrecurring charge in accordance with the rules for the preparation of pro forma financial statements. 68 76 MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA COMBINED FINANCIAL CONDITION AND PRO FORMA COMBINED RESULTS OF OPERATIONS OF THE COMBINED COMPANY FOR THE QUARTER ENDED MARCH 31, 1996 The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations of Atari and JTS and the introduction to the pro forma financial statements on page 60. The pro forma combined results are not necessarily indicative of what would have occurred had the acquisition actually been made at the beginning of each of the respective periods presented or of future operations of the Combined Company. The net loss on a pro forma basis for the Combined Company was $22.5 million on net revenues of $18.9 million. The Combined Company expects sales of Atari's Jaguar and related products to decline substantially in 1996 and thereafter as a result of Atari's decision to focus its efforts on selling its inventory of Jaguar and related products and to emphasize its existing licensing and development activities related to multimedia entertainment software. The Combined Company is expected to focus a substantial portion of its resources on the disk drive portion of its business which is expected to represent a substantial portion of the operations of the Combined Company. Sales of disk drives in the Combined Company are expected to increase during 1996 with the initiation of shipments of the Nordic 3-inch disk drives to Compaq late in the second quarter and the introduction of additional disk drive products with higher performance characteristics and increased capacities beyond JTS' current 1.6 gigabyte product.* There can be no assurance that the Combined Company will be successful in the production and shipment of these products. The Combined Company anticipates that it will have a five year period during which it will not pay taxes on its operations in India. Further, the Combined Company's operations in India are in a tax exempt facility. These tax benefits, to the extent the Combined Company is able to generate profitable operations to utilize them, will provide the Combined Company with a lower tax rate than would otherwise be the case. No assurance can be given, however, that the Combined Company will achieve profitable operations in India or be able to utilize these tax benefits or achieve a lower tax rate. Upon consummation of the Merger, the subordinated convertible note due from JTS to Atari will be canceled. The unaudited pro forma Combined Balance Sheets reflect cash and cash equivalents of $28.9 million and working capital of $14.8 million. The Combined Company will need significant additional financing resources over the next several years for facilities expansion, capital expenditures, working capital, research and development and vendor tooling. In order for the Combined Company to accelerate or increase planned expenditures or to the extent orders do not materialize as currently projected, additional capital will be required. Furthermore, certain equipment and receivable financing as well as existing term loans in place are contingent on compliance with stringent financial covenants. The Combined Company will pursue equity and/or debt financing in the near future to meet its funding requirements. The issuance of equity or convertible debt securities would result in dilution of the voting control of existing stockholders of the Combined Company and could result in dilution to earnings per share. The issuance of debt securities would provide to the holders of those securities seniority over the holders of JTS Common Stock issued in the Merger. There can be no assurance that the Combined Company will be able to maintain its current financing facilities or obtain additional financing as needed on acceptable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of JTS." - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 69 77 INFORMATION REGARDING ATARI CORPORATION BUSINESS OF ATARI Atari was incorporated under the laws of Nevada in May 1984. From 1984 to 1992, Atari designed, manufactured and marketed proprietary personal computers and video games and related software. Over the past several years, Atari has undergone significant change. In 1992 and 1993, Atari significantly downsized operations, decided to exit the computer business and focused on its video game business. As a result, revenues from computer products as a percentage of total revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales of entertainment systems and related software and peripheral products and the receipt of royalties represented the balance of revenues in each such year. These actions resulted in significant restructuring charges for closed operations and write-downs of computer and certain video game inventories in 1992 and 1993. While restructuring, Atari developed its 64-bit Jaguar interactive multimedia entertainment system, which was introduced in selected markets in the fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related products were $9.9 million and $29.3 million, respectively, and represented 68% and 76% of Atari's net revenues, respectively. These Jaguar sales were substantially below Atari's expectations, and Atari's business and financial results were materially adversely affected in 1995 as Atari continued to invest heavily in Jaguar game development, entered into arrangements to publish certain licensed titles and reduced the retail price for its Jaguar console unit. Atari attributes the poor performance of Jaguar to a number of factors including (i) extensive delays in development of software for the Jaguar which resulted in reduced orders due to consumer concern as to when titles for the platform would be released and how many titles would ultimately be available, and (ii) the introduction of competing products by Sega and Sony in May 1995 and September 1995, respectively. By late 1995, Atari recognized that despite the significant commitment of financial resources that were devoted to the Jaguar and related products, it was unlikely that Jaguar would ever become a broadly accepted video game console or that Jaguar technology would be broadly adopted by software title developers. As a result, Atari decided to significantly downsize its Jaguar operations. This downsizing resulted in significant reductions in Atari's workforce, and significant curtailment of research and development and sales and marketing activities for Jaguar and related products. Accordingly, Atari decided to focus its efforts on selling its inventory of Jaguar and related products and to emphasize its existing licensing and development activities related to multimedia entertainment software for various platforms. Atari presently has a substantial unsold inventory of Jaguar and related products and there can be no assurance that such inventory can be sold at current prices. Despite the introduction of four additional game titles in the first quarter of 1996, sales of Jaguar and related software have remained disappointing due to uncertainty about Atari's commitment to the Jaguar platform, increased price competition and pending competitive product introductions. As a result of continued disappointing sales, management revised estimates and wrote-down inventory by an additional $5.0 million in the first quarter of 1996. As of the end of May 1996, Atari had approximately 90,000 units of Jaguar in inventory. PRODUCTS Atari's principal products are described below: Jaguar Entertainment System. Atari introduced its 64-bit Jaguar interactive multimedia entertainment system in late November 1993 into selected markets. During 1994, Atari rolled out a nationwide program and commenced initial shipments into Europe. From its launch through the end of 1994, Jaguar's suggested retail price was $249.99. As a result of competition and cost reductions, during the first quarter of 1995, Atari reduced the retail price of Jaguar to $149.99. The current retail price of Jaguar is $99.99. Despite its substantially lower retail price, sales of Jaguar continue to be disappointing. Volume sales of Jaguar and related software in 1996 have consisted primarily of a large order from a new European customer. Atari is also pursuing wholesale sales channels in the U.S. as well as licensing opportunities. There can be no assurance that Atari's substantial unsold inventory of Jaguar and related software can be sold at current or reduced 70 78 prices, if at all. In addition, any further decrease in the value of such inventory could result in additional inventory write-downs by Atari. The Jaguar is a 64-bit interactive multimedia system that incorporates two proprietary chips developed by Atari which are specialized for multimedia entertainment. The proprietary chips include four processors (graphics processing unit, object processor, blitter and digital signal processor) and a standard Motorola 68000 microprocessor. The computational speed of the system is approximately 44 MIPS and the bus bandwidth is 106.4 megabytes per second. The video features include 24-bit graphics with up to 16.8 million colors and a 3-D engine which can render 3-D shaded or texture mapped polygons in real time. The sound system is based on a high-speed custom digital signal processor dedicated to audio. The audio is 16-bit compact disk ("CD") quality from cartridge-based software, and can be processed from simultaneous sources of audio data. This allows for very realistic sounds in the software, including human voices. Through the use of a compression technology customized by Atari (called "JAGPEG"), software developers can compress data to the point that a 100-megabit game can fit into a 16-megabit ROM cartridge. This allows for more exciting experiences both visually and in game play due to the vast amount of data available. Jaguar Software Titles. From 1994 through 1995, Atari developed titles for the Jaguar primarily under contract with third party software developers. To date, Atari has published approximately 45 software titles for the Jaguar. These titles include an array of licensed and nonlicensed titles, some of which utilize 3-D graphics, high speed animation, 16.8 million colors, full motion video, motion capture techniques and 16-bit stereo sound. Atari's software library includes titles which are cartridge based (ROM chips) and CD based. Since 1995, the development of titles for Jaguar has been curtailed substantially and Atari is currently developing a very limited number of titles which it expects to publish in either cartridge or CD format. In addition to Atari's software development efforts, in 1994 and 1995 Atari licensed independent software vendors ("ISVs") to develop and publish titles for the Jaguar. Atari is not aware of any current development of Jaguar titles by ISVs and does not expect any such development in the foreseeable future. Jaguar Peripherals. Atari offers a CD-ROM peripheral for the Jaguar that enables software end users to have full motion video clips and more complex games than are available on cartridges. Publishers can take advantage of lower media cost and quicker turnaround on orders with CD-ROM software as compared to a ROM cartridge. The CD-ROM peripheral is a double speed player that can play Jaguar video games, regular audio CD's and CD + G (graphics). The suggested retail price of the CD-ROM peripheral is $149.99. The success of the CD-ROM peripheral is substantially dependent on the size of the installed base of cartridge-based Jaguar consoles. PC Software. As a result of Atari's investment in game design, art and programming for its Jaguar software, Atari has ported certain of its Jaguar titles to the IBM PC compatible platform. Atari intends to publish and/or license these titles in 1996. In this regard, Atari commenced shipment of the PC CD-ROM version of Tempest 2000 in Europe during the first quarter of 1996. Library of Titles. In 1996, Atari plans to increase its efforts to license titles from its game library to third party publishers. Atari has over 100 titles in its game library, including the following: Asteroids Combat Iron Soldier RealSport Baseball Tempest Battlezone Crystal Castles Major Havoc RealSport Football Warbird Bentley Bear Earthworld Millipede Space War Warlords Breakout Food Fight Missile Command Star Raiders Yar's Revenge Centipede Pong
COMPETITION The video game business is intensely competitive. Since its introduction in late 1993, Jaguar has failed to achieve broad market acceptance. Atari does not expect that Jaguar, even at its substantially reduced price, will ever become a broadly accepted video game console, or that Jaguar technology will be broadly adopted by software title developers. The video game industry is also characterized by unpredictable and rapid shifts in the popularity of certain platforms, by severe price competition, and by frequent new technology and product 71 79 introductions. In this regard, numerous companies have introduced or have developed and are expected to introduce video game consoles that are or may become competitive with Jaguar. In addition, an increasing number of entertainment titles are being developed for or ported to the PC platform. Most of Atari's competitors have greater experience and expertise in 3D graphics and multimedia technology and have substantially greater engineering, marketing and financial resources than Atari. Jaguar presently competes with products offered by the following companies: - Nintendo commenced development, in collaboration with Silicon Graphics, Inc., of the Nintendo 64 player, expected to be released in Autumn 1996 in the United States. Nintendo also sells the 16 bit Super NES at a retail price of $99.95. - Sega commenced shipment of the Sega Saturn in the United States in May 1995 with a current retail price of $299.00. Sega also sells the 16 bit Genesis at a retail price of $99.95. - Sony released the Sony PlayStation in the United States in late 1995 with a current retail price of $299.00. - The 3DO Company licenses the 3DO Interactive Multiplayer System console architecture for retail sale worldwide. MARKETING AND DISTRIBUTION Atari distributes its products domestically through various independent channels. Jaguar is sold primarily through national retailers, consumer electronic specialty stores and distributors of electronic products. European sales are conducted from Atari's European headquarters in London, U.K. Jaguar and Atari's PC titles are sold in European markets through substantially the same channels of distribution as those in the United States. Net sales outside North America for fiscal years 1995, 1994 and 1993 constituted approximately 44%, 40% and 75%, respectively, of total net revenues. No single customer accounted for 10% or more of total net revenues for the years ended December 31, 1995, 1994 or 1993. RESEARCH AND DEVELOPMENT Most of Atari's products, including Jaguar, were developed by its internal engineering and software groups as well as independent software developers under contract with Atari. Atari's research and development expenses totaled $5.4 million, $5.8 million and $4.9 million in 1995, 1994, and 1993, respectively. Atari has significantly downsized its research and development efforts and currently has five employees dedicated to such efforts. As a result, Atari expects its research and development expenses to decline substantially in 1996.* Atari's current development efforts are dedicated to developing a limited number of Jaguar software titles and porting certain existing Jaguar titles to the PC platform. As part of this development process, Atari has agreements with third parties to develop and/or license properties. Under these agreements, Atari will make payments to these parties as either development fees and/or advance royalties, and is obligated to make certain minimum royalty guarantees on future sales. There can be no assurance that all payments for development fees and/or advance royalties will be recoverable through future sales of products. MANUFACTURING Atari has placed no manufacturing orders for the Jaguar console since mid-1995. Based on current and expected sales and inventory levels, Atari does not intend to pursue additional Jaguar manufacturing. The Jaguar console unit was assembled in the United States by a third-party subcontractor under a manufacturing arrangement. The agreement may be canceled by either party with 90 days' notice. Jaguar software products - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of Atari" and elsewhere in this Joint Proxy Statement/Prospectus. 72 80 and accessories are manufactured by several suppliers and are assembled by subcontractors. Atari believes that it could readily replace these sources of supply and assembly, if necessary. INTELLECTUAL PROPERTY RIGHTS Atari has exclusive use of its "Atari" name and "Fuji" logo in all areas other than coin-operated arcade video game use. Atari also has a portfolio of other intellectual properties including patents, trademarks, and copyrights associated with its video game and computer businesses. Atari believes its patents, trademarks and other intellectual property are important assets. As of December 31, 1995, Atari held over 150 patents in the United States and other jurisdictions which expire from 1996 to 2010 and had applications pending for three additional patents. There can be no assurance that any of these patent rights will be upheld in the future or that Atari will be able to preserve any of its other intellectual property rights. Atari has in the past received communications from third parties asserting rights to certain of its intellectual property. Atari has also been involved in several major lawsuits regarding its intellectual property, including a suit with Nintendo which was settled in March 1994 and a suit with Sega which was settled in September 1994. In the event any third party were to make a valid claim with respect to Atari's intellectual property and a license were not available on commercially reasonable terms, Atari's business, financial condition and results of operations would be materially and adversely affected. Litigation, which has in the past and could in the future result in substantial costs and diversion of resources, may also be necessary to enforce Atari's patents or other intellectual property rights or to defend against third-party infringement claims. The occurrence of litigation relating to patent infringement or other intellectual property matters, regardless of the outcome, could have a material adverse effect on Atari's business, financial condition and results of operations. BACKLOG Orders are usually placed by purchasers on an as-needed basis, are sometimes cancelable before shipment, and are usually filled from inventory shortly after receipt. Atari currently has a substantial inventory of finished products and product components for which there are no orders. Although Atari is taking steps to realize revenue from such inventory, Atari recognized substantial inventory write-downs in 1995 and the first quarter of 1996 and there can be no assurance that additional write-downs will not be required. EMPLOYEES Due to disappointing sales of Jaguar and related products, Atari reduced its workforce from 101 persons at December 31, 1994 to 73 persons at December 31, 1995 and 31 persons at March 31, 1996. Atari had 22 employees at June 19, 1996, including 15 in the United States and seven outside the United States. None of the employees are represented by a labor union. Atari considers its employee relations to be good. PROPERTIES Atari leases its 7,200 square feet headquarters facility in Sunnyvale, California under a lease which expires in 2001. Atari also leases a 33,600 square feet international sales facility in Slough, England and a 19,400 square feet vacant facility in Viannen, Holland. Atari also holds certain properties in Southern California and Texas for sale. Some of these properties are currently being leased by Atari. These properties are reported as real estate held for sale in the Atari Consolidated Financial Statements. See Note 7 of Notes to Atari Consolidated Financial Statements. LEGAL PROCEEDINGS Atari is a defendant in a civil action brought in the Superior Court of the State of California in and for the County of Santa Clara by Citizen America Corporation, a former supplier, in February 1994 seeking damages 73 81 of approximately $900,000 for alleged breach of contract and related claims. Atari believes this action will have no material adverse effect on its business, financial condition or results of operations.* Atari is a defendant and counter claimant in a civil action for alleged breach of contract brought in U.S. District Court for the Northern District of New York, case number 95 Civ. 1945, by Tradewell, Inc., a New York corporation, seeking specific performance for release of goods having a value of $1.6 million. Atari has counterclaimed seeking specific performance for the purchase of media or, alternatively, damages in the amount of $3.3 million. As a result of a partial settlement, Atari now seeks damages of approximately $1.5 million. Atari believes this action will have no material adverse effect on its business, financial condition or results of operations.* Atari is a plaintiff in a civil action brought in the Superior Court of the State of California in and for the County of Santa Clara brought against Phillips Laser Magnetic Storage ("Phillips") for breach of contract and breach of implied covenant of good faith and fair dealing arising out of Phillips' failure to deliver goods to Atari. Phillips has filed a counterclaim seeking damages in excess of $3.0 million. Atari believes this action will have no material adverse effect on its business, financial condition or results of operations.* Atari is a plaintiff in a civil action brought in the Superior Court of the State of California in and for the County of Santa Clara and removed to the United States District Court, Northern District of California brought against Probe Entertainment Limited for breach of contract and related claims. Counterclaims have been filed against Atari for alleged breach of contract. Atari believes this action will have no material adverse effect on its business, financial condition or results of operations.* Atari is not aware of any other pending legal proceedings against Atari and its consolidated subsidiaries other than routine litigation incidental to their normal business. - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of Atari" and elsewhere in this Joint Proxy Statement/Prospectus. 74 82 SELECTED CONSOLIDATED FINANCIAL DATA OF ATARI The following selected consolidated financial data of Atari have been derived from the historical consolidated financial statements of Atari, included elsewhere herein, with the exception of the Atari Consolidated Statement of Operations Data prior to fiscal 1993 and the Atari Consolidated Balance Sheet Data prior to December 31, 1994 which were derived from historical consolidated financial statements not included herein. The information set forth below should be read in conjunction with Atari's Consolidated Financial Statements and notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations of Atari. The unaudited quarterly financial data reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------- ---------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Consolidated Statement of Operations Data: Total revenues............ $ 1,272 $ 4,874 $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992 Operating loss............ (7,149) (5,158) (53,665) (24,047) (47,499) (79,008) (18,683) Income (loss) from continuing operations(1).......... (806) (4,473) (50,158) 9,394 (48,866) (82,719) 23,659 Income (loss) before extraordinary credit... (806) (4,473) (50,158) 9,394 (48,866) (73,719) 23,659 Net income (loss)......... (806) (4,426) (49,576) 9,394 (48,866) (73,615) 25,619 Per common share data: Income (loss) from continuing operations............. $ (0.01) $ (0.07) $ (0.79) $ 0.16 $ (0.85) $ (1.44) $ 0.41 Income (loss) before extraordinary credit... (0.01) (0.07) (0.79) 0.16 (0.85) (1.29) 0.41 Net income (loss)......... (0.01) (0.07) (0.78) 0.16 (0.85) (1.28) 0.44
DECEMBER 31, MARCH 31, -------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- ------- -------- ------- -------- -------- (IN THOUSANDS) Consolidated Balance Sheet Data: Current assets..................... $ 55,976 $65,126 $113,188 $51,388 $109,551 $239,296 Working capital.................... 47,200 55,084 92,670 33,896 75,563 159,831 Total assets....................... 68,406 77,569 131,042 74,833 138,508 253,486 Current liabilities................ 8,776 10,042 20,518 17,492 33,988 79,465 Long-term obligations.............. 42,354 42,354 43,454 52,987 53,937 48,492 Shareholder's equity............... 17,276 25,173 67,070 4,354 50,583 125,529
- --------------- (1) Includes a gain from the sale of marketable securities of $6.3 million in 1996, a gain from the settlement of patent litigation of $32.1 million in 1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9 million in 1991. 75 83 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ATARI This Joint Proxy Statement/Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of certain factors, including those set forth under "Risk Factors -- Risk Factors Related to the Business of Atari" and elsewhere in this Joint Proxy Statement/Prospectus. Over the past several years, Atari has undergone significant change. In 1992 and 1993, Atari significantly downsized operations, decided to exit the computer business and focused on its video game business. As a result, revenues from computer products as a percentage of total revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales of entertainment systems and related software and peripheral products and the receipt of royalties represented the balance of revenues in each such year. These actions resulted in significant restructuring charges for closed operations and write-downs of computer and certain video game inventories in 1992 and 1993. While restructuring, Atari developed its 64-bit Jaguar interactive multimedia entertainment system, which was introduced in selected markets in the fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related products were $9.9 million and $29.3 million, respectively, and represented 68% and 76% of Atari's net revenues, respectively. These Jaguar sales were substantially below Atari's expectations, and Atari's business and financial results were materially adversely affected in 1995 as Atari continued to invest heavily in Jaguar game development, entered into arrangements to publish certain licensed titles and reduced the retail price for its Jaguar console unit. Atari attributes the poor performance of Jaguar to a number of factors including (i) extensive delays in development of software for the Jaguar which resulted in reduced orders due to consumer concern as to when titles for the platform would be released and how many titles would ultimately be available, and (ii) the introduction of competing products by Sega and Sony in May 1995 and September 1995, respectively. By late 1995, Atari recognized that despite the significant commitment of financial resources that were devoted to the Jaguar and related products, it was unlikely that Jaguar would ever become a broadly accepted video game console or that Jaguar technology would be broadly adopted by software title developers. As a result, Atari decided to significantly downsize its Jaguar operations. This downsizing resulted in significant reductions in Atari's workforce, and significant curtailment of research and development and sales and marketing activities for Jaguar and related products. Accordingly, Atari decided to focus its efforts on selling its inventory of Jaguar and related products and to emphasize its existing licensing and development activities related to multimedia entertainment software for various platforms. Atari presently has a substantial unsold inventory of Jaguar and related products and there can be no assurance that such inventory can be sold at current prices. Despite the introduction of four additional game titles in the first quarter of 1996, sales of Jaguar and related software have remained disappointing due to uncertainty about Atari's commitment to the Jaguar platform, increased price competition and pending competitive product introductions. As a result of continued disappointing sales, management revised estimates and wrote-down inventory by an additional $5.0 million in the first quarter of 1996. As of the end of May 1996, Atari had approximately 90,000 units of Jaguar in inventory. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Total revenues for 1995 were $14.6 million compared to $38.7 million for 1994. Sales of Jaguar and related products represented 68% and 76% of total revenues for 1995 and 1994, respectively, and sales of other products and royalties represented the balance of revenues in each such year. The reduction in revenues was primarily the result of lower unit volumes of Jaguar products and lower average selling prices of Jaguar and certain of its software titles. In the first quarter of 1995, Atari reduced the suggested retail price of Jaguar from its original price of $249.99 to $149.99. The current suggested retail price of Jaguar is $99.99. As a result of the Jaguar price reductions, the substantial curtailment of sales and marketing activities for Jaguar and the substantial curtailment of efforts by Atari and independent software developers to develop additional software 76 84 titles for Jaguar, Atari expects sales of Jaguar and related products to decline substantially in 1996 and thereafter.* Cost of revenues for 1995 was $44.2 million compared to $35.2 million for 1994. Included in cost of revenues for 1995 were accelerated amortization and write-offs of capitalized game software development costs of $16.6 million and inventory write-downs of $12.6 million primarily relating to Jaguar products. As a result of these charges and lower selling prices for Jaguar products and provisions for returns and allowances and price protection, gross margin for the year was a loss of $29.6 million. For 1994, gross margin was $3.5 million, or 9.2% of revenues. Included in cost of revenues for 1994 were write-downs of inventory of $3.6 million and amortization and the write-off of capitalized game software development costs of $1.5 million. As of December 31, 1995, Atari had approximately 100,000 units of the Jaguar console in inventory and there can be no assurance that substantial additional write-downs will not be necessary. Research and development expenses for 1995 were $5.4 million compared to $5.8 million for 1994. During 1995 and 1994, a significant number of Atari employees and consultants were devoted to developing hardware and software for the Jaguar, and Atari contracted with third-party software developers to develop Jaguar software titles. As a result of Jaguar's poor sales performance, in the third and fourth quarters of 1995, Atari accelerated its amortization of contracted software development which resulted in charges in those quarters of $6.0 million and $10.6 million, respectively. At December 31, 1995 and 1994, Atari had capitalized software development costs of $758,000 and $5.1 million, respectively. In the fourth quarter of 1995, Atari eliminated its internal Jaguar development teams and other development staff as titles for Jaguar were completed. As a result, Atari expects research and development expenses will be substantially lower for the foreseeable future.* Marketing and distribution expenses for 1995 were $12.7 million compared to $14.7 million for 1994. Such costs included television and print media, promotions and other activities to promote Jaguar. Due to the substantial curtailment of the Jaguar marketing program, Atari expects these expenses will be substantially lower for the foreseeable future.* General and administrative expenses for 1995 were $5.9 million compared to $7.2 million for 1994. The decrease in such expenses was primarily a result of staff reductions, reduced legal fees and other operating costs. Due to the substantial reduction in general and administrative personnel in 1995 and the first quarter of 1996, Atari expects these expenses will be substantially lower for the foreseeable future.* Atari experienced a gain on foreign currency exchange of $13,000 for 1995 compared to a gain of $1.2 million for 1994. These changes were a result of lower foreign asset exposure and a greater percentage of sales made in U.S. dollars which further reduced exposure to foreign currency transaction fluctuations. In 1994, Atari received $2.2 million in connection with the settlement of litigation between Atari, Atari Games Corporation and Nintendo. In 1994, Atari also reached an agreement with Sega, which resulted in a gain of $29.8 million, after contingent legal fees, and the sale of 4,705,883 shares of Atari Common Stock to Sega at $8.50 per share for an aggregate of $40.0 million. During 1995, Atari sold a portion of its holdings in Dixon PLC, a retailer in England, and realized a gain of $2.4 million, of which $1.8 million was realized in the fourth quarter of 1995. In the first quarter of 1996, Atari sold the remaining portion of its holdings and realized a gain of $6.1 million. The 1995 gain of $2.4 million together with other income items resulted in a total other income of $2.7 million compared to $484,000 for 1994. - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of Atari" and elsewhere in this Joint Proxy Statement/Prospectus. 77 85 For each of 1995 and 1994, interest expense was approximately $2.3 million on the Atari Debentures. In 1995, Atari repurchased a portion of the Atari Debentures and realized a gain of $582,000. As of December 31, 1995, the outstanding balance of these debentures was $42.4 million. Interest income for 1995 and 1994 was $3.1 million and $2.0 million, respectively. The increase in interest income was primarily attributable to higher average cash balances in 1995. As a result of Atari's operating losses, there was no provision for income taxes in 1995. See Note 11 to the Atari Consolidated Financial Statements. As a result of the factors discussed above, Atari reported a net loss for 1995 of $49.6 million compared to net income of $9.4 million in 1994. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Total revenues for 1994 were $38.7 million compared to $29.1 million for 1993. The increased revenues were primarily a result of Atari's national rollout of the Jaguar and related products. Sales of Jaguar products represented 76% of revenues in 1994 compared to 13% of revenues in 1993. Jaguar was introduced in selected markets in late 1993, and approximately 100,000 units were sold by the end of 1994 at a suggested retail price of $249.99. Sales of Atari's proprietary personal computers and certain discontinued video game products represented 24% of revenues for 1994 compared to 87% of revenues for 1993. Gross margin for 1994 was $3.5 million, or 9.2% of revenues, compared to a gross loss of $13.7 million for 1993. Included in cost of revenues are inventory write-downs of $3.6 million and $18.1 million for 1994 and 1993, respectively, and a write-off of capitalized game software development costs of $804,000 in 1994. These write-downs of proprietary personal computers and video game products to estimated realizable values were made concurrently with the introduction and change in marketing focus to Jaguar products. Research and development expenses for 1994 were $5.8 million compared to $4.9 million for 1993. The increase resulted from increased expenditures for the Jaguar product line. Marketing and distribution expenses for 1994 were $14.7 million compared to $9.0 million for 1993. The increase in expenditures was primarily the result of the national rollout in 1994 of the Jaguar. Such costs included television and print media promotions and other activities. General and administrative expenses for 1994 were $7.2 million compared to $7.6 million for 1993. The marginally lower general and administrative expenses were primarily due to Atari's restructuring program in 1993. During 1993, Atari made provisions for restructuring totaling $12.4 million, which included closing many of Atari's operations in Europe, Asia and Australia, including, but not limited to, severance payments, rental commitments and other closure costs. For 1994, Atari experienced a gain on foreign currency exchange of $1.2 million compared to a loss on exchange of $2.2 million in 1993. This change was a result of fluctuation in exchange rates, a lower foreign asset exposure and a greater percentage of sales made in U.S. dollars, thereby further reducing exposure to foreign currency transaction fluctuations. For each of 1994 and 1993, interest expense was approximately $2.3 million on the Atari Debentures. Atari utilized net operating loss carryforwards and, as a result, there was no provision for income taxes in 1994. As a result of the factors discussed above, Atari reported net income for 1994 of $9.4 million compared to a net loss of $48.9 million in 1993. QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995 Total revenues for the first quarter of 1996 were $1.3 million compared to $4.9 million for the first quarter 1995, a reduction of $3.6 million. Sales of Jaguar and related products represented 41% and 72% of total revenues for the first quarter of 1996 and 1995, respectively, and sales of other products and royalties represented the balance of revenues in each such year. The reduction in revenues was primarily the result of lower unit volumes of Jaguar products and lower average selling prices of Jaguar and certain of its software 78 86 titles. As a result of the Jaguar price reductions and the substantial curtailment of sales and marketing activities for Jaguar, Atari expects sales of Jaguar and related products to decline substantially in 1996 and thereafter. Cost of revenues for the first quarter of 1996 was $1.2 million compared to $3.8 million for the first quarter of 1995. The reduction in cost of revenues is consistent with the reduction in revenues. In the first quarter of 1996, the Company wrote-down inventory by $5.0 million relating to Jaguar products. These write-downs resulted from management's revised estimates of sales resulting from continued disappointing sales of Jaguar. Despite the introduction of four additional game titles in the first quarter of 1996, sales of Jaguar and related products have remained disappointing due to uncertainty about Atari's commitment to the Jaguar platform, increased price competition and pending competitive product introductions. Atari is pursuing alternative sales channels and licensing opportunities. Atari expects the market to remain highly competitive throughout the year. Research and development expenses were $200,000 for the first quarter of 1996 compared to $1.8 million for the first quarter of 1995. The substantial decline is due to the elimination of the Company's internal Jaguar development team and other development staff in the fourth quarter of 1995. As of March 31, 1996, Atari had capitalized $900,000 of development cost associated with certain CD titles. Marketing and distribution expenses were $800,000 for the first quarter of 1996 compared to $2.6 million for the first quarter of 1995. The reduction was due to the curtailment of marketing activities for the Jaguar. General and administrative expenses for the first quarter of 1996, were $1.3 million compared to $1.8 million for the first quarter of 1995. The decrease in such expenses was primarily the result of staff reductions, reduced rent and other reductions in operating costs. Other Income (Expense), net for the first quarter of 1996 was $290,000 compared to $200,000 for the first quarter of 1995. Gains on sales of marketable securities were $6.3 million for the first quarter of 1996 compared to $107,000 for the first quarter of 1995. The 1996 gain represented the sale of the remaining portion of Atari's holdings in Dixon PLC, a retailer in England. During the 1995 quarter Atari repurchased a portion of its 5 1/4% Convertible Subordinated Debentures and recorded an extraordinary credit of $47,250. Interest income for the first quarter of 1996 was $300,000 compared to $1.0 million for the first quarter of 1995, reflecting Atari's significantly lower cash balances during the first quarter of 1996. Interest expenses for the 1996 and 1995 quarters were $600,000 which represents interest due on Atari's 5 1/4% Convertible Subordinated Debentures. In April 1996, Atari made an annual payment of interest on its bonds that totaled $2.2 million. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, Atari held cash and marketable securities of $50.6 million compared to $81.0 million at December 31, 1994. The decrease in cash and marketable securities was primarily the result of operating losses incurred during 1995. During 1995, Atari sold a portion of its holding in Dixon PLC., a U.K. retailer, and realized a gain on the sale of these securities in the amount of $2.4 million. In the first quarter of 1996, Atari sold its remaining interest in Dixon PLC. and realized a gain of $6.3 million. As of December 31, 1995, Atari's balance sheet reflected an unrealized gain on marketable securities of $7.1 million. As of March 31, 1996 , Atari held cash and marketable securities of $23.7 million compared to $50.6 million as of December 31, 1995 for a reduction of $26.9 million. In connection with the Merger, on February 13, 1996, Atari extended a bridge loan to JTS in the amount of $25.0 million. In event the Merger is not consummated, the bridge loan can be converted into shares of JTS Series A Preferred Stock at the option of Atari or JTS, subject to certain conditions. See "The Proposed Merger and Related Transactions -- Related Transactions -- Atari Loan to JTS." 79 87 As of March 31, 1996, Atari had $42.4 million of its 5 1/4% convertible subordinated debentures due April 29, 2002 outstanding. The market value of the Atari Debentures was approximately $31.0 million at May 29, 1996. The Atari Debentures may be redeemed at Atari's option, upon payment of a premium. The debentures, at the option of the holders, are convertible into Atari Common Stock at $16.3125 per share. A default with respect to other indebtedness of Atari in an aggregate amount exceeding $5 million would result in an event of default whereby the Atari Debentures would be due and payable immediately. Atari believes its existing cash balances are sufficient to meet its requirements at least for the next 12 months.* - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of Atari" and elsewhere in this Joint Proxy Statement/Prospectus. 80 88 MANAGEMENT OF ATARI EXECUTIVE OFFICERS AND DIRECTORS Following the Merger, Atari and JTS have agreed that Jack Tramiel, Chairman of the Board of Directors of Atari, and Michael Rosenberg, a member of Atari's Board of Directors, will serve as members of the Board of Directors of the Combined Company. In addition, Atari and JTS have agreed that Jack Tramiel or a person designated by him shall serve as a member of each committee of the Board of Directors of the Combined Company. None of the executive officers of Atari prior to the Merger will serve as executive officers of the Combined Company. The following table lists the names, ages and positions held by all directors and executive officers of Atari as of March 31, 1996.
NAME AGE POSITION(S) WITH ATARI ------------------------------- ---------------------------------------------- Jack Tramiel 67 Chairman of the Board Sam Tramiel 45 Director, President, Chief Executive Officer and Chief Financial Officer Leonard I. Schreiber 81 Director Michael Rosenberg 68 Director August J. Liguori 44 Director Laurence M. Scott, Jr. 50 Vice President, Manufacturing and Operations Leonard Tramiel 41 Vice President, Advanced Software Development
JACK TRAMIEL and a group of associates purchased the assets and liabilities of Atari from Warner Communications in May 1984 and Mr. Tramiel has served as Chairman of Atari's Board of Directors since such time. Mr. Tramiel served as Atari's Chief Executive Officer from May 1984 through May 1988. SAM TRAMIEL has served as President and as a member of the Board of Directors of Atari since June 1984, as Chief Executive Officer of Atari since May 1988 and as Chief Financial Officer of Atari since March 1996. LEONARD I. SCHREIBER has served as a member of the Board of Directors of Atari since May 1984. Mr. Schreiber was a partner of Schreiber & McBride, a private law firm, from 1980 to 1995. MICHAEL ROSENBERG has served as a member of the Board of Directors of Atari since May 1987. Mr. Rosenberg has served as Chief Executive Officer of Ross & Roberts, Inc., a plastics company, since September 1987. Mr. Rosenberg is a Certified Public Accountant. AUGUST J. LIGUORI has served as a member of the Board of Directors of Atari since 1992. Since March 1996, Mr. Liguori has served as Vice President, Finance of Marvel Entertainment Group, Inc. From October 1986 to February 1996, Mr. Liguori served in several positions with Atari, including Vice President and General Manager of Atari U.S. Corp., an Atari subsidiary, from October 1986 to October 1989, Vice President of Atari Corporation from October 1989 to October 1990, and Vice President, Finance, Treasurer and Chief Financial Officer from October 1990 to February 1996. LAURENCE M. SCOTT, JR. has served as Vice President, Manufacturing and Operations of Atari since 1992. Prior to joining Atari, Mr. Scott served as President of Radofin Electronics (FE) Ltd., a contract manufacturing firm, from 1978 to 1991. LEONARD TRAMIEL has served Vice President, Advanced Software Development of Atari since March 1991. Mr. Tramiel served as Vice President, Software Development of Atari from July 1984 to March 1991. All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. Executive officers of Atari are appointed by and serve at the discretion of the Atari Board of Directors. Jack Tramiel is the father of Sam Tramiel and Leonard Tramiel. 81 89 COMPENSATION OF DIRECTORS Each of the non-employee directors of Atari, including Mr. Rosenberg, receives $500 for each meeting of the Atari Board of Directors which such individual attends. In 1995, each non-employee director received an option to purchase 20,000 shares of Atari Common Stock pursuant to Atari's 1986 Stock Option Plan, as amended. Such options have an exercise price of $2.69 and vest over a period of five years. PRINCIPAL STOCKHOLDERS OF ATARI The following table sets forth information, as of May 22, 1996, with respect to beneficial ownership of Atari Common Stock owned by (a) each person (or group of affiliated persons) known by Atari to be the beneficial owners of more than 5% of Atari's Common Stock, (b) each of Atari's directors, (c) each of Atari's executive officers and (d) all directors and executive officers as a group.
SHARES PERCENT NUMBER OF SHARES OF PERCENT OF SHARES OF BENEFICIALLY BENEFICIALLY THE COMBINED THE COMBINED NAME OF BENEFICIAL OWNER OWNED OWNED(1) COMPANY COMPANY(2) - -------------------------------------- ------------ ------------ ------------------- -------------------- Jack Tramiel(3)....................... 12,494,616 19.6% 12,494,616 12.2% 455 South Mathilda Avenue Sunnyvale, California 94086 Time Warner, Inc.(4).................. 8,600,000 13.5 8,600,000 8.4 75 Rockefeller Plaza New York, New York 10019 Sam Tramiel(5)........................ 5,662,567 8.9 5,662,567 5.5 455 South Mathilda Avenue Sunnyvale, California 94086 Leonard Tramiel(6).................... 5,263,946 8.2 5,263,946 5.1 455 South Mathilda Avenue Sunnyvale, California 94086 Sega Holdings USA Inc ................ 4,705,883 7.4 4,705,883 4.6 303 Twin Dolphin Drive, Suite 200 Redwood City, California 94065 Garry Tramiel(7)...................... 4,055,000 6.4 4,055,000 3.9 455 South Mathilda Avenue Sunnyvale, California 94086 August J. Liguori(8).................. 262,000 * 262,000 * Michael Rosenberg(9).................. 45,000 * 45,000 * Leonard I. Schreiber(10).............. 214,000 * 214,000 * Laurence M. Scott, Jr.(11)............ 10,000 * 10,000 * All directors and executive officers 23,952,129 37.3 23,952,129 23.3 as a group (seven persons)(12)......
- --------------- * Less than 1% (1) Based on 63,735,718 shares of Atari Common Stock outstanding as of May 22, 1996. (2) Based on (i) 63,735,718 shares of Atari Common Stock outstanding as of May 22, 1996 (assuming no exercise of outstanding options after such date) and (ii) 29,696,370 shares of JTS Series A Preferred Stock and 9,255,116 shares of JTS Common Stock outstanding as of May 15, 1996 (assuming no exercise of outstanding options and warrants after such date). (3) Includes 11,597,315 shares held by Jack Tramiel's wife. Also includes 155,690 shares held by Mr. Tramiel's wife as trustee of trusts for the benefit of Mr. Tramiel's minor grandchildren. Also includes 4,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. (4) Includes 7,100,000 shares held by Warner Communications Investors, Inc., 1,500,000 shares held by Warner Communications, Inc. 82 90 (5) Includes 352,062 shares held by Sam Tramiel as custodian on behalf of his children, 8,100 shares held by Mr. Tramiel's wife and an aggregate of 97,416 shares held by Mr. Tramiel's minor children. Also includes 225,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. (6) Includes 40,000 shares held by Leonard Tramiel's wife and 10,000 shares held by Mr. Tramiel's minor children. Also includes 55,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. (7) Includes 55,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. (8) Includes 165,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. (9) Includes 20,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. (10) Includes 20,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. (11) Represents shares subject to options which are vested or become vested within 60 days following May 22, 1996. (12) Includes 499,000 shares subject to options which are vested or become vested within 60 days following May 22, 1996. 83 91 INFORMATION REGARDING JTS CORPORATION BUSINESS OF JTS JTS was founded as a Delaware corporation in February 1994 to design, manufacture and market hard disk drives for use in notebook computers and desktop personal computers. JTS has developed two product families of hard disk drives: the Nordic product family for notebook computers, which includes disk drives with 3-inch form factors and two or three recording disks; and the Palladium product family for desktop personal computers, which includes disk drives with 3.5-inch form factors and two or three recording disks. JTS is also developing a family of 5.25-inch form factor disk drives for the desktop personal computer market. JTS markets and sells its products to original equipment manufacturers ("OEMs") for incorporation into their notebook and desktop computer systems and subsystems. JTS acquired several technical personnel and rights to certain key technology utilized in JTS' disk drives in connection with bankruptcy proceedings involving Kalok Corporation in February 1994. All JTS disk drives are currently manufactured at JTS' subsidiary, Moduler Electronics, located in Madras, India. INDUSTRY BACKGROUND The hard disk drive industry is intensely competitive and dominated by a small number of large companies, including Quantum, Seagate, Western Digital and Maxtor. In addition, a number of computer companies, such as Hewlett-Packard, Toshiba and IBM, have in-house or "captive" disk drive manufacturing operations that produce disk drives for incorporation into their own computers as well as for sale to other OEMs. In 1995, the top six disk drive vendors accounted for approximately 88% of the unit market share. In 1995, approximately 89 million hard disk drives were shipped, representing a 30% increase over the prior year. Approximately 70 million, or 77%, of the hard disk drives shipped in 1995 were sold as part of desktop personal computers, and approximately 11 million, or 12%, were sold as part of notebook computers. In 1995, Seagate, Quantum and Western Digital controlled approximately 61% of the desktop hard disk drive market share, and IBM and Toshiba controlled approximately 70% of the notebook hard disk drive market share. All hard disk drives used in notebook and desktop personal computers incorporate the same basic technology. One or more rigid disks are attached to a spin motor assembly which rotates the disks at a constant speed within a sealed, contamination-free enclosure. Typically, both surfaces of each disk are coated with a thin layer of magnetic material. Magnetic heads record and retrieve data from discrete magnetic domains located on pre-formatted concentric tracks in the magnetic layers of the rotating disks. An actuator positions the head over the proper track upon instructions from the drive's electronic circuitry. Most disk drives are "intelligent" disk drives which incorporate an embedded ASIC controller to manage communications with the computer. The size of a hard disk drive is referred to as the drive's "form factor" or "footprint." At present, the vast majority of personal desktop and notebook computers incorporate disk drives with either 3.5-inch or 2.5-inch form factors. The size of the form factor determines the size of the recording disk and, hence, dictates the recording capacity of the disk drive. Disk drives with smaller form factors must incorporate more disks and, as a result, more heads to offer the same recording capacity as larger form factor drives. Therefore, because heads and disks are the most expensive components in the hard disk drive, larger form factor disk drives are relatively less expensive to manufacture than smaller form factor drives with comparable recording capacities. As a result, 3.5-inch drives are better suited for desktop personal computers, which are not subject to the size constraints of notebook computers. In contrast, 2.5 inch drives, because of their reduced size as well as power conservation features and lightweight design, presently dominate the notebook computer market. In recent years, the computer industry has witnessed the emergence of several trends that JTS believes will continue to drive demand for innovative disk drive products. First, new data- and image-intensive applications are generating increased demand for greater storage capacity and performance at a lower cost for both business and home computer users. JTS believes that this trend will continue as more applications are developed that enable individuals to easily access, store and manipulate digital information and as computers 84 92 become a more common home appliance. At the same time, a significant percentage of personal computing is occurring on mobile devices, such as notebook computers, which represented approximately 15% of all personal computers sold in 1995. Third, the personal computer industry is migrating towards lower profile computing devices, both in the desktop and notebook arenas. The pressure to shrink the dimensions, increase the capacities and lower the costs of personal computers has presented manufacturers, especially notebook designers, with a substantial and ongoing technical challenge. JTS STRATEGY JTS' objective is to become a leading supplier of hard disk drives to the notebook and desktop computer markets. JTS' strategy to achieve this objective includes the following key elements: - Establish 3-inch form factor technology for notebook computers. JTS has developed a family of 3-inch form factor disk drives, the Nordic product family, for use in notebook computers as an alternative to 2.5-inch drives, the current industry standard. JTS Nordic disk drives are similar to 2.5-inch drives in terms of weight and power consumption but have a modestly larger footprint, although the low-profile design of the 3-inch drive results in its total volume being the same as the 2.5-inch drive. The disks used in JTS' 3-inch drives have 82% greater recording surface area per drive than disks used in 2.5-inch drives, and, therefore, greater storage capacities can be achieved at the same areal densities (megabytes per square inch) as 2.5-inch drives. JTS began shipment of Nordic drives in the second calendar quarter of 1996.* Nordic drives are expected to be offered at prices that are competitive with the prices of 2.5-inch drives.* - Develop innovative disk drives for desktop personal computers. JTS has developed a 3.5-inch family of disk drives, the Palladium family, for desktop personal computers. Like the Nordic family of disk drives, the Palladium family is characterized by a low-profile, fully-encapsulated design and a simplified, highly-integrated platform approach. JTS began volume production and shipment of Palladium drives in September 1995 and is presently shipping Palladium drives with capacities of 1.0 and 1.6 gigabytes. JTS is also developing a family of 5.25-inch form factor disk drives for the desktop market with many of the same design features as JTS' Nordic and Palladium drives, but with significantly greater recording capacities. - Achieve low product cost structure. All of JTS' manufacturing operations and some of its design operations take place in Madras, India, which offers a low-cost and well-trained labor force. In order to capitalize upon the low-cost labor base in India, JTS has adopted a manufacturing strategy of selective vertical integration. For example, JTS is presently vertically integrated in the manufacture of particularly labor-intensive components such as head stacks. JTS' disk drive products also share a significant amount of common componentry, thereby reducing manufacturing and development costs. - Form strategic alliances with key participants in the computer industry. JTS has entered into a Development Agreement and Purchase Agreement with Compaq pursuant to which Compaq has agreed to design at least one of JTS' disk drives into Compaq's products and to purchase a minimum number of disk drives subject to certain conditions. JTS intends to establish similar arrangements with other major computer OEMs and notebook computer manufacturers. In addition, JTS has entered into a Technology Transfer and License Agreement with Western Digital, which provides for the cross-licensing of JTS' and Western Digital's 3-inch disk drive technology and licenses Western Digital to act as a second source of 3-inch drives to Compaq. - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 85 93 PRODUCTS JTS' disk drives are characterized by the following design features: - Low Profile Design. JTS' hard disk drives have a lower profile than competing hard disk drives with comparable form factors and recording capacities. The low profile design is accomplished by a high level of electronic integration that allows for the printed circuit board assembly ("PCBA") to be placed in a small corner of the drive in the same plane as the recording disks (this design is known as "board in the plane of the media" packaging). Most competing drives place the PCBA under the drive mechanics which significantly increases the height of the drive. - Simplified and Highly-Integrated Platform Approach. JTS' product families share a simplified, highly-integrated platform approach characterized by a reduced number of components. JTS believes that its PCBAs have the fewest components in the industry because of a highly-integrated ASIC controller. JTS believes this simplified platform approach combined with common technology among its product families facilitates the introduction of new technology and utilizes research personnel in a more efficient manner, thereby reducing development costs. - Fully-Encapsulated Design. JTS disk drives are fully-encapsulated with no exposed PCBA and contain either a standard fixed drive connector or optional multi-insertion connector. The encapsulated design eliminates the possibility of damage to the PCBA due to electrostatic discharge and improves the electromagnetic interference immunity of the drive. - Common Componentry. The Nordic and Palladium product families share a substantial percentage of common electronic componentry which facilitates the simultaneous development of products for the notebook and desktop computer markets and reduces time to market for JTS products. For example, JTS' product families share spindle motors, certain head stack components and controller ASICs. Nordic Product Family JTS' Nordic product family is designed for notebook computers. Nordic drives measure 90mm wide, the same width as a floppy diskette, and are classified as 3-inch drives. The Nordic drives incorporate low-profile architecture, measuring 10.5mm high for the two disk version and 12.5mm for the three disk version. Nordic drive capacities presently range from 640 to 810 megabytes for the two disk version and 1.2 gigabytes for the three disk version. The 10.5mm and 12.5mm Nordic drives are significantly thinner than the 17mm or 19mm high 2.5-inch drives, while the surface area of the recording disk in a Nordic drive is 82% greater than a 2.5-inch disk. The greater surface area of the disk media used in the Nordic drives allows for greater recording capacity using the same areal densities. At the same time, the Nordic drives consume approximately the same amount of power as 2.5-inch drives, making them well suited for battery operated applications. The Nordic product family is being developed in conjunction with Western Digital, which has entered into a Technology Transfer and License Agreement with JTS obligating Western Digital to make milestone payments and to share advancements in 3-inch technology and licensing Western Digital to serve as a second source of Nordic products to Compaq. In addition, JTS has entered into a Development Agreement with Compaq which committed Compaq to partially fund Nordic development costs and obligated Compaq to purchase a minimum number of disk drives over a two year period. Shipments to Compaq of Nordic disk drives are expected to commence in the second calendar quarter of 1996.* See "-- Relationship with Compaq" and "-- Western Digital Arrangement." - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 86 94 Palladium Product Family Palladium disk drives are 3.5-inch form factor drives designed for desktop personal computers. The Palladium product family includes two and three disk versions with capacities presently ranging from 540 megabytes to 1.6 gigabytes. The Palladium drives incorporate low-profile architecture similar to Nordic drives, measuring 1/2-inch in height compared to competing drives that typically measure 1-inch in height. The low profile design allows two disk drives to be configured into the same space required for one competing 3.5-inch drive. JTS began volume production and shipments of Palladium drives in September 1995. 5.25-inch Family of Hard Disk Drives JTS is developing a family of 5.25-inch form factor hard disk drives for desktop personal computers. The 5.25-inch drives will initially include three disks and have a capacity of 3.5 gigabytes. The 5.25-inch drives are being designed to meet the increased data storage demands of advanced multimedia applications. Like the Nordic and Palladium drives, the 5.25-inch drives will have a low-profile, fully-encapsulated design and a simplified, highly-integrated platform approach. JTS expects to begin volume production and shipment of 5.25-inch drives in the fourth quarter of fiscal 1997.* RELATIONSHIP WITH COMPAQ In June 1994, JTS entered into a Development Agreement with Compaq pursuant to which the two companies established a plan for the development of JTS' Nordic family of disk drives. Pursuant to the terms of the Development Agreement, Compaq has paid $500,000 to JTS for product development expenses. In addition, JTS has granted to Compaq certain pricing preferences and agreed to pay royalties to Compaq on sales of Nordic disk drives to third parties during the term of the agreement. Compaq has been granted a license to use the Nordic designs to manufacture Nordic drives on a royalty-free basis in the event JTS fails to meet the agreed upon production schedule. The Development Agreement also restricts JTS' ability to sublicense Nordic technology. The Development Agreement has a five year term, which will automatically be renewed under certain circumstances and may be terminated by either party only with cause. JTS and Compaq have also entered into a Purchase Agreement related to future purchases by Compaq of Nordic drives. See "-- Patents and Licenses." WESTERN DIGITAL ARRANGEMENT In February 1995, JTS entered into a Technology Transfer and License Agreement with Western Digital. Under the terms of the agreement, Western Digital obtained manufacturing and marketing rights to JTS' 3-inch hard disk drive products. In return, Western Digital is obligated to make payments to JTS totalling $6.0 million upon the achievement of certain development milestones and is licensed to act as a second source of Nordic drives to Compaq. As of January 28, 1996, Western Digital had made milestone payments to JTS in an aggregate amount of $5.3 million. In February 1995, Western Digital also made a $4.1 million equity investment in JTS as part of the transaction. The parties have reciprocal, royalty-free, cross-license agreements for future 3-inch drive developments, and Western Digital has granted to JTS licenses on existing patents covering its 3-inch disk drive technology. Under certain circumstances, the Technology Transfer and License Agreement restricts JTS from sublicensing Nordic technology until 1998. See "-- Patents and Licenses." MANUFACTURING JTS' manufacturing strategy is to be a low-cost producer of hard disk drives for the notebook and desktop personal computer markets. All of JTS' manufacturing operations are currently conducted at its subsidiary, - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 87 95 Moduler Electronics, located in Madras, India, which JTS acquired in April 1996. See "JTS' Acquisition of the Disk Drive Division of Moduler Electronics." As of April 26, 1996, 1,760 individuals were employed at Moduler Electronics. The Madras facility presently occupies 85,000 square feet in a single building, 4,000 square feet of which are designated a "clean room" environment. At this facility, JTS is adding production lines and expanding its clean room environment. JTS believes that locating its manufacturing operations in India is an important element of its low-cost manufacturing strategy due to the availability of a high-quality, low-cost technical labor pool. In 1995, JTS was granted a five year "tax holiday" with respect to sales of JTS' products in and outside of India. In addition, Moduler Electronics is located in the Madras export processing zone and, therefore, enjoys a tax exemption with respect to profits generated from sales outside of India. Such exemption may be terminated at any time, in which event JTS would become subject to significantly greater taxes on sales of disk drives outside of India. Other benefits associated with conducting business in India, which historically has experienced considerable political instability, are subject to the vagaries of the Indian government, and may be withdrawn at any time. The manufacture of high-capacity hard disk drives is a complex process, requiring a "clean room" environment, the assembly of precision components within narrow tolerances and extensive testing to ensure reliability. JTS' manufacturing process is performed in three stages: subassembly, final assembly and final test. The subassembly group builds mechanical subassemblies and flex cables and modifies PCBAs. Printed circuit board assembly is performed by outside vendors. The final assembly group assembles all subassemblies and components into the mechanical head/disk assembly ("HDA"), writes servo information, and performs preliminary testing. To avoid contamination by dust and other particles which may impair the functioning of the disk drive, most assembly takes place under controlled "clean room" conditions. The final test group connects PCBAs to HDAs, burns-in completed drives and performs final tests. The principal components used in JTS' manufacturing process are disks, heads and PCBAs. JTS has two qualified sources for PCBAs and is in the process of qualifying second sources for disks and heads. JTS' Indian subsidiary imports approximately 85% of the componentry used in the manufacture of its disk drives from outside of India. In the past, JTS has experienced delays in obtaining certain integrated circuits required in the assembly of PCBAs, and there can be no assurance that such delays, or difficulties in obtaining those or other components, will not occur in the future. JTS' inability to obtain essential components or to qualify additional sources as necessary, if prolonged, could have a material adverse effect on JTS' business, operating results and financial condition. In the second quarter of 1996, JTS was advised that its sole supplier of certain head stack components intends to decrease production and ultimately discontinue manufacturing of such components, and, therefore, JTS will be required to secure a new supply arrangement with another manufacturer of such components. JTS has developed a comprehensive quality assurance program. All significant electrical and mechanical parts received from outside sources are inspected or tested, normally on a sample basis, and testing and burn-in of certain components and subassemblies occurs during assembly. In addition, JTS performs several in-process quality checks and inspections, both in the PCBA and HDA processes, and a final drive-level quality check prior to packaging. Additional performance and reliability testing is done on a sample basis from each week's production units in order to monitor quality levels and provide corrective action to the factory processes. JTS generally warrants its products against defects in design, materials and workmanship for three years. JTS maintains in-house service facilities for refurbishment or repair of its products in Madras, India. Due to the common componentry of the Nordic and Palladium disk drives, JTS believes that it enjoys considerable flexibility in managing inventory levels and meeting its customers' production requirements. In addition, JTS believes that common componentry reduces the amount of scrap materials generated in the manufacturing process and facilitates the training of operators in producing new products, thus reducing production costs. JTS' longer-term manufacturing strategy calls for selective vertical integration to reduce JTS' manufacturing costs. At present, JTS is vertically integrated in certain labor intensive components, such as head stacks, thereby capitalizing on the low-cost labor base in India. JTS also believes that its proprietary controller ASIC is less expensive and more easily upgradeable than commercially available integrated circuits. 88 96 RESEARCH AND DEVELOPMENT JTS operates in an industry characterized by rapid technological change and short product life cycles. As a result, JTS' success will depend upon its ability to develop new products, successfully introduce these products to the market and ramp up production to meet customer demand. Accordingly, JTS is committed to timely development of new products and the continuing evaluation of new technologies. JTS' research and development efforts are presently concentrated on broadening its existing 3.5- and 3-inch product lines and introducing new generations of products with increased capacity and improved performance at a lower cost. In this regard, JTS is presently designing various high performance features, such as MR heads, new ASIC/channel technology and advanced head lifters, into each of its hard disk drive product families. In June 1996, JTS entered into a Heads of Agreement with Headway Corporation ("Headway"), a joint venture between Hewlett-Packard and Komag Corporation, pursuant to which Headway has agreed to act as the exclusive supplier of MR heads for JTS' future products. JTS expects to begin shipment of Palladium drives with recording capacities of up to 2.5 gigabytes and Nordic drives with recording capacities of up to 2.0 gigabytes in the fourth quarter of fiscal 1997.* In addition, JTS is developing a family of 5.25-inch disk drives for the desktop personal computer market. JTS expects to begin shipment of 5.25-inch drives in the fourth quarter of fiscal 1997.* For the fiscal years ended January 31, 1995 and 1996, JTS' research and development expenses totalled approximately $3.7 million and $13.4 million, respectively. As of January 28, 1996, JTS employed 137 individuals in engineering support and research and development. SALES AND MARKETING JTS sells its products through its direct sales force operating in the United States, Europe and Asia. In addition, JTS' hard disk drives are sold into the Latin American markets by FutureTech International, Inc. ("Futuretech"), a products distributor. JTS presently has a sales office in Taiwan that employs three individuals. The Taiwan sales office markets the JTS Nordic disk drives to local notebook computer manufacturers and works closely with the manufacturers to design JTS' disk drives into their products. In addition, JTS has independent sales representatives located in Japan, Germany and South Africa who market JTS' Nordic disk drives to notebook computer manufacturers. JTS employs two sales representatives in the United States who market JTS' 3.5-inch disk drives to OEMs. International sales accounted for 81% of revenues in fiscal 1996. See "Notes to JTS Financial Statements." A limited number of customers account for a significant percentage of JTS' total revenue. In fiscal 1996, Olidata S.p.A., Connexe Peripherals, Ltd., Liuski International, Inc. and Aashima Technology, B.V. accounted for 34%, 12%, 11% and 10%, respectively, of JTS' total revenue. In the quarter ended April 28, 1996, Peacock Systems GmbH, Markvision International S.A. and FutureTech accounted for 43%, 18% and 14% respectively, of JTS' total revenue. JTS expects that sales to a relatively small number of OEMs will account for a substantial portion of its net revenues for the foreseeable future, although the companies that comprise JTS' largest customers may change from period to period. In particular, based on existing contracts with FutureTech and Compaq, JTS expects that revenues from these companies will account for a substantial percentage of JTS' revenues in the foreseeable future. The loss of, or decline in orders from, one or more of JTS' key customers would have a material adverse effect on JTS' business, operating results and financial condition. PATENTS AND LICENSES JTS holds no patents and has licensed in a substantial portion of the technology used in its hard disk drives pursuant to license agreements with Pont Peripherals Corporation, formerly DZU Corporation ("Pont"), TEAC Corporation ("TEAC") and Western Digital. If such license agreements were prematurely - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 89 97 terminated or if JTS were enjoined from relying upon such licenses due to JTS' alleged or actual breach of such agreements, JTS would be prevented from manufacturing disk drives incorporating technology subject to such licenses. As a result, JTS' business, operating results and financial condition would be materially adversely affected. JTS has filed three United States patents applications. Although JTS believes that patent protection could offer significant value, the rapidly changing technology of the computer industry makes JTS' future success dependent primarily upon the technical competence and creative skills of its personnel rather than on patent protection. A license with respect to certain key technology employed in JTS' Nordic disk drives was granted to JTS by TEAC pursuant to a license agreement dated February 4, 1994 (the "TEAC Agreement"). The TEAC Agreement also includes a cross-license with respect to Nordic technology developed jointly by TEAC and JTS, which will be owned jointly by the two companies, and granted certain rights to TEAC with respect to Nordic technology developed independently by JTS, which will be owned solely by JTS. Under the TEAC Agreement, JTS is obligated under certain circumstances to make royalty payments to TEAC in connection with the sale of future generation disk drives incorporating Nordic technology that is jointly developed by JTS and TEAC or independently developed by TEAC. JTS is not obligated to make royalty payments with respect to developments to Nordic technology made independently by JTS, but JTS is obligated to license such developments to TEAC on a royalty-free basis. The TEAC Agreement restricts JTS' ability to sublicense certain technology licensed to JTS. TEAC originally acquired its rights in certain Nordic disk drive technology pursuant to the Agreed Order Compromising Controversies dated February 4, 1994 (the "Order") governing the distribution of the assets of Kalok Corporation. The Order imposes certain restrictions on JTS' right to sublicense, manufacture and sell certain disk drive technology of Kalok Corporation that was transferred to both TEAC and Pont pursuant to the Order. In June 1994, JTS entered into a Development Agreement with Compaq which imposes certain restrictions on JTS' ability to sublicense Nordic technology to third parties. In addition, the Development Agreement imposes a royalty obligation upon JTS with respect to the sale of Nordic disk drives to third parties during the term of the agreement. Moreover, Compaq has a right of first refusal with respect to all production of Nordic drives until June 1997 and a right of first refusal to license and/or acquire future JTS technologies and products during the term of the agreement. JTS has also granted certain non-exclusive manufacturing and marketing rights with respect to certain Nordic technology and developments thereto within the term of the Development Agreement. See "-- Relationship with Compaq." In January 1995, JTS and Pont entered into a cross-licensing agreement (the "Pont Agreement") pursuant to which JTS granted to Pont a royalty-free, nonexclusive, perpetual license to use certain JTS and jointly-developed hard disk drive technology, to make developments to such technology and to manufacture and sell in certain territories hard disk drives incorporating such technology. In return, Pont granted to JTS a royalty-free, nonexclusive, perpetual license to use certain Pont and jointly-developed hard disk drive technology, to make developments to such technology and to manufacture and sell in certain territories hard disk drives incorporating such technology. In addition, Pont was obligated to make certain royalty payments to JTS for a limited period of time with respect to the sale of hard disk drives incorporating certain JTS technology. In February 1995, the TEAC Agreement, the Order, the Pont Agreement and the Compaq Development Agreement were each amended to permit the license and sublicense by JTS to Western Digital of certain rights in Nordic disk drive technology. In addition, the amendment to the TEAC Agreement provides that JTS will pay certain royalties to TEAC, under certain circumstances, upon the sale of Nordic drives for a limited period of time. The Pont Agreement was also amended to expand the territories in which JTS may manufacture and sell hard disk drives incorporating technology subject to the agreement. JTS and Western Digital concurrently entered into a Technology Transfer and License Agreement pursuant to which Western Digital obtained certain manufacturing and marketing rights to Nordic disk drive technology. The parties have reciprocal, royalty-free, cross-license agreements for future Nordic technology developments, and Western Digital has granted to JTS licenses on existing patents covering its 3-inch hard disk drive technology. See "-- Western Digital Arrangement." 90 98 COMPETITION The hard disk drive industry is intensely competitive and dominated by a small number of large companies, including Quantum, Seagate, Western Digital and Maxtor. In addition, a number of computer companies, such as Hewlett-Packard, Toshiba and IBM, have in-house or "captive" disk drive manufacturing operations that produce disk drives for incorporation into their own computers as well as for sale to other OEMs. JTS believes that competition in the disk drive industry is based primarily upon time to market, product availability, performance, product capacity and price. JTS believes that it competes favorably with respect to each of these factors. Many of JTS' competitors have broader product lines than JTS, and all have significantly greater financial, technical and marketing resources. There can be no assurance that JTS will be able to develop and manufacture products on a timely basis with the quality and features necessary in order to be competitive. High volume disk drive users typically utilize from two to four suppliers but desire to limit the number of sources. As a result, it may be necessary for JTS to displace competitors in many circumstances in order to increase its net sales. In addition, JTS faces competition from the manufacturing operations of its current and potential OEM customers, which could initiate or increase internal production and reduce or cease purchasing from independent disk drive suppliers such as JTS. Moreover, the hard disk drive industry is characterized by intense price competition. If other disk manufacturers add significant capacity or demand for disk drives decreases, the resulting pricing pressures could adversely affect JTS' business, operating results and financial condition. JTS has experienced pricing pressures in the past, and there can be no assurance that JTS will not experience increased price competition in the future. Any increase in price competition could have a material adverse effect on JTS' business, operating results and financial condition. If JTS' current and prospective customers and end users were to adopt alternative data storage products, including optical storage, flash memory and holographic storage, JTS' business, operating results and financial condition could be adversely affected. BACKLOG JTS' sales are generally made pursuant to purchase orders that are subject to cancellation, modification, quantity reductions or rescheduling without significant penalties. Changes in forecasts, cancellations, rescheduling and quantity reductions may result in excess inventory costs, inventory losses and under-utilization of production capacity and may have a material adverse effect on JTS' business, operating results and financial condition. As a result of the foregoing, JTS' backlog as of any particular date may not be representative of actual sales for any succeeding period. EMPLOYEES As of April 26, 1996, JTS had 1,936 full-time employees, of whom 158 were located in San Jose, California, 1,760 were located in Madras, India, 13 were located in Singapore and five were located in Taipei, Taiwan. Of the full-time employees, 1,490 are engaged in manufacturing, 12 in marketing, sales and service, 108 in product development and 18 in administration and finance. The market for well-trained employees with disk drive industry experience is intensely competitive. JTS believes that its future success will depend on its ability to continue to attract and retain a team of highly motivated and skilled individuals. None of JTS' employees is represented by a labor organization. JTS believes that its employee relations are good. PROPERTIES JTS presently leases facilities in San Jose, California, Madras, India, Singapore and Taipei, Taiwan. JTS' executive and administrative headquarters are located in a 52,000 square foot building in San Jose. The lease on this facility expires in July 2000, and has an option to renew for four years, subject to certain restrictions. The Madras facility comprises approximately 85,000 square feet and is used for all of JTS' manufacturing operations. JTS does not presently lease the Madras facility, but rather occupies the facility pursuant to allotment letters from the Development Commissioner of the Madras Export Processing Zone. Such allotment letters authorize JTS to occupy the premises indefinitely so long as the space is used in the 91 99 reasonable conduct of JTS' business and rents are paid in a timely fashion. JTS currently intends to increase the size of the Madras facility by 65,000 square feet by the end of fiscal 1997.* The Singapore office comprises approximately 1,500 square feet and is used for JTS' purchasing operations in Southeast Asia. The lease for this facility expires in October 1997. The Taiwan sales office has approximately 1,144 square feet and is used for JTS' marketing and sales operations in Taiwan. The lease for this facility expires in July 1997. LEGAL PROCEEDINGS JTS has been served with a complaint filed in the Superior Court of the State of California in and for the County of Santa Clara by Venture Lending & Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment from its initial location to Madras, India, in alleged violation of the lease agreement. The complaint alleges fraud and breach of the lease agreement and seeks damages of approximately $4.6 million. - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 92 100 JTS AND MODULER ELECTRONICS UNAUDITED SELECTED FINANCIAL DATA The following unaudited selected pro forma combined financial data of JTS and Moduler Electronics presents the pro forma combined financial position and results of operations of JTS and Moduler Electronics as of and for the year ended January 28, 1996 and for the three months ended April 28, 1996 and April 30, 1995. This unaudited selected pro forma financial data combine JTS and Moduler Electronics and give effect to the JTS and Moduler Electronics combination, which was accounted for as a purchase. The April 28, 1996 balance sheet reflects the acquisition of Moduler Electronics which took place on April 4, 1996. Intercompany balances and transactions have been eliminated in the presentation. This data should be read in conjunction with the Unaudited Pro Forma Financial Statements and related notes, and the historical financial statements and related notes of JTS and Moduler Electronics which are included elsewhere herein. All amounts are stated in thousands, except per share amounts. Statement of Operations Data: Year Ended January 28, 1996 (Pro forma) Net revenues................................................ $ 18,777 Gross margin (deficit)...................................... (14,849) Research and development.................................... 13,375 Selling, general and administrative expenses................ 5,777 Operating loss.............................................. (34,001) Net loss.................................................... (35,170) Loss per common share(1).................................... (7.63)
THREE MONTHS ENDED ----------------------------------- APRIL 28, 1996 APRIL 30, 1995 ---------------- -------------- Quarter ended April 28, 1996 and April 30, 1995 (Pro forma) Total revenues.............................................. $ 17,581 $ 2,077 Operating loss.............................................. (12,098) (1,203) Net loss.................................................... (12,820) (1,143) Net loss per share(1)....................................... (1.47) (.26)
JANUARY 28, 1996 APRIL 28, 1996 -------------- ---------------- (PRO FORMA) (ACTUAL) Balance Sheet Data: Current assets.............................................. $ 30,474 $ 12,722 Equipment and leasehold improvements, net................... 16,212 14,795 Total assets................................................ 46,871 28,111 Current liabilities......................................... 61,669 30,615 Long-term debt.............................................. 6,381 6,248 Redeemable Series A Preferred Stock......................... 29,697 29,696 Stockholders' deficit....................................... (50,876) (38,448)
- --------------- (1) Excludes JTS Series A Preferred Stock, warrants and options as their effect would be antidilutive. 93 101 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF JTS JTS was incorporated in February 1994 and remained in the development stage until October 1995, when it began shipping hard disk drives. From October 1995 through January 1996, JTS shipped 98,000 Palladium disk drives in 540 megabyte, 850 megabyte and 1 gigabyte configurations primarily to customers in the United States and Europe. During the second quarter of calendar year 1996, JTS expects to begin shipment of Nordic disk drives to Compaq under a volume purchase agreement.* There can be no assurance that JTS will be successful in the production and shipment of these products. Since its inception, JTS has incurred significant losses which have resulted from the substantial costs associated with the design, development and marketing of new products, the establishment of manufacturing operations and the development of a supplier base. JTS' ability to achieve successful operations will depend upon a number of factors, including market acceptance of JTS' products, the introduction of new products in a timely and cost-effective manner, and the volume production of disk drives at acceptable manufacturing yields. In addition, JTS will need significant additional financing resources over the next several years for facilities expansion, capital expenditures, working capital, research and development and vendor tooling. There can be no assurance that JTS will achieve successful operations. All of JTS' products are manufactured in Madras, India by its Moduler Electronics subsidiary. In March 1995, JTS entered into a verbal agreement to acquire Moduler Electronics and subsequently assumed operational and management control of certain aspects of Moduler Electronics' disk drive business. In April 1996, JTS acquired 90% of Moduler Electronics and, accordingly, the Pro Forma Combined Condensed Financial Statements of JTS and Moduler Electronics are the bases for the following discussion and analysis. PRO FORMA YEAR ENDED JANUARY 28, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995 For the fiscal year ended January 28, 1996, JTS' pro forma results reflect a net loss of $35.2 million, compared to a net loss of $4.8 million for JTS in fiscal 1995. Total pro forma revenues for fiscal 1996 were $18.8 million and consisted of product sales and license revenues. Net product sales for fiscal 1996 were $13.5 million as JTS initiated product shipments to customers in October 1995. License revenues for fiscal 1996 were $5.3 million as JTS achieved certain development milestones under its Technology Transfer and License Agreement with Western Digital which was executed in February 1995. Of total revenues, 81% were derived from European customers and 19% were derived from customers in the United States. During fiscal 1996, JTS' product sales were concentrated among several key customers with Olidata Spa, Connexe Peripherals, Ltd., Liuski International, Inc. and Aashima Technology B.V. accounting for 34%, 12%, 11% and 10% of total product sales, respectively. JTS had no revenues in fiscal 1995. Pro forma gross margin for fiscal 1996 was a deficit of $14.8 million. The deficit resulted principally from costs and expenses due to low manufacturing yields and high per unit costs associated with the start-up of manufacturing operations. Cost of product sales for fiscal 1996 also included a $4.3 million provision for inventory allowances. The principal reasons for these allowances include approximately $3.6 million for obsolete and unsaleable inventory, approximately $345,000 for the costs of repairing defective products and a reserve of approximately $500,000 for various other allowances. JTS anticipates incurring future inventory allowances, the level of which will depend upon a number of factors including manufacturing yields, new product introductions, maturity or obsolescence of product designs, inventory levels and competitive pressures.* The hard disk drive industry has been characterized by ongoing rapid price erosion and resulting pressure on gross margins. JTS expects that hard disk drive prices will continue to decline in the future and that - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 94 102 competitors will offer products which meet or exceed the performance capabilities of JTS products. Due to such pricing pressures, JTS' future gross margin will be substantially dependent upon its ability to control manufacturing costs, improve manufacturing yields and introduce new products on a timely basis.* Research and development expenses for fiscal 1996 were $13.4 million compared to $3.7 million for fiscal 1995. The increase is primarily attributable to salaries and benefits resulting from the significant increase in staffing required for product design and the development of manufacturing processes. Specifically, during fiscal 1996, the number of employees in research and development increased by 112 to a total of 137 employees at the end of fiscal 1996. In addition, expenses for supplies, materials and other costs associated with design and pilot production of new products were approximately $5.0 million in fiscal 1996 compared to approximately $1.5 million in fiscal 1995. JTS expects that research and development expenses will continue to increase throughout fiscal 1997 in absolute dollars but that such expenses will decline as a percent of sales.* Selling, general and administrative expenses for fiscal 1996 were $5.8 million compared to $1.5 million for fiscal 1995. The major components of these expenses are salaries and benefits of administrative and marketing and sales employees, facility costs and professional fees. The growth in these expenses in fiscal 1996 was required to support the expansion of JTS' operations and the commencement of marketing and sales efforts. Included in 1996 is a non-cash charge of $930,000 of amortization of deferred compensation related to the issuance of common stock to certain officers (see Note 7 to JTS Financial Statements). JTS expects that selling, general and administrative expenses will increase throughout fiscal 1997 in absolute dollars but that such expenses will decline as a percentage of sales.* QUARTER ENDED APRIL 28, 1996 COMPARED TO QUARTER ENDED APRIL 30, 1995 Revenue for the first quarter of fiscal 1997 was $17.6 million compared to $2.0 million for the first quarter of fiscal 1996. Revenue for the current quarter was comprised primarily of sales of the Company's 850 megabyte and 1 gigabyte Palladium 3 1/2-inch disk drives. Minimal product revenues were recorded in the first quarter of fiscal 1996, as the Company initiated volume shipments of disk drives in October 1995. However, JTS earned $2.0 million of technology license revenue during the first quarter of fiscal 1997 as a result of achieving certain development milestones under the Technology Transfer and License Agreement with Western Digital. JTS' management expects revenues from its 850 megabyte drives to be nominal for the rest of the fiscal year and sales from its 1 gigabyte products to decline in the near future.* JTS recently began shipment of its 1.6 gigabyte drives, the sales of which are expected to increase in the near future.* During the second fiscal quarter, the Company will begin shipment of Nordic 3-inch disk drives to Compaq Computer Corporation under a volume purchase agreement.* There can be no assurance that product sales will materialize as expected. The gross margin for the first quarter of fiscal 1997 was a deficit of $1.8 million compared to a margin of $2.0 million for the first quarter in fiscal 1996. The $3.8 million increase in the gross margin deficit is attributable to high unit costs associated with the ramp-up of volume production of disk drives. In order for JTS to realize positive gross margins in the future, the Company will have to control manufacturing costs, further improve manufacturing yields and successfully introduce new products on a timely basis. Research and development expenses were $7.4 million for the first quarter of fiscal year 1997 compared to $1.7 million for the first quarter of fiscal year 1996 as a result of a significant increase in the number of employees in research and development required to meet demand for timely product design. JTS expects that research and development expenses will continue to increase throughout fiscal 1997 in absolute dollars but that such expenses will decline as a percentage of sales. Selling, general and administrative expenses for the first quarter of fiscal 1997 were $3.1 million compared to $700,000 for the first quarter of fiscal 1996. The increase resulted from the expansion of JTS' operations and the commencement of marketing and sales efforts. Also included is a non-cash charge of - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 95 103 $330,000 related to the amortization of deferred compensation. JTS expects that selling, general and administrative expenses will increase throughout fiscal 1997 in absolute dollars but that such expenses will decline as a percentage of sales. LIQUIDITY AND CAPITAL RESOURCES As of January 28, 1996, JTS had cash and cash equivalents of $1.4 million. Of this amount, $380,000 on deposit in India was restricted for use by JTS for a 90 day period beginning on January 28, 1996. On a pro-forma basis, at January 28, 1996, JTS had a working capital deficit of $17.9 million, which included short term borrowings of $10.4 million. The short term borrowings were used to finance working capital requirements, and included $4.3 million outstanding under a bank line of credit and $6.1 million outstanding under bank lines of credit in India. Since inception, JTS has acquired approximately $11.0 million in capital equipment, furniture and fixtures and leasehold improvements. Long term debt associated with capital acquisitions amounted to approximately $7.9 million at January 28, 1996. JTS currently expects that approximately $22 million will be required during calendar year 1996 for capital equipment, tooling and leasehold improvements, primarily in India.* As of January 28, 1996, JTS had no material commitments related to such expenditures. On February 13, 1996, Atari loaned $25.0 million to JTS pursuant to a Subordinated Secured Convertible Promissory Note (the "Note") which is secured by substantially all of the assets of JTS. Interest accrues on the unpaid principal amount of the Note at the rate of 8.5% per annum. The Note provides that JTS shall repay the outstanding principal and interest under the Note on September 30, 1996 if the Merger has not occurred prior to such time. In the event that the Merger Agreement is terminated, either party may, under certain conditions, elect to convert the outstanding indebtedness under the Note into shares of JTS Series A Preferred Stock. The Note is expressly subordinated to outstanding indebtedness in connection with JTS' primary bank loan agreement, up to an amount of $5.0 million at any one time. In addition, at January 28, 1996, JTS had approximately $400,000 of unused lines of credit and approximately $600,000 of letter of credit facilities available from three banks in India. In March 1996, Moduler Electronics received approval from another Indian bank for a $10 million term loan to finance capital equipment purchases. See "The Proposed Merger and Related Transactions -- Related Transactions -- Atari Loan to JTS." Since its inception, JTS has incurred significant losses which have resulted from the substantial costs associated with the design, development and marketing of new products, the establishment of manufacturing operations and the development of a supplier base. At January 28, 1996, JTS had a working capital deficit of $17.9 million and a negative net worth of $38.4 million. JTS has yet to generate significant revenues and cannot assure that any level of future revenues will be attained or that JTS will achieve or maintain successful operations in the future. Such factors have raised substantial doubt about the ability of JTS to continue its operations without achieving successful future operations or obtaining financing to meet its working capital needs, neither of which can be assured. The report of independent public accountants on JTS' financial statements includes an explanatory paragraph describing uncertainties concerning the ability of JTS to continue as a going concern. See "Notes to JTS Financial Statements." JTS believes that it will be able to fund operations for the next 12 months from a combination of funds made available as a result of the Merger, funds available under its credit facilities, cash flow from operations and existing cash balances.* At April 28, 1996, JTS' consolidated balance sheets reflected cash and cash equivalents of $5.1 million compared to $1.4 million at January 28, 1996. Of the $5.1 million, approximately $400,000 on deposit in Indian banks was restricted for use by JTS until certain obligations related to letters of credit are settled. JTS had a working capital deficit of $31.2 million at quarter end, which included short term borrowings from Atari of $25 million and $10.3 million outstanding under bank lines of credit. - --------------- * This statement is a forward-looking statement reflecting current expectations. Actual results could differ materially from those projected in the forward-looking statement due to numerous factors, including those set forth in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere in this Joint Proxy Statement/Prospectus. 96 104 The hard disk drive business is extremely capital intensive, and JTS anticipates that it will need significant additional financing resources in the near term for facilities expansion, capital expenditures, working capital, research and development and vendor tooling. In this regard, JTS has held discussions with investment banking firms regarding the possibility of raising additional capital through the issuance of debt or equity securities. In June 1996, JTS signed an engagement letter with an investment banking firm regarding the private issuance of debt securities convertible into JTS Common Stock. JTS intends for such financing to close as soon as practicable after the closing of the Merger. However, there can be no assurance that JTS will be able to consummate such financing on terms acceptable to JTS or at all. The issuance of equity or convertible debt securities, upon conversion, would result in dilution of the voting control of existing stockholders, could result in dilution to earnings per share and would provide to the holders of convertible debt securities seniority over the holders of JTS Common Stock issued in the Merger. There can be no assurance that additional funding will be available on terms acceptable to JTS or at all. The failure to fund its capital requirements with additional financing would have a material adverse effect on JTS' business, operating results and financial condition. Furthermore, certain equipment and receivables financing as well as term loans made to JTS and Moduler Electronics are contingent on JTS' ability to comply with stringent financial covenants. There can be no assurance that JTS will be able to maintain its current financing facilities or obtain additional financing as needed on acceptable terms or at all. If JTS is unable to obtain sufficient capital, it would be required to curtail its facilities expansion, capital expenditures, working capital, research and development and vendor tooling expenditures, which would materially adversely affect JTS' business, operating results and financial condition. 97 105 MANAGEMENT OF JTS The following individuals are expected to serve as directors, executive officers or significant employees of the Combined Company following the Merger. Their positions at JTS and their ages as of March 31, 1996 are as follows:
NAME AGE POSITION(S) - ----------------------- ---- --------------------------------------------- David T. Mitchell 54 Chief Executive Officer, President and Director Sirjang L. Tandon 54 Chairman of the Board of Directors and Corporate Technical Strategist Kenneth D. Wing 48 Executive Vice President, Research & Development Quality/Reliability W. Virginia Walker 51 Executive Vice President, Finance and Administration, Chief Financial Officer and Secretary Amit Chokshi 41 Executive Vice President, Worldwide Operations and Managing Director of India Operations Steven L. Kaczeus 61 Chief Technical Officer Alain L. Azan 47 Director Jean D. Deleage 55 Director Roger W. Johnson 61 Director Lip-Bu Tan 36 Director
MR. DAVID T. MITCHELL joined JTS in May 1995 as Chief Executive Officer and President and is a member of the Board of Directors of JTS. Prior to joining JTS, he served as President, Chief Operating Officer and a director of Conner Peripherals, Inc. commencing in October 1992. Prior to that time, Mr. Mitchell co-founded Seagate, where he served as President, Chief Operating Officer and director. MR. SIRJANG L. TANDON founded JTS in February 1994 and served as its Chairman of the Board of Directors, Chief Executive Officer and President from inception until May 1995. Since such time, he has served as Chairman of the Board of Directors and Corporate Technical Strategist. Prior to founding JTS, Mr. Tandon founded and was Chief Executive Officer of Tandon Corporation, a personal computer manufacturing firm. Tandon Corporation filed a petition under the Federal bankruptcy laws in 1993. MR. KENNETH D. WING joined JTS in July 1995 as Executive Vice President, Research & Development Quality/Reliability. Prior to joining JTS, Mr. Wing worked for 14 years at Seagate. During his tenure at Seagate, Mr. Wing served in several capacities, including Vice President of Process Engineering, Vice President of Quality, Vice President of Manufacturing Operations and Vice President of Worldwide Automation. He holds a Bachelor of Science degree in Science and Engineering and a Master of Science in Mechanical Engineering from the University of Michigan. MS. W. VIRGINIA WALKER joined JTS in November 1995 as Executive Vice President, Finance and Administration, Chief Financial Officer and Secretary. Prior to joining JTS, Ms. Walker served as Vice President of Finance and Chief Financial Officer of Scios Inc. from 1985 to 1992 and as Vice President, Finance and Administration and Chief Financial Officer of Scios Inc. and Scios Nova Inc. Prior to 1985, Ms. Walker served as Controller for Intersil Inc., a manufacturer of integrated circuits and at that time a subsidiary of General Electric Company. MR. AMIT CHOKSHI joined JTS in June 1995 as Executive Vice President, Worldwide Operations and Managing Director of India Operations. Prior to joining JTS, Mr. Chokshi co-founded Dastek Corporation, a hard disk drive manufacturing company, where he served as Vice President of Marketing/Sales and Operations until December 1994. Mr. Chokshi has a Bachelor of Science degree in Statistical Mathematics from Gujarat University, India. MR. STEVEN L. KACZEUS joined JTS in February 1994 as Chief Technical Officer. Prior to joining JTS, he founded Kalok Corporation in 1987 and served in various technical and management positions, most recently as Chairman of the Board of Directors and Chief Technical Officer. Kalok Corporation filed a petition under the Federal bankruptcy laws in 1993. Mr. Kaczeus holds a Master of Science and Bachelor of Science 98 106 in Mechanical Engineering from the University of Bridgeport and University of Budapest, Hungary, respectively. MR. ALAIN L. AZAN became a director of JTS in 1995. In 1985, he joined the Sofinnova group in France as a charged d'affaires. In 1987, Mr. Azan was assigned to Sofinnova's United States subsidiary, Sofinnova Inc. Currently, Mr. Azan serves as Managing General Partner for Sofinnova Ventures Funds I, II and III. Mr. Azan holds degrees in Sciences Humaines et Economiques from Marseille, International Trade from C.E.C.E. and Management from INSEAD. MR. JEAN D. DELEAGE became a director of JTS in 1995. He has served as a Managing General Partner of Burr, Egan, Deleage & Co., a venture capital firm, since its formation in 1979. In 1976, he formed Sofinnova, Inc. (the U.S. subsidiary of Sofinnova). Mr. Deleage holds a Master of Science in Electrical Engineering from Ecole Superieure d'Electricite and a Ph.D. in Economics from the Sorbonne. In 1993, he was awarded the Legion of Honor from the French government in recognition of his career accomplishments. Mr. Deleage is also a director of DepoTech Corporation and OraVex, Inc. MR. ROGER W. JOHNSON became a director of JTS in April 1996. He served as Administrator of the United States General Services Administration ("GSA") from July 1993 to March 1996. From 1984 to 1993, Mr. Johnson served as Chairman of the Board and Chief Executive Officer of Western Digital. Mr. Johnson received a Bachelor of Business Administration from Clarkson University and a Master of Business Administration in Industrial Management from the University of Massachusetts. MR. LIP-BU TAN became a director of JTS in 1995. He has served as General Partner of the Walden Group, a venture capital firm, since 1985. He is also the founder and Chairman of Walden International Investment Group in Asia. Mr. Tan received a Bachelor of Science degree from Nanyang University, Singapore, a Master of Science in Nuclear Engineering from the Massachusetts Institute of Technology and a Master of Business Administration from the University of San Francisco, where he served on the Advisory Council and the Board of Trustees. Mr. Tan is also a director of Creative Technology Ltd. and Premisys Communications, Inc. All directors hold office until the next annual meeting of stockholders at which their term expires and until their successors have been duly elected and qualified. Executive officers of JTS are appointed by and serve at the discretion of the Board of Directors of JTS. There are no family relationships among any of the directors, officers or key employees of JTS. COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMBINED COMPANY JTS does not presently have an Audit Committee. Effective upon the closing of the Merger, the Audit Committee of the Combined Company's Board of Directors will consist of Messrs. Jack Tramiel, Michael Rosenberg and Alain L. Azan. The Audit Committee will make recommendations to the Board regarding the selection of independent auditors, review the results and scope of audits and other services provided by JTS' independent auditors, and review and evaluate JTS' internal audit and control functions. JTS does not presently have a Compensation Committee. Effective upon the closing of the Merger, the Compensation Committee of the Combined Company's Board of Directors will consist of Messrs. Jack Tramiel, Lip-Bu Tan and Jean D. Deleage. The Compensation Committee will make recommendations concerning salaries and incentive compensation, award stock options to employees and consultants under the Combined Company's stock option plans and otherwise determine compensation levels and perform such other functions regarding compensation as the Board may delegate. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1996, JTS had no Compensation Committee. Each of the members of the JTS Board of Directors during fiscal 1996 participated in deliberations concerning executive officer compensation. David T. Mitchell, a member of JTS' Board of Directors, has served as Chief Executive Officer and President of JTS since May 1995. Mr. Sirjang L. Tandon, Chairman of JTS' Board of Directors, served as Chief Executive Officer and President of JTS from February 1994 to May 1995. 99 107 DIRECTOR COMPENSATION The members of JTS' Board of Directors do not currently receive any cash compensation from JTS for their services as members of the Board of Directors or any committee thereof. Roger W. Johnson, a director of JTS, provides consulting services to JTS pursuant to a two-year agreement which compensates Mr. Johnson in the amount of $2,000 per month. Mr. Johnson's consulting agreement expires in April 1998. In March 1996, the JTS Board adopted the 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") to provide for the automatic grant of options to purchase shares of JTS Common Stock to non-employee directors of JTS ("Non-Employee Directors"). The maximum number of shares of JTS Common Stock that may be issued pursuant to options granted under the Directors' Plan is 500,000. Pursuant to the terms of the Directors' Plan, each Non-Employee Director (other than a compensated Chairman of the Board and any former Atari director appointed to the JTS Board of Directors in connection with the Merger) who is elected to the JTS Board for the first time after adoption of the Directors' Plan and each other Non-Employee Director (other than a compensated Chairman of the Board) who is reelected to the JTS Board at or after the 1998 stockholders' meeting will automatically be granted an option to purchase 50,000 shares of Common Stock on the date of his or her election or reelection to the Board. Thereafter, each Non-Employee Director (other than a compensated Chairman of the Board) will automatically be granted an option to purchase an additional 50,000 shares of Common Stock under the Directors' Plan on the date any and all previous options or stock purchases by such person either under the Directors' Plan or otherwise become fully vested, as discussed below. Neither directors of JTS serving on the date the Directors' Plan was adopted nor former directors of Atari appointed to the JTS Board in connection with the Merger have received option grants under the Directors' Plan or will receive any such grants in connection with the Merger, and such individuals are not eligible to receive such grants until the 1998 stockholders' meeting. Outstanding options under the Directors' Plan will vest in two equal annual installments measured from the date of grant. The exercise price of options granted under the Directors' Plan shall equal the fair market value of the Common Stock on the date of grant. No option granted under the Directors' Plan may be exercised after the expiration of ten years from the date of grant. Options granted under the Directors' Plan are generally non-transferable. The Directors' Plan will terminate in March 2006, unless earlier terminated by the Board. In the event of the dissolution, liquidation or sale of substantially all of the assets of JTS, a specified form of merger, consolidation or reorganization involving JTS or an acquisition transaction resulting in the change of control of the voting power of JTS' voting securities, options outstanding under the Plan will automatically become fully vested and will terminate if not exercised prior to such event. 100 108 EXECUTIVE COMPENSATION The following table sets forth the compensation paid to or earned by JTS' Chief Executive Officer and JTS' four other most highly compensated executive officers (together, the "JTS Named Executive Officers") for services rendered to JTS during the fiscal year ended January 28, 1996 ("fiscal 1996"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------------------------ SECURITIES RESTRICTED STOCK UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS($) (1) OPTIONS(#) ---------------------------------- -------- -------- ---------------- ----------- David T. Mitchell (2)............. $168,427 -- -- -- President and Chief Executive Officer Sirjang L. Tandon (3)............. 184,615 -- -- -- Chairman of the Board of Directors and Corporate Technical Strategist Kenneth D. Wing (4)............... 126,752 $82,625 -- 100,000 Executive Vice President, Research & Development Quality/Reliability Amit Chokshi (5).................. 104,327 -- -- -- Executive Vice President, Worldwide Operations and Managing Director of India Operations Steven L. Kaczeus................. 192,308 -- -- 242,500 Chief Technical Officer David B. Pearce (6)............... 206,192 -- -- 8,750 Former executive officer
- --------------- (1) Mr. Mitchell, Mr. Wing and Mr. Pearce purchased 2,000,000, 300,000 and 450,000 shares of restricted Common Stock of JTS, respectively, during fiscal 1996 at a per share price of $0.25. The dollar value to the purchasers of each such purchase, net of the consideration paid by the purchasers, was zero on the date of each such purchase. No dividends have been paid or are expected to be paid with respect to the JTS Common Stock purchased by such individuals. (2) Mr. Mitchell became Chief Executive Officer of JTS in May 1995. Mr. Mitchell purchased 2,000,000 shares of restricted JTS Common Stock in fiscal 1996 at a price of $0.25 per share, 250,000 shares of which were immediately vested. The remaining 1,750,000 shares are subject to a right of repurchase by JTS which began lapsing as to 1/48th of such shares monthly commencing on January 5, 1996. (3) Mr. Tandon served as Chief Executive Officer of JTS from February 1994 to May 1995. (4) Mr. Wing became Executive Vice President, Research & Development Quality/Reliability of JTS in July 1995. Mr. Wing purchased 300,000 shares of JTS Common Stock in fiscal 1996 at a price of $0.25 per share. Such shares are subject to a right of repurchase by JTS which began lapsing as to one-eighth of such shares in January 1996 and as to 1/48th of such shares monthly thereafter. Includes forgiveness of $80,000 of loan principal and accrued interest as specified in Mr. Wing's employment agreement. See "Employment Agreement." (5) Mr. Chokshi became Executive Vice President, World of JTS in June 1995. (6) Mr. Pearce purchased 450,000 shares of restricted JTS Common Stock in fiscal 1996 at a price of $0.25 per share, 253,125 shares of which were immediately vested. The remaining 196,875 shares were subject to a right of repurchase by JTS which began lapsing as to 1/42nd of such shares monthly commencing on January 15, 1996. Mr. Pearce's employment with JTS terminated in March 1996, at which time an aggregate of 257,873 shares of his JTS Common Stock had vested. 101 109 EMPLOYMENT AGREEMENT In June 1995, Kenneth D. Wing, Executive Vice President, Research & Development Quality/Reliability of JTS, entered into an employment agreement with JTS which provides for an annual base salary of $225,000, eligibility for annual bonuses and a severance package that, under certain circumstances, provides that Mr. Wing will continue to receive his base salary until June 1997 in the event he is terminated prior to such time. In addition, the employment agreement provides for a $160,000 loan which was forgiven as to 50% of principal and interest accrued thereon in January 1996 and shall be forgiven as to the remainder in January 1997, provided Mr. Wing's employment with JTS continues through such time. STOCK OPTION PLAN In April 1996, JTS amended and restated its 1995 Stock Option Plan (the "1995 Plan"), which was adopted in March 1995. Under the 1995 Plan, as amended and restated (the "Restated Plan"), an aggregate of 9,000,000 shares of JTS Common Stock have been reserved for issuance upon exercise of options granted to employees, officers and directors of and consultants to JTS. As of May 15, 1996, options to purchase 3,680,358 shares of JTS Common Stock had been granted under the Restated Plan. The Restated Plan will terminate in February 2006, unless sooner terminated by the Board of Directors of JTS. The Restated Plan provides for the grant of both incentive stock options intended to qualify as such under Section 422 of the Code and nonstatutory stock options. The Board of Directors has determined that, following the Merger, the Compensation Committee will administer the Restated Plan. The Board of Directors has also established a Non-Officer Stock Option Committee, consisting of David T. Mitchell, JTS' President, Chief Executive Officer and a director, with authority to grant stock options to persons who are not at the time of the grant of the options subject to Section 16 of the Exchange Act. As used herein with respect to the Restated Plan, the JTS Board refers to the Compensation Committee, the Non-Officer Stock Option Committee as well as to the Board of Directors of JTS. The JTS Board has the authority to select the persons to whom grants are to be made, to designate the number of shares to be covered by each option, to establish vesting schedules, to specify the type of consideration to be paid upon exercise and, subject to certain restrictions, to specify other terms of the options. The maximum term of options granted under the Restated Plan is ten years. Options granted under the Restated Plan generally are nontransferable and generally expire three months after the termination of an optionee's employment, directorship or consulting relationship with JTS. In general, if an optionee becomes permanently disabled or dies while employed or retained by JTS, such person's options generally may be exercised up to 12 months after his or her disability and generally up to 18 months after his or her death. The exercise price of incentive stock options granted under the Restated Plan must equal at least the fair market value of JTS' Common Stock on the date of grant. The exercise price of nonstatutory stock options granted under the Restated Plan must equal at least 85% of the fair market value of JTS' Common Stock on the date of grant. The exercise price of incentive stock options granted to any person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock must be at least 110% of the fair market value of such stock on the date of grant and the terms of these options cannot exceed five years. Options under the Restated Plan typically become exercisable over four years, as to one-eighth of the shares subject to such options six months after the date of grant and as to 1/48th of such shares each month thereafter. The Restated Plan and options outstanding thereunder will be appropriately adjusted as to the class and the maximum number of shares subject to the Restated Plan and the class, number of shares and price per share of stock subject to such outstanding options in the event of stock splits, stock dividends, recapitalizations and similar events. Under the Restated Plan, the JTS Board of Directors has discretion in connection with a merger, consolidation or liquidation involving JTS to provide that outstanding options shall be terminated or shall be assumed or otherwise continued or to provide for the accelerated vesting of outstanding options. 102 110 401(K) PLAN In January 22, 1996, JTS adopted the JTS Corporation Employee 401(k) Saving Plan ("the 401(k) Plan") covering all of JTS' employees, except collectively bargained employees and employees who are nonresident aliens with no United States source income. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lesser of 15% of eligible compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) plan permits, but does not require, matching contributions and profit sharing contributions to the Plan by JTS on behalf of all participants. JTS has not made any such contributions to date. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by JTS to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn, and contributions by JTS, if any, are deductible by JTS. OPTION GRANTS IN LAST FISCAL YEAR The following table contains information concerning the grant of stock options under the 1995 Plan to each JTS Named Executive Officer during fiscal 1996:
INDIVIDUAL GRANTS ------------------------------------------------------------ POTENTIALLY PERCENTAGE REALIZABLE VALUE AT OF TOTAL ASSUMED ANNUAL NUMBER OF OPTIONS RATES OF STOCK SECURITIES GRANTED TO PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(3) OPTIONS IN FISCAL BASE PRICE EXPIRATION ------------------- NAME GRANTED(#)(1) YEAR(%)(2) ($/SH) DATE 5%($) 10%($) - --------------------------------------- ------------ ------------ ---------- ------- ------- David T. Mitchell -- -- -- -- -- -- Sirjang L. Tandon -- -- -- -- -- -- Kenneth D. Wing 100,000 2.5% $ 0.25 11/29/2005 $15,750 $39,750 Amit Chokshi -- -- -- -- -- -- Steven L. Kaczeus 242,500 6.1 0.25 2/7/2004 38,194 96,394 David B. Pearce 8,750 0.02 0.25 6/7/2005 1,378 3,478
- --------------- (1) Under the 1995 Plan, options granted to employees vest at the rate of one-eighth at the end of six months and an additional 1/48 per month until all options have become vested at the end of four years' service. In the event an option was granted to an existing employee of JTS (rather than a newly-hired employee), such option shall vest at the rate described above based on the grant date of such option. (2) Based on total grants of options to purchase 3,996,674 shares of JTS Common Stock. (3) The potential realizable value is calculated based on the term of the option at its time of grant (10 years). It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term. 103 111 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the exercise of stock options by the Named Executive Officers during the fiscal year ended January 28, 1996 and the number and value of securities underlying unexercised options held by the Named Executive Officers as of January 28, 1996:
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT SHARES FISCAL FISCAL ACQUIRED YEAR-END(#)(1) YEAR-END($)(1) ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE - ----------------------------- ----------- ----------- ----------------- -------------- David T. Mitchell -- -- -- -- Sirjang L. Tandon -- -- -- -- Kenneth D. Wing -- -- 0/100,000 0/0 Amit Chokshi -- -- -- -- Steven L. Kaczeus -- -- 125,313/117,187 0/0 David B. Pearce -- -- 8,750/0 0/0
- --------------- (1) Fair market value of JTS' Common Stock at January 28, 1996 ($0.25), minus the exercise price of the options ($0.25), multiplied by the number of shares underlying the options. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS As permitted by the DGCL, JTS' Certificate of Incorporation provides that no director of JTS will be personally liable to JTS or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to JTS or to its stockholders, (ii) for acts or omissions not made in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, relating to prohibited dividends or distributions or the repurchase or redemption of stock, or (iv) for any transaction from which the director derives an improper personal benefit. In addition, JTS' Bylaws provide that any director or executive officer who was or is a party or is threatened to be made a party to any action or proceeding by reason of his or her services to JTS will be indemnified to the fullest extent permitted by the DGCL. JTS has entered into indemnification agreements with each of its directors and executive officers under which JTS has agreed to indemnify each of them against expenses and losses incurred for claims brought against them by reason of their being a director or officer of JTS, and JTS maintains directors' and officers' liability insurance. There is no pending litigation or proceeding involving a director or officer of JTS as to which indemnification is being sought, nor is JTS aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. 104 112 CERTAIN TRANSACTIONS Since JTS' inception in February 1994, JTS has maintained significant business relationships with Moduler Electronics, Tantec Magnetics, Inc., a California corporation ("Tantec"), and Maazda Travel, Inc. ("Maazda"). Mr. Sirjang L. Tandon, JTS' Chairman and Corporate Technical Strategist, or members of his immediate family, directly or indirectly own controlling equity interests in each of Moduler Electronics, Tantec and Maazda. In fiscal 1996, Moduler Electronics provided subassembly and final assembly manufacturing services to JTS for which JTS had made aggregate payments to Moduler Electronics of approximately $13.0 million, and JTS has provided certain equipment on consignment to Moduler Electronics with an aggregate value of approximately $4.4 million. Tantec has provided certain hard disk drive component parts, test equipment and services to JTS for which JTS had made aggregate payments to Tantec of approximately $366,000 and $295,000 in fiscal 1995 and 1996, respectively, and JTS sold certain hard disk drives to Tantec with an aggregate value of approximately $653,000 in fiscal 1996. During fiscal 1996, JTS made aggregate payments to Maazda, JTS' principal travel agent, of approximately $100,000. From February 1994 to February 1995, JTS received bridge loans aggregating approximately $2.9 million from certain significant JTS stockholders evidenced by secured convertible notes (the "First Financing Notes"). The First Financing Notes accrued interest at a rate of 8.5% per annum. All of the First Financing Notes were canceled and the principal outstanding thereunder was converted into shares of JTS Series A Preferred Stock in connection with the JTS Series A Preferred Stock financing in February 1995 (the "First Series A Financing"). JTS sold an aggregate of 16,200,000 shares of JTS Series A Preferred Stock in the First Series A Financing for a purchase price of $1.00 per share in exchange for cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred in the First Series A Financing included the following:
SHARES OF JTS AMOUNT OF SERIES A PREFERRED CASH INDEBTEDNESS PURCHASER(S) PURCHASED(#) CONSIDERATION($) CANCELED($) -------------------------------- ------------------ ---------------- ------------ Entities affiliated with Burr, Egan, Deleage & Co.(1)........ 2,500,000 $1,673,374 $826,626 Entities affiliated with Sofinnova Management, L.P.(2) ...................... 1,000,000 709,349 290,651 Advanced Technology Ventures III(3)........................ 1,000,000 709,350 290,650 Brentwood Associates VI, L.P.(4)....................... 1,650,000 1,170,427 479,573 Western Digital(5).............. 4,100,000 3,300,000 800,000 Steven L. Kaczeus(6)............ 223,511 -- 223,511
- --------------- (1) Jean D. Deleage, a director of JTS, is Managing General Partner of Burr, Egan, Deleage & Co. ("Burr Egan"). (2) Alain L. Azan, a director of JTS, is a Managing General Partner of three funds affiliated with Sofinova Management, L.P. ("Sofinnova"). (3) Entities affiliated with Advanced Technology Ventures III own more than 5% of the outstanding shares of JTS Series A Preferred Stock. (4) Brentwood Associates VI, L.P. owns more than 5% of the outstanding shares of JTS Series A Preferred Stock. (5) Western Digital, a second source manufacturer for JTS, owns more than 5% of the outstanding shares of JTS Series A Preferred Stock. (6) Steven L. Kaczeus is the Chief Technical Officer of JTS. In connection with the First Series A Financing and pursuant to that certain Debt Cancellation Agreement, dated as of February 3, 1995, by and among JTS, Tantec and Mr. Tandon, JTS issued 2,202,227 shares of JTS Series A Preferred Stock to Tantec in exchange for the cancellation of $2,202,227 of indebtedness owed by JTS to Tantec. 105 113 In June 1995, JTS received bridge loans aggregating approximately $2.75 million from certain significant JTS stockholders, evidenced by secured convertible notes (the "Second Financing Notes"). The Second Financing Notes accrued interest at a rate of 8% per annum. All of the Second Financing Notes were canceled and the principal amount outstanding thereunder was converted into shares of JTS Series A Preferred Stock in connection with a JTS Series A Preferred Stock financing in August 1995 (the "Second Series A Financing"). JTS sold an aggregate of 12,496,370 shares of JTS Series A Preferred Stock in the Second Series A Financing for a purchase price of $1.00 per share in exchange for cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred in the Second Series A Financing included the following:
SHARES OF JTS AMOUNT OF SERIES A PREFERRED CASH INDEBTEDNESS PURCHASER(S) PURCHASED(#) CONSIDERATION($) CANCELED($) -------------------------------- ------------------ ---------------- ------------ Entities affiliated with the Walden Group of Venture Capital Funds(1).............. 3,000,000 $3,000,000 -- Entities affiliated with Advanced Technology Ventures...................... 2,826,424 2,576,424 $ 250,000 Entities affiliated with Burr Egan.......................... 1,437,500 437,500 1,000,000 David T. Mitchell(2)............ 1,010,196 -- 1,010,196 Brentwood Associates VI, L.P.... 952,083 448,750 503,333 Entities affiliated with Sofinnova..................... 500,000 500,000 -- Steven L. Kaczeus............... 37,000 37,000 --
- --------------- (1) Lip-Bu Tan, a director of JTS, is a General Partner of the Walden Group. (2) David T. Mitchell is the President, Chief Executive Officer and a member of the Board of Directors of JTS. In July 1995, JTS loaned $160,000 to Kenneth D. Wing, Executive Vice President, Research & Development Quality/Reliability, pursuant to the terms of Mr. Wing's employment agreement. Of such loan amount, $80,000 of principal (and interest accrued thereon) were forgiven on January 1, 1996, and, subject to Mr. Wing's continued employment with JTS, any remaining amounts owed under such loan will be forgiven on January 1, 1997. See "Management of JTS -- Employment Agreement." During fiscal 1996, in connection with the Technology Transfer and Licensing Agreement between JTS and Western Digital, JTS provided certain hard disk drive components to Western Digital, a principal stockholder of JTS, with an aggregate value of approximately $358,000. In addition, JTS received aggregate milestone payments of approximately $5.3 million from Western Digital in fiscal 1996. See "Business of JTS -- Western Digital Arrangement." In January 1996, JTS made loans to each of David T. Mitchell, Kenneth D. Wing, Virginia Walker, JTS' Executive Vice President, Finance and Administration and Chief Financial Officer, and David B. Pearce in connection with the purchase by such individuals of 2,000,000 shares, 300,000 shares, 250,000 shares and 450,000 shares of JTS Common Stock, respectively, at a purchase price of $0.25 per share. Each purchaser executed a restricted stock purchase agreement (each, a "Restricted Stock Purchase Agreement") granting JTS a right of repurchase as to such shares in the event the purchasers' employment with JTS terminates. With respect to Mr. Mitchell, 250,000 shares of the JTS Common Stock purchased were immediately vested, and JTS' repurchase right lapses monthly with respect to the remainder of such shares at the rate of 1/48th per month. With respect to the shares purchased by Mr. Wing, JTS' repurchase right lapsed as to one-eighth of such shares in January 1996 and as to 1/48th of such shares monthly thereafter. With respect to the shares purchased by Ms. Walker, JTS' repurchase right lapsed as to one-eighth of such shares in May 1996 and as to 1/48th of such shares monthly thereafter. With respect to the shares purchased by Mr. Pearce, 253,125 shares of the JTS Common Stock purchased were immediately vested and 14,063 additional shares had vested at the time Mr. Pearce's employment with JTS terminated. In March 1996, JTS repurchased 182,812 shares of JTS Common Stock from Mr. Pearce. In addition, the Restricted Stock Purchase Agreements provide that JTS' repurchase right shall lapse entirely upon certain events following a change in control of JTS. See "The 106 114 Proposed Merger and Related Transactions -- Certain Other Items Related to the Merger -- Interests of Certain Persons in the Merger." From January 1996 to April 1996, JTS received an aggregate of approximately $2.0 million in bridge loans evidenced by promissory notes (the "Bridge Notes"), from certain significant stockholders of JTS. The Bridge Notes are due and payable on July 15, 1996 and accrue interest at a rate of 10% per annum. Individuals and entities to whom Bridge Notes were issued include the following:
PRINCIPAL AMOUNT STOCKHOLDER(S) OF BRIDGE NOTE($) ------------------------------------------------------------ ------------------ Tantec...................................................... $1,000,000 Entities affiliated with Burr Egan.......................... 260,000 Entities affiliated with Advanced Technology Ventures....... 260,000 Entities affiliated with the Walden Group of Venture Capital 200,000 Funds..................................................... Brentwood Associates VI, L.P. .............................. 185,000 Entities affiliated with Sofinnova.......................... 99,900
In April 1996, JTS acquired a 90% interest in Moduler Electronics in exchange for issuing 1,911,673 shares of JTS Series A Preferred Stock and a warrant to purchase 750,000 shares of JTS Common Stock at an exercise price of $0.25 per share to Lunenburg S.A., an affiliate of Sirjang L. Tandon. Such warrant is immediately exercisable as to 500,000 shares and becomes exercisable as to 250,000 shares when certain credit facilities in India are made available to Moduler Electronics in the amount of at least $29 million. See "JTS Acquisition of Disk Drive Division of Moduler Electronics." A family member of Sirjang Lal Tandon, JTS' Chairman and Corporate Technical Strategist, has guaranteed the secured short term borrowings and secured long term loans of Modular Electronics furnished by certain Indian banks. See Notes 4 and 5 to the Financial Statements to the Hard Disk Drive Division of Modular Electronics (India) Private Ltd. JTS believes that all of the transactions set forth above were made on terms no less favorable to JTS than could have been obtained from unaffiliated third parties. All future transactions, including loans, between JTS and its officers, directors and principal stockholders and their affiliates will be approved by a majority of the JTS Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and have been and will be on terms no less favorable to JTS than could be obtained from unaffiliated third parties. 107 115 PRINCIPAL STOCKHOLDERS OF JTS The following table sets forth certain information regarding beneficial ownership of JTS Common Stock and JTS Series A Preferred Stock as of May 15, 1996 by (a) each person (or group of affiliated persons) known to JTS to beneficially own more than 5% of the outstanding shares of JTS Common Stock or more than 5% of the outstanding shares of JTS Series A Preferred Stock, (b) each of the directors and executive officers of JTS who will be a director or executive officer of the Combined Company, and (c) all of JTS directors and executive officers who will be directors and executive officers of the Combined Company as a group.
PERCENT OF NUMBER OF ALL SHARES COMMON STOCK(2) PREFERRED STOCK(2) PERCENT SHARES OF OF THE ----------------------- ------------------------ OF ALL THE COMBINED NUMBER PERCENT OF NUMBER PERCENT OF JTS CAPITAL COMBINED COMPANY BENEFICIAL OWNER(1) OF SHARES CLASS(%)(3) OF SHARES CLASS(%)(3) STOCK(%) COMPANY (%)(3) - --------------------------------- --------- ----------- ---------- ----------- ----------- ---------- ----------- Entities affiliated with Tantec Magnetics, Lunenburg S.A. and the Tandon Family Partnership(4)................. 5,350,000 57.6% 4,613,900 15.5% 25.6% 9,963,900 9.7% Sirjang L. Tandon c/o JTS Corporation 166 Baypointe Parkway San Jose, CA 95134 Western Digital Corporation...... -- -- 4,100,000 13.8 10.5 4,100,000 4.0 8105 Irving Center Drive Irvine, CA 92718 David T. Mitchell................ 3,000,000 32.3 1,010,196 3.4 10.3 4,010,196 3.9 c/o JTS Corporation 166 Baypointe Parkway San Jose, CA 95134 Entities affiliated with Burr, Egan, Deleage & Co.(5)... -- -- 3,937,500 13.3 10.1 3,937,500 3.8 Jean D. Deleage One Embarcadero Center Suite 4050 San Francisco, CA 94111 Entities affiliated with Advanced Technology Ventures(6).................... -- -- 3,826,424 12.9 9.8 3,826,424 3.7 485 Ramona Street, Suite 200 Palo Alto, CA 94301 Entities Affiliated with the Walden Group of Venture Capital Funds(7)............... -- -- 3,000,000 10.1 7.7 3,000,000 2.9 Lip-Bu Tan 750 Battery Street, Suite 700 San Francisco, CA 94111 Brentwood Associates VI, L.P..... -- -- 2,602,083 8.8 6.7 2,602,083 2.5 11150 Santa Monica Blvd. #1200 Los Angeles, CA 90025 Entities Affiliated with Sofinnova Management, L.P.(8)........................ -- -- 1,500,000 5.1 3.9 1,500,000 1.5 Alain L. Azan One Market Plaza Stewart Tower, Suite 2630 San Francisco, CA 94105 Steven L. Kaczeus(9)............. 153,437 1.6 260,511 * 1.1 409,261 * Kenneth D. Wing.................. 314,583 3.4 -- -- * 300,000 * David B. Pearce.................. 275,937 3.0 -- -- * 275,937 * Amit Chokshi..................... -- -- -- -- -- -- -- Roger W. Johnson................. -- -- -- -- -- -- -- All current directors and executive 9,068,020 97.0 14,122,107 47.6 59.3 23,190,857 22.6 officers as a group (10 persons)(10)
- --------------- * Less than 1% (1) Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of JTS Common Stock and JTS Series A Preferred Stock shown as beneficially owned by them. 108 116 (2) Beneficial ownership is determined in accordance with the rules of the Securities Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding, including for purposes of computing the percentage of the person holding such option, but not for purposes of computing the percentage of any other holder. (3) Based on (i) 63,735,718 shares of Atari Common Stock outstanding as of May 22, 1996 (assuming no exercise of outstanding options after such date) and (ii) 29,696,370 shares of JTS Series A Preferred Stock and 9,263,866 shares of JTS Common Stock outstanding as of May 15, 1996 (assuming no exercise of outstanding options and warrants after such date). (4) Preferred Stock includes 2,702,227 shares and 1,911,673 shares of JTS Series A Preferred Stock held by Tantec Magnetics, Inc. and Lunenburg S.A., respectively. Sirjang L. Tandon, a director of JTS, is an executive officer of Tantec Magnetics, Inc. and may have shared voting power over the shares held by Lunenburg S.A. Common Stock includes 4,350,000 shares of JTS Common Stock held by the Tandon Family Partnership. Mr. Tandon is a general partner of the Tandon Family Partnership. Includes 1,000,000 shares of JTS Common Stock over which Mr. Tandon has voting power, but which are subject to a right of repurchase by JTS until fully vested. Mr. Tandon disclaims beneficial ownership of the shares held by Tantec Magnetics, Lunenburg S.A. and the Tandon Family Partnership except to the extent of his proportionate partnership and shareholder interests therein. (5) Preferred Stock includes 3,896,550 shares and 40,950 shares of JTS Series A Preferred Stock held by Alta V Limited Partnership and Customs House Partners, respectively. Jean Deleage, a director of JTS, is Vice President of Burr, Egan, Deleage & Co. which is a general partner of Alta V Management Partners, L.P., a general partner of Alta V Limited Partnership, and Customs House Partners. He has voting and investment power with respect to such shares. Mr. Deleage disclaims beneficial ownership of such shares except to the extent of his proportionate partnership interests therein. (6) Preferred Stock includes 2,250,000 shares and 1,576,424 shares of JTS Series A Preferred Stock held by Advanced Technology Ventures IV and Advanced Technology Ventures III, respectively. (7) Preferred Stock includes 700,000; 600,000; 500,000; 300,000; 200,000; 200,000; 200,000; 200,000 and 100,000 shares of JTS Series A Preferred Stock held by Walden Capital Partners II, L.P.; International Venture Capital Investment Corporation; Walden Investors; BI Walden Ventures Kedua Sdn Bhd; Seed Ventures II Limited; OWW Pacrim Investments Ltd.; OCBC, Wearnes & Walden Investments (Singapore) Ltd.; Walden Ventures and Walden Technology Ventures II, L.P., respectively. Lip-Bu Tan, a director of JTS, has voting power and investment power with respect to the shares held by each of the foregoing investment funds, except Walden Ventures. Mr. Tan disclaims beneficial ownership of such shares except to the extent of his proportionate interests in such entities. (8) Preferred Stock includes 800,000 shares and 700,000 shares of JTS Series A Preferred Stock held by C.V. Sofinnova Ventures Partners III and C.V. Sofinnova Ventures Partners II, respectively. Alain Azan, a director of JTS, is a general partner of Sofinnova Management, L.P., the general partner of C.V. Sofinnova Ventures Partners II and C.V. Sofinnova Ventures Partners III and has voting and investment power with respect to such shares. Mr. Azan disclaims beneficial ownership of such shares except to the extent of his proportionate partnership interest therein. (9) Includes options to purchase 168,020 shares of JTS Common Stock that are exercisable within 60 days of May 15, 1996. (10) Includes 8,900,000 shares of JTS Common Stock and 14,122,107 shares of JTS Preferred Stock held by executive officers and entities affiliated with certain directors and includes options to purchase 168,020 shares of JTS Common Stock by executive officers that are exercisable within 60 days of May 15, 1996. See footnotes (4)-(9). 109 117 DESCRIPTION OF CAPITAL STOCK OF ATARI AND JTS The following descriptions of the capital stock of Atari and JTS are qualified by reference to Atari's Articles of Incorporation and JTS' Certificate of Incorporation and any amendments thereto. Copies of these are included as exhibits to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part. ATARI CAPITAL STOCK General. The authorized capital stock of Atari consists of 100,000,000 shares of Common Stock, $.01 par value per share, and 10,000,000 of undesignated Preferred Stock, $.01 par value per share. As of close of business on May 22, 1996, 63,735,718 shares of Atari Common Stock were issued and outstanding and no shares of Preferred Stock were issued and outstanding. At the Effective Time of the Merger, each share of Atari Common Stock issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and be converted automatically into the right to receive one share of JTS Common Stock. Common Stock. Holders of Atari Common Stock are entitled to one vote per share on matters to be voted upon by the stockholders and are not entitled to cumulative voting in the election of directors. Subject to any preferences granted to holders of Atari Preferred Stock or of any other senior equity, holders of Atari Common Stock are entitled to receive dividends when, as and if declared by the Atari Board of Directors, and to share ratably in the assets of Atari legally available for distribution to its stockholders in the event of liquidation, dissolution and winding up of Atari. Holders of Atari Common Stock have no preemptive, subscription, redemption or conversion rights with respect to Atari Common Stock. All outstanding shares of Atari Common Stock are validly issued, fully paid and nonassessable. Preferred Stock. Atari has 10,000,000 shares of undesignated preferred stock authorized, none of which are issued and outstanding. The Atari Board of Directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders. Convertible Subordinated Debentures. As of March 31, 1996, Atari had $42.4 million of 5 1/4% convertible subordinated debentures due April 29, 2002 outstanding. The market value of these debentures was approximately $29.3 million at June 18, 1996. The debentures may be redeemed at Atari's option, upon payment of a premium. The debentures, at the option of the holders, are convertible into common stock at $16.3125 per share. At March 31, 1996, 2,596,414 shares of Atari Common Stock were reserved for issuance upon conversion of the outstanding debentures. A default with respect to other indebtedness of Atari in an aggregate amount exceeding $5 million would result in an event of default whereby the outstanding debentures would be due and payable immediately. Registrar and Transfer Agent. The registrar and transfer agent for Atari Common Stock is the Registrar and Transfer Company. JTS CAPITAL STOCK Prior to the Merger, the authorized capital stock of JTS consists of 90,000,000 shares of JTS Common Stock, $.000001 par value per share, and 70,000,000 shares of Preferred Stock, $.000001 par value per share, all of which is designated Series A Preferred Stock. JTS is a privately held company; there is no public trading market for its stock. As of the close of business on May 15, 1996, 9,255,116 shares of JTS Common Stock and 29,696,370 shares of JTS Series A Preferred Stock were issued and outstanding. There are a total of 52 holders of record of JTS Series A Preferred Stock and 16 holders of record of JTS Common Stock. Preferred Stock Rights. The principal rights, privileges and preferences of the issued and outstanding shares of JTS Series A Preferred Stock are as set forth below. 110 118 Dividends. Holders of JTS Series A Preferred Stock are entitled to dividend preferences when, as and if declared by the JTS Board, at an annual rate of $.09 per share. All dividends are cumulative. JTS may not pay cash dividends on JTS Common Stock while there are any declared but unpaid cash dividends on any shares of JTS Series A Preferred Stock. Liquidation. In the event of any liquidation, dissolution or winding up of JTS (which, upon the election of the holders of a majority of the Series A Preferred Stock, would include the Merger), holders of the JTS Series A Preferred Stock are entitled to receive, prior and in preference to any distribution of any assets of JTS to the holders of JTS Common Stock, $1.00 per share plus all accrued and unpaid dividends. After the holders of JTS Series A Preferred Stock have received the full amount of their liquidation preference, the holders of JTS Common Stock and JTS Series A Preferred Stock (on an as-converted basis) are entitled to receive all remaining assets of JTS available for distribution pro rata based on the number of shares of JTS Common Stock held or, after conversion of JTS Series A Preferred Stock, that would be held by each such holder; provided, however, if the holders of JTS Series A Preferred Stock, exclusive of any unpaid cumulative dividends, would receive at least an aggregate of $5.00 per share of Series A Preferred Stock, then the holders of Series A Preferred Stock shall not be entitled to the $1.00 per share preference over the holders of JTS Common Stock. Redemption. Holders of JTS Series A Preferred Stock are entitled to certain mandatory redemption rights. Upon the election of a majority of the holders of JTS Series A Preferred Stock and provided JTS has funds legally available to do so, JTS shall redeem one-third, one-half and the remainder of all of the outstanding shares of Series A Preferred Stock on February 7, 2000, February 7, 2001 and February 7, 2002, respectively. Voting Rights. Subject to the protective provisions described above and except as otherwise required by law, the holders of JTS Common Stock and JTS Series A Preferred Stock are entitled to notice of any stockholders' meeting and to vote together as a single class upon any matter submitted to the stockholders for a vote on the following basis: (a) Common Vote. Each share of Common Stock issued and outstanding has one vote. (b) Preferred Vote. Each holder of JTS Series A Preferred Stock has a number of votes equal to the number of full shares of JTS Common Stock into which such JTS Preferred Stock is then convertible. Each share of JTS Series A Preferred Stock is presently convertible into one share of JTS Common Stock. Protective Provisions. JTS must obtain the approval of at least two-thirds of the outstanding shares of JTS Series A Preferred Stock to (i) create a new class of stock with rights equal to or superior to the rights of Series A Preferred Stock; (ii) sell, lease or convey all or substantially all of JTS' property or business; (iii) amend JTS' Certificate of Incorporation if such alters the rights of the Series A Preferred Stock; (iv) increase the authorized number of shares of JTS Preferred or Common Stock; (v) undertake a reorganization, merger, or consolidation in which the holders of JTS voting stock will hold less than 50% of the voting stock of the successor entity; (vi) pay or declare a dividend other than in Common Stock to the holders of Common Stock; or (vii) repurchase JTS securities other than from employees or consultants of JTS when their employment ends. All of the outstanding shares of JTS Common Stock and JTS Series A Preferred Stock are validly issued, fully paid and nonassessable. Upon consummation of the Merger, the holders of JTS Series A Preferred Stock will become holders of JTS Common Stock and, consequently, will no longer be entitled to certain rights and privileges described above. In addition, certain other rights and privileges of JTS stockholders will change as a result of the Merger. Upon completion of the Merger, the percentage ownership of the Combined Company by each former JTS stockholder will be significantly less than his, her or its current percentage ownership of JTS. Accordingly, former JTS stockholders will have a significantly smaller voting influence over the affairs of the Combined Company than they currently enjoy over the affairs of JTS. "See Risk Factors -- Risk Factors Related to the Business of JTS -- Reduction in Voting Control." Moreover, certain contractual rights presently possessed by holders of JTS Series A Preferred Stock will cease to exist after the Merger. Finally, 111 119 the statutory protections available to JTS stockholders under Section 2115 of the CGCL will no longer exist. See "Comparison of Rights of Stockholders of Atari and JTS -- Application of the General Corporation Law of California to Delaware Corporations." CERTIFICATE OF INCORPORATION AND BYLAWS OF THE COMBINED COMPANY The authorized capital stock of the Combined Company shall consist of 150,000,000 shares of common stock, $.001 par value per share, and 10,000,000 shares of undesignated, "blank check" preferred stock, $.001 par value per share. The Board of Directors of the Combined Company will have the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders. The Combined Company's Certificate of Incorporation will provide that all stockholder actions must be effected at a duly called meeting and may not be effected by written consent. In addition, the Combined Company's Certificate of Incorporation and Bylaws will provide that only the Chairman of the Board of Directors, the Chief Executive Officer or the Board of Directors pursuant to a resolution adopted by at least two directors will be permitted to call a special meeting of stockholders. These and other provisions, including the creation of "blank check" preferred stock, could discourage potential acquisition proposals and could delay or prevent a change in control of the Combined Company. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Combined Company. These provisions are designed to reduce the vulnerability of the Combined Company to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for the Combined Company's shares and, as a consequence, they also may inhibit fluctuations in the market price of the Combined Company's shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in the management of the Company. See "Risk Factors -- Other Risk Factors Related to the Merger -- Control by Affiliates; Anti-takeover Effects." DELAWARE TAKEOVER STATUTE The Combined Company will be subject to Section 203 of the Delaware General Corporation Law ("DGCL"), which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the time that such stockholder became an interested stockholder, unless: (i) prior to such time, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) at or subsequent to such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation by the interested stockholder; or 112 120 (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. COMPARISON OF RIGHTS OF STOCKHOLDERS OF ATARI AND JTS AND THE COMBINED COMPANY The rights of Atari stockholders are governed by its Articles of Incorporation and any amendments thereto (the "Atari Articles"), Atari's Bylaws and any amendments thereto (the "Atari Bylaws") and the laws of the State of Nevada. The rights of JTS stockholders are governed by its Certificate of Incorporation and any amendments thereto (the "JTS Certificate"), JTS' Bylaws and any amendments thereto (the "JTS Bylaws") and the DGCL. After the Effective Time, the rights of Atari and JTS stockholders who become stockholders of the Combined Company will be governed by the Certificate and Bylaws of the Combined Company and the DGCL. APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE CORPORATIONS The discussion below primarily addresses the differences between the DGCL and general corporation law of Nevada. However, Section 2115 of the CGCL makes substantial portions of the CGCL applicable, with limited exceptions, to a foreign corporation with ("Section 2115") more than half of its outstanding stock held of record by persons having addresses in California and more than half of its business conducted in the state (as measured by factors based on a corporation's levels of property, payroll and sales determined for California franchise tax purposes), irrespective of the corporation's state of incorporation. Although JTS is incorporated in Delaware, it is subject to Section 2115. The statutory provisions of the CGCL to which JTS is subject include but are not limited to provisions governing a director's standard of care in performing the duties of a director, a stockholder's right to vote cumulatively in any election of directors, a director's or stockholder's right to inspect corporate records, indemnification requirements concerning directors, officers and others and the corporate requirements to effectuate corporate reorganizations (including mergers and acquisitions). Section 2115 also invokes the application of Chapter 13 of the CGCL to the Merger with respect to JTS stockholders who elect to exercise dissenters' rights. Upon completion of the Merger, the statutory protections available to JTS stockholders pursuant to Section 2115 will no longer apply. COMPARISON OF THE RIGHTS OF ATARI AND JTS STOCKHOLDERS AND STOCKHOLDERS OF THE COMBINED COMPANY The following is a summary of material differences between the rights of Atari and JTS stockholders under their respective charter documents, the Combined Company's charter documents and applicable state laws. Cumulative Voting. Under Delaware and Nevada law, cumulative voting in the election of directors is not mandatory. Elimination of cumulative voting limits the ability of minority stockholders to obtain representation on the board of directors. The JTS Certificate provides for cumulative voting in elections of Directors. The Atari Articles and Bylaws do not provide for cumulative voting in elections of Directors. The Certificate and Bylaws of the Combined Company do not provide for cumulative voting in elections of Directors. To the extent that Section 2115 would render California law applicable to JTS, cumulative voting in the election of directors would be required. Power to Call Special Stockholders' Meetings; Advance Notice of Stockholder Business and Nominees. The Atari Bylaws provide that special meetings of stockholders may be called by the Board of Directors, the Chairman of the Board or the President. The JTS Bylaws provide that special meetings of stockholders may be called by the Board of Directors or a committee of the Board. The Bylaws of the Combined Company provide that special meetings of stockholders may be called by the Chairman of the Board of Directors, the Chief Executive Officer or the Board of Directors pursuant to a resolution adopted by at least two directors. 113 121 Under Delaware and Nevada law, a special meeting of stockholders may be called by the board of directors or by any other person authorized to do so in the certificate of incorporation or the bylaws. Any limitation on the ability to call special stockholder meetings could make it more difficult for stockholders to initiate action that is opposed by the board of directors. Such action on the part of stockholders could include the removal of an incumbent director, the election of a stockholder nominee as a director or the implementation of a rule requiring stockholder ratification of specific defensive strategies that have been adopted by the board of directors with respect to unsolicited takeover bids. Size of the Board of Directors. Delaware and Nevada law each permit the board of directors alone to change the authorized number, or the range, of directors by amendment to the bylaws, unless the directors are not authorized to amend the bylaws or the number of directors is fixed in the certificate of incorporation (in which case a change in the number of directors may be made only by amendment to the certificate of incorporation following approval of such change by the stockholders). The Atari Bylaws provide for a range of directors between five and seven, until changed by an amendment to the Atari Articles or by stockholder vote. However, the number of directors cannot be less than five if the votes against the action or the votes not consenting to the action are equal or are greater than 16 2/3% of the outstanding shares. The exact number of directors shall be fixed by the Board or by stockholder resolution. The current number of directors on the Atari Board is six. The JTS Certificate and Bylaws authorize the JTS Board of Directors to determine the number of directors on the JTS Board of Directors. The current number of directors on the JTS Board is six. The Certificate of the Combined Company provides that number of directors on the Board of Directors of the Combined Company shall be determined exclusively by resolutions of the Board of the Combined Company. Classified Board of Directors. A classified board is one to which a certain number, but not all, of the directors are elected on a rotating basis each year. Delaware and Nevada law permit, but do not require, a classified board of directors, with staggered terms under which one-half or one-third of the directors are elected for terms of two or three years, respectively. This method of electing directors may make changes in the composition of the board of directors, and thus a potential change in control of a corporation, a lengthier and more difficult process. The charter documents of Atari, JTS and the Combined Company do not provide for a classified board of directors. The establishment of a classified board following the Merger would require the approval of the stockholders of the Combined Company. To the extent that Section 2115 would render California law applicable to JTS, directors must be elected annually, unless the corporation is listed on the Nasdaq National Market and has at least 800 stockholders or is listed on certain public exchanges. Removal of Directors. Under Nevada law, unless the articles of incorporation provide for cumulative voting or a larger percentage of voting stock required to do so, any director may be removed from office by the vote of stockholders representing not less than two-thirds of the voting power of the class or series of stock of the corporation entitled to elect such director. The Atari Bylaws do not provide for cumulative voting. The Atari Bylaws allow the Board to remove any director declared of unsound mind by court order or convicted of a felony. Otherwise, a two-thirds vote of outstanding shares is needed to remove a director. Under Delaware law, a director of a corporation that does not have a classified board of directors or cumulative voting may be removed with or without cause with the approval of a majority of the outstanding shares entitled to vote. In the case of a Delaware corporation having cumulative voting, if less than the entire board is to be removed, a director may not be removed without cause if the number of votes cast against such removal would be sufficient to elect the director under cumulative voting. A director of a corporation with a classified board of directors may be removed only for cause, unless the certificate of incorporation otherwise provides. To the extent that Section 2115 would render California law applicable to JTS, any directors or the entire board of directors may be removed, with or without cause, with the approval of a majority of the outstanding shares entitled to vote; provided, however, no director may be removed (unless the entire board is removed) if the number of shares voted against removal would be sufficient to elect the director under applicable cumulative voting rules. The JTS Certificate provides for cumulative voting. The Certificate of the Combined Company does not provide for cumulative voting. The Certificate and Bylaws of the Combined Company allow removal of a director, subject to the rights of preferred stock holders, (i) with cause by a majority of the outstanding shares or (ii) without cause by two-thirds of the outstanding shares. 114 122 Filling Vacancies on the Board of Directors. Under Nevada law, unless a Corporation's articles of incorporation provide otherwise, any vacancy on the board of directors, including one created by removal of a director or an increase in the number of authorized directors, may be filled by the majority of the remaining directors, even if such number constitutes less than a quorum. The Atari Articles so provide. The Atari Bylaws also provide for vacancies filled by directors. Stockholders may fill the vacancy if the directors fail to do so. Under Delaware law, vacancies and newly created directorships may be filled by a majority of the directors then in office (even though less than a quorum) unless otherwise provided in the certificate of incorporation or bylaws (and unless the certificate of incorporation directs that a particular class is to elect such director, in which case any other directors elected by such class, or a sole remaining director, shall fill such vacancy). In addition Delaware law permits a ten percent (10%) stockholder to order an election to fill a director vacancy. The JTS Bylaws allow a vacancy to be filled by a majority of the remaining members of the Board of Directors, although the majority is less than a quorum or by a plurality of stockholder votes. The Bylaws of the Combined Company provide that a director vacancy shall only be filled by a majority of the remaining directors, even though less than a quorum. Interested Director Transactions. Under both Nevada and Delaware law, certain contracts or transactions in which one or more of a corporation's directors has an interest are not void or voidable because of such interest provided that certain conditions, such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure, are met. With certain exceptions, the conditions are similar under Nevada and Delaware law. Under Nevada and Delaware law, either the stockholders or the disinterested members of the board of directors must approve any such contract or transaction after full disclosure of the material facts, and in the case of board approval the contract or transaction must also be fair to the corporation, or the contract or transaction must have been just and reasonable or fair as to the corporation at the time it was authorized or approved. If board approval is sought, the contract or transaction must be approved by a majority vote of a quorum of the directors, without counting the vote of any interested directors (except that interested directors may be counted for purposes of establishing a quorum). The JTS Bylaws reiterate Delaware corporate law regarding interested director transactions. The Articles and Bylaws of Atari and the Certificate and Bylaws of the Combined Company contain no special provision regarding such transactions. Loans to Officers and Employees. Under Nevada law, any transaction (including any loan or guaranty) to or for the benefit of a director or officer of the corporation or its parent is permitted (unless otherwise provided for in the corporation's articles of incorporation) provided a disinterested majority of the board of directors or stockholders, after full and fair disclosure of the material terms of such transaction, approve such transaction, or if such transaction is fair to the corporation at the time it is authorized or approved. Under Delaware law, a corporation may make loans to, guarantee the obligations of or otherwise assist its officers or other employees and those of its subsidiaries (including directors who are also officers or employees) when such action, in the judgment of the directors, may reasonably be expected to benefit the corporation. Pursuant to the Bylaws of the Combined Company and in accordance with Delaware law, the Combined Company may make loans to, guarantee the obligations of or otherwise assist its officers or other employees and those of its subsidiaries (including directors who are also officers or employees) when such action, in the judgment of the Board of the Combined Company, may reasonably be expected to benefit the corporation. The Articles and Bylaws of Atari and the Certificate and Bylaws of JTS contain no special provision regarding such transactions. Indemnification and Limitation of Liability. Nevada and Delaware have similar laws respecting indemnification by a corporation of its officers, directors, employees and other agents. The laws of both states also permit corporations to adopt a provision in their charters eliminating the liability of a director to the corporation or its stockholders for monetary damages for breach of the director's fiduciary duty of care. There are nonetheless certain differences between the laws of the two states with respect to indemnification and limitation of liability. Atari's Articles indemnify directors to the fullest extent permissible under Nevada law. Atari's Bylaws further provide for indemnification for Atari's agents and authorize the Board of Directors to purchase and maintain insurance. Similar to Delaware law, Nevada law does not permit the elimination of monetary liability 115 123 where such liability is based on intentional misconduct, fraud, knowing violation of law or payments or distributions in violation of law. In addition, Nevada law departs from Delaware law insofar as Nevada law (i) permits a broader array of insurance or other financial arrangements between a company and its directors, and (ii) allows a provision in the corporation's bylaws or articles of incorporation which mandates indemnification rather than leaving that decision to the board of directors. The Certificates of JTS and the Combined Company eliminate the liability of directors and officers to the fullest extent permissible under Delaware law, as such law exists currently or as it may be amended in the future. Under Delaware law, such provision may not eliminate or limit director monetary liability for (a) breaches of the director's duty of loyalty to the corporation or its stockholders; (b) acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; (c) the payment of unlawful dividends or unlawful stock repurchases or redemptions under DGCL Section 174; or (d) transactions in which the director received an improper personal benefit. Such limitation of liability provisions also may not limit a director's liability for violation of, or otherwise relieve JTS, the Combined Company or the directors of either of them from the necessity of complying with, federal or state securities laws, or affect the availability of non-monetary remedies such as injunctive relief or rescission. The Bylaws of JTS and the Combined Company state that indemnification for JTS' or the Combined Company's agents will be as set forth in the DGCL. However, JTS may modify the extent of such indemnification by individual contracts with its directors and executive officers. In addition, the DGCL provides that the indemnification provided by statute shall not be deemed exclusive of any other rights under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Bylaws of JTS and the Combined Company track this provision of Delaware law. JTS has entered into indemnification agreements with its officers and directors. Upon consummation of the Merger, such agreements will become binding on the Combined Company. It is expected that the Combined Company will enter in similar agreements with Jack Tramiel and Michael Rosenberg. Delaware law generally permits indemnification of expenses incurred in the defense or settlement of a derivative or third-party action, provided there is a determination by a disinterested quorum of the directors, by independent legal counsel or by a majority vote of a quorum of the stockholders that the person seeking indemnification acted in good faith and in a manner reasonably believed to be in or (in contrast to Nevada law) not opposed to the best interests of the corporation (or in the case of a criminal proceeding, if the accused had no reasonable cause to believe the conduct was unlawful). Without court approval, however, no indemnification may be made in respect of any derivative action in which such person is adjudged liable for negligence or misconduct in the performance of his duty to the corporation. The Certificate of the Combined Company limits director liability to the Combined Company or its stockholders for monetary damages arising out of a director's breach of his duty of care. The duty of care refers to the fiduciary duty of a director to exercise sufficient diligence and care in considering a transaction or causing the corporation to take or refuse to take corporate action. The Certificate of the Combined Company, however, does not eliminate the duty of care; it only eliminates monetary damage awards occasioned by a breach of such duty. Thus, after the Merger, a breach of the duty of care would remain a valid basis for a suit seeking to prevent a proposed transaction from occurring. After the transaction has occurred, however, the stockholders would not have a claim against directors for monetary damages based on the breach of the duty of care, even if that breach involved gross negligence on the part of the directors. Reorganizations, Asset Sales and Mergers. Both Nevada and Delaware law generally require that a majority of the stockholders of the acquiring and target corporations approve statutory mergers. Delaware law does not require a stockholder vote of the surviving corporation in a merger (unless the corporation provides otherwise in its certificate of incorporation) if (a) the merger agreement does not amend the existing certificate of incorporation, (b) each share of the surviving corporation outstanding before the merger is an identical out standing or treasury share after the merger, and (c) the number of shares to be issued by the surviving corporation in the merger does not exceed 20% of the shares outstanding immediately prior to the merger. Nevada law contains a substantially similar exception to its voting requirements for the surviving corporation in a reorganization. To the extent Section 2115 would render California law applicable to JTS, 116 124 stockholder approval of each constituent corporation in a statutory merger and any parent corporation is required, except (i) corporations which will own (or where stockholders will own), equity securities (other than warrants) possessing more than 5/6 of the voting power of the surviving corporation or (ii) parent corporations, not subject to Section 2115, incorporated under the laws of other states not requiring such approval. Both Nevada and Delaware law also require that a sale of all or substantially all of the assets of a corporation be approved by the board of directors and a majority of the voting shares of the corporation transferring such assets. If required by the articles of incorporation, Nevada law requires that mergers, reorganizations, certain sales of assets and similar transactions be approved by a majority vote of each class of shares outstanding and/or a larger percentage vote than a simple majority of the voting shares. The Atari Articles do not require such approval. By contrast, Delaware law generally does not require class voting, except in certain transactions involving an amendment to the certificate of incorporation which adversely affects a specific class of shares. To the extent Section 2115 would render California law applicable to JTS, a majority vote of each class of shares outstanding and/or a larger percentage vote than a simple majority would be required to approve certain mergers, reorganizations, sales of assets or similar transactions. JTS' Certificate provides for special voting rights of JTS' Series A Preferred Stock. The following actions must be approved by at least 2/3 of holders of outstanding JTS Series A Preferred Stock: (1) creation of a new class of stock on par or superior in rights to the Series A Preferred Stock; (2) selling, leasing or otherwise disposing of all or most of JTS's property; (3) an amendment of the JTS Certificate if such amendment would alter the rights of the JTS Series A Preferred Stock; (4) increasing the authorized number of shares of JTS Series A Preferred or JTS Common Stock; (5) a transaction involving a reorganization, consolidation or merger in which the holders of JTS voting stock hold less than 50% of the voting stock of the successor entity; (6) payment or declaration by any dividend other than in Common Stock to the holders of Common Stock; or (7) repurchase of securities other than from employees or consultants terminating their employment or consulting relationship with JTS. Should JTS authorize and issue shares of a new class of capital stock, the holders thereof would vote with the holders of the previously outstanding capital stock on proposals not adversely affecting a particular class. In such event the holders of the previously outstanding capital stock, if in the minority, would be unable to control the outcome of a vote, and, if in the majority, would be able to control the outcome of such a vote. Elimination of Actions by Written Consent of Stockholders. Under Nevada and Delaware law, stockholders may execute an action by written consent in lieu of a stockholder meeting. Nevada and Delaware law permit a corporation to eliminate such actions by written consent in its charter or bylaws. The Bylaws of Atari and JTS provide for action of the stockholders without a meeting including written consent. The Certificate of the Combined Company does not permit action by written consent of stockholders. Dividends and Repurchases of Shares. Nevada law dispenses with the concepts of par value of shares as well as statutory definitions of capital, surplus and the like. The concepts of par value, capital and surplus are retained under Delaware law. Nevada law prohibits a distribution (including dividends, purchases, redemptions or other acquisition of shares, distributions of indebtedness or otherwise) if, after giving effect to the distribution, (1) the corporation would not be able to pay its debts as they become due in the usual course of business or (2) except as provided in the articles of incorporation, the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Delaware law permits a corporation to declare and pay dividends out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. In addition, Delaware law generally provides that a corporation may redeem or repurchase its shares only if such redemption or repurchase would not impair the capital of the corporation. To the extent that Section 2115 would render California law applicable to JTS, 117 125 distributions (including dividends and redemptions of shares) are permitted if the corporation's assets-to-liabilities ratios are sufficient under CGCL Section 500. Appraisal or Dissenters' Rights. Under both Nevada and Delaware law, a stockholder of a corporation participating in certain major corporate transactions may, under varying circumstances, be entitled to appraisal or dissenters' rights pursuant to which such stockholder may receive cash in the amount of the fair market value of his or her shares in lieu of the consideration he or she would otherwise receive in the transaction. Under Delaware law, such dissenters' rights are not available (a) with respect to the sale, lease or exchange of all or substantially all of the assets of a corporation, (b) with respect to a merger or consolidation by a corporation whose shares are either listed on a national securities exchange or are held of record by more than 2,000 holders if such stockholders receive only shares of the surviving corporation or shares of any other corporation which are either listed on a national securities exchange or held of record by more than 2,000 holders, plus cash in lieu of fractional shares, or (c) to stockholders of a corporation surviving a merger if no vote of the stockholders of the surviving corporation is required to approve the merger because the merger agreement does not amend the existing certificate of incorporation, each share of the surviving corporation outstanding prior to the merger is an identical outstanding or treasury share after the merger, and the number of shares to be issued in the merger does not exceed 20% of the shares of the surviving corporation outstanding immediately prior to the merger and if certain other conditions are met. See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters' Rights -- Delaware Appraisal Rights." Under Nevada law, dissenters' rights are not available in a merger or share exchange if the shares held by the stockholders prior to the share exchange or merger were either listed on a national securities exchange or held by at least 2,000 stockholders of record unless the articles of incorporation of the corporation provide otherwise or the stockholders are required to accept under the plan of merger share exchange anything other than cash or shares of the surviving corporation or shares that are listed on a national securities exchange, or a combination of these. Because Atari Common Stock is listed on a national securities exchange and because the Atari Articles do not provide otherwise, Atari stockholders may not exercise dissenters' rights with respect to the Merger. To the extent that Section 2115 would render California law applicable to JTS, stockholders who dissent from a merger may also be entitled to dissenters' rights under the CGCL. See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters' Rights -- California Dissenters' Rights." The foregoing discussion of material differences between the rights of Atari and JTS stockholders under their respective charter documents and applicable state laws is only a summary of certain provisions and does not purport to be a complete description of such differences. The discussion is qualified in its entirety by reference to the Nevada, Delaware and California General Corporation Laws, the respective common law in Nevada, Delaware and California and the full text of the Certificate of Incorporation and any amendments thereto and the Bylaws and any amendment thereto of Atari and JTS. LEGAL MATTERS The validity of the JTS Common Stock issuable in the Merger, the federal income tax consequences in connection with the Merger and certain other matters relating to the Merger will be passed upon for JTS by Cooley Godward Castro Huddleson & Tatum. The federal income tax consequences in connection with the Merger and certain other matters relating to the Merger will be passed upon for Atari by Wilson Sonsini Goodrich & Rosati, P.C. As of May 22, 1996, one member of Wilson Sonsini Goodrich & Rosati, P.C., investment partnerships of which such individual is a partner and a trust for which such individual serves as trustee, beneficially owned 84,000 shares of JTS Series A Preferred Stock. EXPERTS The consolidated financial statements of Atari Corporation as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 included in this Joint Proxy Statement/Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report 118 126 appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of JT Storage, Inc and The Hard Disk Drive Division of Moduler Electronics (India) Private Limited included in this Joint Proxy Statement/Prospectus have been audited by Arthur Andersen LLP, independent public accountants, to the extent and for the periods indicated in their reports, and are included herein in reliance upon the authority of said firm as experts in giving said reports. Reference is made to said reports which include an explanatory paragraph describing uncertainties concerning the ability of the Company to continue as a going concern discussed in Note 1 to the financial statements. STOCKHOLDER PROPOSALS In the event the Merger is not consummated for any reason, Atari expects to hold an annual meeting in 1997. To be eligible for inclusion in Atari's proxy solicitation materials for its annual stockholder meeting to be held in 1997, any stockholder proposal to be considered at such meeting must have been received at Atari's principal executive offices, 455 South Mathilda Avenue, Sunnyvale, California 94086, no later than February , 1997. Any such proposal is subject to the requirements of the proxy rules adopted under the Exchange Act. 119 127 ATARI CORPORATION, JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED INDEX TO FINANCIAL STATEMENTS
PAGE ---- ATARI CORPORATION Report of Deloitte & Touche LLP....................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993................................................................................ F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994, and 1993...................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993................................................................................ F-6 Notes to Consolidated Financial Statements............................................ F-7 Unaudited Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995...... F-15 Unaudited Consolidated Statements of Operations for the Quarters Ended March 31, 1996 and March 31, 1995.................................................................. F-16 Unaudited Consolidated Statements of Cash Flows for the Quarters Ended March 31, 1996 and March 31, 1995.................................................................. F-17 Unaudited Notes to Consolidated Financial Statements.................................. F-18 JTS CORPORATION Report of Arthur Andersen LLP......................................................... F-19 Balance Sheets as of January 28, 1996 and January 29, 1995............................ F-20 Statements of Operations for the 52 weeks ended January 28, 1996 and for the period from inception (February 3, 1994) to January 29, 1995............................... F-21 Statements of Stockholders' Deficit from inception (February 3, 1994) to January 28, 1995.................................................................... F-22 Statements of Cash Flows for the 52 weeks ended January 28, 1996 and for the period from inception (February 3, 1994) to January 29, 1995............................... F-23 Notes to Financial Statements......................................................... F-24 Unaudited Condensed Consolidated Balance Sheets as of April 28, 1996 and January 28, 1996................................................................................ F-33 Unaudited Condensed Consolidated Statements of Operations for the Quarters Ended April 28, 1996 and April 30, 1995......................................................... F-34 Unaudited Consolidated Statements of Cash Flows for the Quarters Ended April 28, 1996 and April 30, 1995.................................................................. F-35 Unaudited Notes to Consolidated Financial Statements.................................. F-36 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED Report of Arthur Andersen LLP......................................................... F-37 Statements of Assets and Liabilities as of January 28, 1996 and January 31, 1995...... F-38 Statement of Revenues and Expenses for the period from February 1, 1995 to January 28, 1996................................................................................ F-39 Statement of Cash Flows for the period from February 1, 1995 to January 28, 1996...... F-40 Notes to Financial Statements......................................................... F-41
F-1 128 REPORT OF DELOITTE & TOUCHE LLP To the Shareholders and Board of Directors of Atari Corporation: We have audited the accompanying consolidated balance sheets of Atari Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atari Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California March 1, 1996 (April 8, 1996 as to Note 16) F-2 129 ATARI CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ----------------------- 1995 1994 --------- --------- ASSETS CURRENT ASSETS: Cash and equivalents (including $700 and $4,450 held as restricted balances in 1995 and 1994)...................................... $ 28,941 $ 22,592 Marketable securities.............................................. 21,649 58,432 Accounts receivable (less allowances for returns and doubtful accounts: 1995, $4,221; 1994, $1,957)..................................... 2,468 9,262 Inventories........................................................ 10,934 18,185 Other current assets............................................... 1,134 4,717 --------- --------- Total current assets....................................... 65,126 113,188 GAME SOFTWARE DEVELOPMENT COSTS -- Net............................... 758 5,145 EQUIPMENT AND TOOLING -- Net......................................... 671 1,315 REAL ESTATE HELD FOR SALE............................................ 10,468 10,741 OTHER ASSETS......................................................... 546 653 --------- --------- TOTAL...................................................... $ 77,569 $ 131,042 ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................... $ 4,954 $ 15,341 Accrued liabilities................................................ 5,088 5,177 --------- --------- Total current liabilities.................................. 10,042 20,518 --------- --------- LONG-TERM OBLIGATIONS................................................ 42,354 43,454 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 14) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value -- authorized, 10,000,000 shares; none outstanding................................................ -- -- Common stock, $.01 par value -- authorized, 100,000,000 shares; outstanding: 1995, 63,687,118 shares; 1994, 63,648,535 shares... 637 636 Additional paid-in capital......................................... 196,209 196,138 Unrealized net gain on marketable securities....................... 7,088 542 Accumulated translation adjustments................................ (663) (1,724) Accumulated deficit................................................ (178,098) (128,522) --------- --------- Total shareholders' equity...................................... 25,173 67,070 --------- --------- TOTAL...................................................... $ 77,569 $ 131,042 ========= =========
See notes to consolidated financial statements. F-3 130 ATARI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- REVENUES................................................... $ 14,626 $ 38,748 $ 29,108 COST AND EXPENSES: Cost of revenues......................................... 44,234 35,200 42,768 Research and development................................. 5,410 5,775 4,876 Marketing and distribution............................... 12,726 14,651 8,980 General and administrative............................... 5,921 7,169 7,558 Restructuring charges.................................... -- -- 12,425 -------- -------- -------- Total operating expenses......................... 68,291 62,795 76,607 -------- -------- -------- OPERATING LOSS............................................. (53,665) (24,047) (47,499) Settlements of patent litigation........................... -- 32,062 -- Exchange gain (loss)....................................... 13 1,184 (2,234) Other income............................................... 2,670 484 854 Interest income............................................ 3,133 2,015 2,039 Interest expense........................................... (2,309) (2,304) (2,290) -------- -------- -------- Income (loss) before income taxes................ (50,158) 9,394 (49,130) Income tax credit.......................................... -- -- 264 -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT.................. (50,158) 9,394 (48,866) Extraordinary credit -- gain on extinguishment of 5 1/4% convertible subordinated debentures...................... 582 -- -- -------- -------- -------- NET INCOME (LOSS).......................................... $(49,576) $ 9,394 $(48,866) ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary credit................ $ (0.79) $ 0.16 $ (0.85) Net income (loss)........................................ $ (0.78) $ 0.16 $ (0.85) Number of shares used in computations.................... 63,697 58,962 57,148
See notes to consolidated financial statements. F-4 131 ATARI CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
NOTES RECEIVABLE UNREALIZED FROM NET GAIN COMMON STOCK ADDITIONAL SALE OF ACCUMULATED ON ----------------- PAID-IN COMMON TRANSLATION MARKETABLE ACCUMULATED SHARES AMOUNT CAPITAL STOCK ADJUSTMENTS SECURITIES DEFICIT TOTAL ------ ------ ---------- ---------- ----------- ---------- ----------- -------- BALANCES, JANUARY 1, 1993.......... 57,137 $571 $142,315 $(19) $(3,234) $ -- $ (89,050) $ 50,583 Stock options exercised........ 89 1 191 192 Common stock repurchased...... (11) (9) 9 -- Collection of notes receivable....... 7 7 Translation adjustments...... 2,438 2,438 Net loss........... (48,866) (48,866) ------ ---- -------- ---- ------- ------ ------ --------- BALANCES, DECEMBER 31, 1993......... 57,215 572 142,497 (3) (796) -- (137,916) 4,354 Sale of common stock............ 6,277 63 53,270 53,333 Stock options exercised........ 157 1 371 372 Collection of notes receivable....... 3 3 Translation adjustments...... (928) (928) Unrealized net gain on marketable securities....... 542 542 Net income......... 9,394 9,394 ------ ---- -------- ---- ------- ------ ------ --------- BALANCES, DECEMBER 31, 1994......... 63,649 636 196,138 -- (1,724) 542 (128,522) 67,070 Stock options exercised........ 82 1 109 110 Stock repurchased...... (44) (38) (38) Translation adjustments...... 1,061 1,061 Unrealized net gain on marketable securities....... 6,546 6,546 Net loss........... (49,576) (49,576) ------ ---- -------- ---- ------- ------ ------ --------- BALANCES, DECEMBER 31, 1995......... 63,687 $637 $196,209 $ -- $ (663) $7,088 $(178,098) $ 25,173 ====== ==== ======== ==== ======= ====== ====== =========
See notes to consolidated financial statements. F-5 132 ATARI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- OPERATING ACTIVITIES: Net income (loss).......................................................................... $(49,576) $ 9,394 $(48,866) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Gain from extinguishment of 5 1/4% convertible subordinated debentures..................... (582) -- -- Depreciation and amortization.............................................................. 1,970 2,619 361 Provision for production tooling........................................................... 300 -- -- Provision for doubtful accounts............................................................ 50 194 232 Provision for sales returns and allowances................................................. 5,028 1,563 457 Provision for restructuring................................................................ -- -- 12,425 Gain on sale of marketable securities...................................................... (2,377) -- (324) Provision for inventory valuation.......................................................... 12,640 5,362 18,100 Utilization of advertising barter credits.................................................. 3,179 -- -- Write-off of game software development costs............................................... 16,578 804 -- Changes in operating assets and liabilities: Accounts receivable...................................................................... 1,637 (5,383) 16,863 Inventories.............................................................................. (5,389) (14,177) 951 Other assets............................................................................. 395 (336) 3,178 Accounts payable......................................................................... (10,372) 3,763 (4,925) Accrued liabilities...................................................................... (42) (660) (15,881) -------- -------- -------- Net cash provided (used) by operations..................................................... (26,561) 3,143 (17,429) -------- -------- -------- INVESTING ACTIVITIES: Sales and maturities of marketable securities.............................................. 55,703 -- 2,525 Purchase of marketable securities.......................................................... (9,997) (50,000) -- Purchases of property, equipment and tooling............................................... (782) (1,207) (663) Sale of property........................................................................... 29 7,543 -- Game software development costs............................................................ (12,791) (5,810) (789) Other assets............................................................................... 107 482 541 -------- -------- -------- Net cash provided (used) by investing activities........................................... 32,269 (48,992) 1,614 -------- -------- -------- FINANCING ACTIVITIES: 5 1/4% convertible subordinated debentures extinguished.................................... (518) -- -- Repayments of borrowings................................................................... -- (7,642) (259) Issuance of common stock, net.............................................................. 72 53,708 199 -------- -------- -------- Net cash provided (used) by financing activities........................................... (446) 46,066 (60) -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS...................................... 1,087 (684) (356) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................................. 6,349 (467) (16,231) CASH AND EQUIVALENTS: Beginning of year.......................................................................... 22,592 23,059 39,290 -------- -------- -------- End of year................................................................................ $ 28,941 $ 22,592 $ 23,059 ======== ======== ======== OTHER CASH FLOW INFORMATION: Interest paid.............................................................................. $ 2,309 $ 2,303 $ 3,023 ======== ======== ======== Income taxes refunded...................................................................... $ -- $ (426) $ (225) ======== ======== ======== NONCASH INVESTING AND FINANCING ACTIVITIES: Exchange of inventory for advertising services............................................. $ -- $ 3,179 $ -- ======== ======== ======== Exchange of property for retirement of debt................................................ $ -- $ 1,891 $ -- ======== ======== ========
See notes to consolidated financial statements. F-6 133 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. COMPANY Nature of Operations -- The Company designs and markets interactive multimedia entertainment systems and related software and peripheral products. Manufacture of these products is performed by third parties. The principal methods of distribution are through mass market retailers, consumer electronic specialty stores and distributors of electronic products. Product Focus -- Since 1992, the Company has focused its research and development effort on its 64-bit Jaguar interactive multimedia entertainment system. This product was introduced in 1993 and, in 1995 and 1994, 68% and 76% of revenues, respectively, were associated with this product. Sales of the Jaguar in 1995 were disappointing and the Company is currently test marketing different price points and software bundles for the Jaguar in an attempt to sell its substantial inventory of such products. In December 1994, the Company planned price reductions beginning in early 1995 and recognized the impact of this decision on finished and in-process inventory through a write-down of inventory of $3.6 million, which is included in cost of sales in the fourth quarter of 1994. In December 1995, the Company planned further price reductions beginning in early 1996 and recognized the impact of this decision through a $10.9 million write-down of inventory, which is included in cost of sales in the fourth quarter of 1995. The Company continues to carry limited quantities of its older 8-bit and 16-bit video games and computer product lines. As a result of rapid technological change and intense competition, the Company wrote down inventories of these products by $18.1 million in 1993 which was included in cost of sales. Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect recorded amounts of assets, liabilities, revenues and expenses as of the dates and for the periods presented. In connection with the change of the Company's focus, measurement of assets and liabilities is dependent upon management's ability to accurately predict future operating results. Actual results could differ from these estimates. Restructuring -- The Company has active operations in the United States and the United Kingdom. During 1993 and 1992, the Company significantly restructured its operations around the world, closing operations in Australia and the Far East, in several European countries and in Canada and Mexico. These operational closures resulted in the bankruptcy of subsidiaries in Australia and Germany and may result in the voluntary or involuntary liquidation or bankruptcy of other subsidiary companies. Charges for restructuring have been separately reported in the consolidated statements of operations for 1993. The remaining accruals of $351,000 at December 31, 1995 relate to employee benefits in Italy and lease obligations in the Netherlands. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the Company and its subsidiaries. All transactions and balances between the companies are eliminated. Cash and Equivalents -- Cash equivalents are stated at cost, which approximates market value, have maturities not exceeding ninety days upon acquisition and generally consist of certificates of deposit, time deposits, treasury notes and commercial paper. Marketable Securities -- Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Marketable securities are carried as available-for-sale securities and reported at the fair market value. The cumulative effect of adoption of SFAS 115 as of January 1, 1994 was not material. Unrealized gains and losses are reported as a separate component of shareholders' equity. Realized gains and losses are recorded in the statements of operations and realized gains were $2.4 million in 1995. The cost of securities sold is based on average cost. F-7 134 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventories -- Inventories are stated at the lower of cost or market. Cost is computed using standard costs which approximate actual cost on a first-in, first-out basis. Market for each of the Company's product lines is determined by reference to expected sales prices less direct selling expenses. Prepaid Advertising -- Included in other current assets at December 31, 1994 is $3.2 million of prepaid advertising resulting from a barter transaction. The amount recorded as prepaid advertising equals the carrying value of certain inventory exchanged for advertising credits. The Company expensed the prepaid advertising as utilized during 1995. Equipment and Tooling -- Equipment and tooling are stated at cost. Depreciation on equipment is computed using the straight-line method based on estimated useful lives of the assets of two to five years. Tooling is depreciated on a units of production basis. Leasehold improvements are amortized over the estimated useful life or lease term, as appropriate. Fully depreciated assets, and related depreciation, are excluded from the consolidated financial statements. Real Estate Held for Sale -- Real property associated with closed operations in the U.S. is stated at estimated market value as determined by recent valuations, appraisals or pending sales offers. Revenue Recognition -- Sale of consoles, software game cartridges and related products are recorded as revenue at the time of shipment to customers. Concurrently, the Company establishes reserves for estimated returns, which are recorded as a reduction of sales, and for cooperative advertising allowances, which are recorded as marketing and distribution expense. Royalty revenues are recognized when earned and collection is probable. Income Taxes -- The Company adopted SFAS No. 109 "Accounting for Income Taxes" in the first quarter of 1993 which requires an asset and liability method for financial accounting and reporting of income taxes. The impact of the adoption of SFAS 109 was not material. Foreign Currency Translation -- Assets and liabilities of operations outside the United States are translated into United States dollars using current exchange rates, and the effects of foreign currency translation adjustments are deferred and included as a component of shareholders' equity. Income (Loss) per Common Share -- Per share amounts are computed based on the weighted average number of common and dilutive common equivalent shares (stock options) outstanding during each period. The effect of the assumed conversion of the 5 1/4% convertible subordinated debentures was antidilutive for all periods presented and excluded from the computation. Fiscal Year -- The Company uses a 52/53 week fiscal year which ends on the Saturday closest to December 31. All fiscal years presented contain 52 weeks. For simplicity of presentation, the date December 31 is used to represent the fiscal year end. Reclassifications -- Certain items have been reclassified in the 1994 and 1993 financial statements to conform to the 1995 presentation and had no effect on operating results or shareholders' equity. Recently Issued Pronouncements -- In October 1995, the Financial Accounting Standards Board issued FASB No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and other equity instruments, such as stock purchase plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. This standard will be effective for the Company beginning in 1996, and requires measurement of awards made beginning in 1995. The new standard permits companies to continue to account for equity transactions with employees under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the Company had applied the new method of accounting. The Company intends to follow these F-8 135 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) disclosure requirements for its employee stock plans. As a result, adoption of the new standard will not impact reported earnings or earnings per share, and will have no effect on the Company's cash flows. 3. FINANCIAL INSTRUMENTS Marketable Securities -- Marketable securities available for sale consist of (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1994 ---------------------------------- ---------------------------------- GROSS GROSS AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED ISSUE COST VALUE GAINS COST VALUE GAINS - ---------------------------------------- --------- ------- ---------- --------- ------- ---------- Equity securities -- Dixon common stock.................... $ 4,565 $11,606 $7,041 $ 7,890 $ 8,432 $ 542 Government securities -- Federal Home Loan Bank................ 4,993 5,026 33 -- -- -- Federal Home Loan Mortgage Corp....... 5,003 5,017 14 -- -- -- Foreign government debt securities -- Eurodollar notes...................... -- -- -- 50,000 50,000 -- ----- ------- ------- ------ Total marketable securities......... $14,561 $21,649 $7,088 $57,890 $58,432 $ 542 ===== ======= ======= ======
The contractual maturities of the government securities range from two to four years. The Eurodollar notes matured during 1995. Concentration of Credit Risk -- The Company sells to mass market retailers, consumer electronic specialty stores and to distributors of electronic products throughout the United States and Europe. The Company makes ongoing credit evaluations of customers and, at times, requires letters of credit from some foreign customers. Sales to foreign customers are generally stated in the currency of the customer. To date, the Company has not entered into hedges of these foreign currency exposures. Fair Value of Financial Instruments -- In accordance with the provisions of SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," which requires the disclosure of fair value information about both on and off balance sheet financial instruments where it is practicable to estimate the value, the Company has estimated the fair value of its financial instruments. The estimated fair value of the 5 1/4% convertible subordinated debentures at December 31, 1995 was approximately $20 million based primarily on quoted market prices. The carrying amounts of the remainder of the Company's financial instruments, including cash and equivalents, marketable securities, accounts receivable and accounts payable, approximate fair values due to their short maturities. 4. INVENTORIES Inventories at December 31 consist of the following (in thousands):
1995 1994 ------- ------- Finished goods................................................... $ 9,927 $15,799 Raw materials and work-in-process................................ 1,007 2,386 ------- ------- Total....................................................... $10,934 $18,185 ======= =======
5. GAME SOFTWARE DEVELOPMENT COSTS Internal game software development costs are expensed as incurred as these costs relate primarily to development tools. External development costs are capitalized once technological feasibility has been determined. During 1995 and 1994, the Company capitalized $12.8 million and $5.8 million, respectively, of F-9 136 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts paid to third parties, primarily as prepaid licenses, in connection with game development for the Jaguar. The Company amortizes such costs over the shorter of 12 months from game introduction or the estimated unit sales of the game title. The Company assesses the recoverability of capitalized games software development costs in light of many factors, including, but not limited to, anticipated future revenues, estimated economic useful lives and changes in software and hardware technologies. Amortization expense and adjustments for management's assessment of recoverability were $17.1 million (including a write-off of $16.6 million) and $1.5 million (including a write-off of $804,000) for the years ended December 31, 1995 and 1994, respectively. 6. EQUIPMENT AND TOOLING Equipment and tooling at December 31 consists of the following (in thousands):
1995 1994 ------ ------- Equipment and tooling............................................. $1,526 $ 1,874 Furniture and fixtures............................................ 198 708 Leasehold improvements............................................ -- 43 ------ ------- Total............................................................. 1,724 2,625 Accumulated depreciation and amortization......................... (753) (1,310) Reserve for production tooling.................................... (300) -- ------ ------- Equipment and tooling -- net...................................... $ 671 $ 1,315 ====== =======
7. REAL ESTATE HELD FOR SALE Property held for sale at December 31, 1995 consists of nine properties in California and Texas, from the discontinued consumer electronics and home entertainment products operation. Certain of the properties have rental tenants, although all properties are available for sale. Rental income, net of rental expense and depreciation, is included in other income (expense) and was not material. Disposals in 1994 represented the Company's building in Germany and land and building in France, which were disposed of with no significant gain or loss. 8. ACCRUED LIABILITIES Accrued liabilities at December 31 consist of the following (in thousands):
1995 1994 ------ ------ Accrued interest........................................... $1,483 $1,513 Accrued game software development costs.................... 1,525 -- Accrued restructuring charge............................... 351 719 Accrued royalties.......................................... 28 320 Other...................................................... 1,701 2,625 ------ ------ Total...................................................... $5,088 $5,177 ====== ======
9. LETTERS OF CREDIT AND RESTRICTED CASH At December 31, 1995, cash balances of $700,000 were collateral for outstanding commercial letters of credit associated with inventory components and software development. At December 31, 1994, cash balances of $4.5 million were collateral for outstanding letters of credit. F-10 137 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. LONG-TERM DEBT OBLIGATIONS Convertible Subordinated Debentures -- The Company has $42.4 million of 5 1/4% convertible subordinated debentures due April 29, 2002. The debentures may be redeemed at the Company's option, upon payment of a premium. The debentures, at the option of the holders, are convertible into common stock at $16.3125 per share. At December 31, 1995, 2,596,414 shares of common stock were reserved for issuance upon conversion. Default with respect to other indebtedness of Atari Corporation in an aggregate amount exceeding $5 million would result in an event of default whereby the outstanding debentures would be due and payable immediately. In 1995, the Company reacquired in the open market and extinguished $1.1 million face value of these debentures for $500,000, resulting in an extraordinary credit of $582,000. Term Loans on Real Estate in Europe -- At December 31, 1993, the Company had two secured term loans outstanding totaling $7.5 million for its building in Germany and a term loan of $2.0 million for its land and building in France. These loans were repaid or exchanged in 1994 from the sale or transfer of the properties. 11. SETTLEMENTS OF PATENT LITIGATION During the first quarter of 1994, the Company received $2.2 million with respect to the settlement of litigation between the Company, Atari Games Corporation and Nintendo. Although not part of the litigation, the Company sold 1,500,000 shares of its common stock to Time Warner (parent company of Atari Games Corporation), Inc. for $12.8 million. During the fourth quarter of 1994, the Company completed a comprehensive agreement ("Agreement") with Sega Enterprises, Ltd. ("Sega") concerning resolution of disputes, equity investment and patent and product licensing agreements. The results of the Agreement were as follows: (i) Sega acquired 4,705,883 shares of the Company's common stock for $40.0 million; (ii) the Company received a payment of $29.8 million ($50.0 million from Sega, net of $20.2 million of legal fees and associated costs) in exchange for a license from Atari covering the use of a library of Atari patents issued between 1977 through 1984 (excluding patents which exclusively claim elements of the Company's JAGUAR and LYNX products) through the year 2001; and (iii) the Company and Sega agreed to cross-license up to five software game titles each year through the year 2001. 12. INCOME TAXES The credit for income taxes consists of the following (in thousands):
1995 1994 1993 ---- ---- ----- Current: Federal............................................. $-- $-- $ -- Foreign............................................. -- -- (264) State............................................... -- -- -- -- -- ----- Income tax credit..................................... $-- $-- $(264) == == =====
At December 31, 1995, the Company has a U.S. income tax operating loss carryforward of $165 million which expires in 2006 through 2010, a research and development tax credit carryforward of $1.8 million which expires in 2002 through 2010, and a California income tax operating loss carryforward of $60 million which expires as follows: $16.4 million in 1997, $16.7 million in 1998, $1.6 million in 1999 and $21.8 million in 2000. F-11 138 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The effective income tax rates for 1995, 1994 and 1993 were 0%, 0%, and (1)%, respectively, and differ from the federal statutory rate of 35% as follows (in thousands):
1995 1994 1993 -------- ------- -------- Computed at federal statutory rates................. $(17,402) $ 3,288 $(17,103) Valuation allowance................................. 18,604 (3,288) 16,821 Effect of foreign tax rates different than statutory rates and utilization of foreign loss carrybacks........................................ -- -- 16 Other............................................... (1,202) -- 2 -------- ------- -------- Income tax credit................................... $ -- $ -- $ (264) ======== ======= ========
The components of the net deferred tax asset at December 31 consist of (in thousands):
1995 1994 -------- -------- Deferred tax assets: U.S. operating loss carryforwards...................... $ 57,706 $ 42,149 State operating loss carryforwards..................... 3,820 2,321 Capital loss carryforwards............................. 1,035 1,804 Research and development tax credit carryforwards...... 1,813 1,370 Inventory reserves..................................... 3,237 2,781 Restructuring charges.................................. 50 239 Capitalized game software development costs............ 3,022 -- Other items............................................ 4,411 5,826 -------- -------- Subtotal............................................... 75,094 56,490 Valuation allowance.................................... (75,094) (56,490) -------- -------- Net deferred tax asset................................. $ -- $ -- ======== ========
Due to the uncertainty surrounding the timing and realization of the benefits of its favorable tax attributes in future years, the Company has established a valuation allowance to offset its net deferred tax assets. Current federal and state tax law includes certain provisions limiting the use of net operating loss carryforwards in the event of certain defined changes in stock ownership. The annual use of the Company's net operating loss carryforwards could be limited according to these provisions, and there can be no assurance that such limitations will not result in the loss of carryforward benefits during the carryforward period. 13. STOCK OPTIONS The Company's stock option plan and restricted stock plan provide for the issuance of up to 3,000,000 shares of common stock through the issuance of incentive stock options to employees and nonqualified stock options and restricted stock to employees, directors and consultants. Under the plans, stock options or restricted stock may be granted at not less than fair market value as determined by the Board of Directors. Stock options become exercisable as established by the Board (generally ratably over five years) and expire up to ten years from date of grant. The Company's right to repurchase restricted stock lapses over a maximum period of five years. At December 31, 1995, options for 551,925 shares were exercisable and options for 602,310 shares were available for future grant. At December 31, 1995, no restricted stock under the restricted stock plan had been issued. F-12 139 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additional information with respect to the stock option plan is as follows:
OPTION PRICE RANGE PER SHARE NUMBER OF ------------------ OPTIONS LOW HIGH TOTAL --------- ------ ----- ----------- Outstanding, January 1, 1993............... 970,400 $1.500 - $7.50 $ 3,131,450 Granted.................................... 535,583 0.875 - 4.75 1,045,093 Exercised.................................. (89,300) 0.875 - 3.00 (195,463) Cancelled.................................. (222,500) 0.875 - 6.00 (831,625) --------- Outstanding, December 31, 1993............. 1,194,183 0.875 - 7.50 3,149,455 Granted.................................... 289,500 2.250 - 7.00 1,467,750 Exercised.................................. (157,065) 0.875 - 6.25 (372,403) Cancelled.................................. (18,160) 1.675 - 7.50 (93,980) --------- Outstanding, December 31, 1994............. 1,308,458 0.875 - 7.00 4,150,822 Granted.................................... 1,487,000 1.438 - 3.81 3,970,814 Exercised.................................. (82,333) 0.875 - 2.00 (110,250) Cancelled.................................. (615,600) 0.875 - 7.00 (2,135,175) --------- Outstanding, December 31, 1995............. 2,097,525 $0.875 - $5.25 $ 5,876,211 =========
14. SEGMENT INFORMATION The Company operates in one industry segment -- the design and sale of consumer electronic products. The Company's foreign operations at December 31, 1995 consist of sales and distribution facilities in Europe. Transfers between geographic areas are accounted for at amounts generally above cost and in accordance with the rules and regulations of the respective governing tax authorities. Corporate assets are primarily cash and equivalents, marketable securities and real estate held for sale. The following tables present a summary of operations by geographic region (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Revenues from unaffiliated customers: North America.............................. $ 8,163 $ 23,158 $ 7,390 Export sales from North America............ 1,868 8,538 -- Europe..................................... 4,595 7,052 18,548 Other...................................... -- -- 3,170 ------- ------- ------- Total............................ $ 14,626 $ 38,748 $ 29,108 ======= ======= ======= Transfer between geographic areas (eliminated in consolidation): North America.............................. $ 4,041 $ 1,046 $ 17,781 Europe..................................... 68 1,895 25,284 Other...................................... -- -- 102 ------- ------- ------- Total............................ $ 4,109 $ 2,941 $ 43,167 ======= ======= =======
F-13 140 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 1994 1993 ------- ------- ------- Operating loss: North America.............................. $(51,036) $(21,600) $(14,025) Europe..................................... (2,629) (2,447) (19,741) Other...................................... -- -- (13,733) ------- ------- ------- Total............................ $(53,665) $(24,047) $(47,499) ======= ======= ======= Identifiable assets at December 31: North America.............................. $ 14,588 $ 37,627 $ 17,369 Europe..................................... 1,856 1,650 5,801 Corporate assets........................... 61,125 91,765 51,663 ------- ------- ------- Total............................ $ 77,569 $131,042 $ 74,833 ======= ======= =======
No single customer accounted for more than 10% of total revenues for the years ended December 31, 1995, 1994 or 1993. 15. COMMITMENTS AND CONTINGENT LIABILITIES The Company leases various facilities and equipment under noncancellable operating lease arrangements. These leases generally provide renewal options of five additional years. Minimum future lease payments under noncancellable operating leases as of December 31, 1995 are as follows (in thousands): 1996................................................ $ 670 1997................................................ 460 1998................................................ 183 1999................................................ 85 2000................................................ 74 ------ Total minimum lease payments.............. $1,472 ======
Rent expense for operating leases was $1,193,000, $1,218,000 and $1,251,000 for the years 1995, 1994 and 1993, respectively. Certain claims and suits arising in the ordinary course of business have been filed or are pending against the Company. The number of such claims has increased as the Company significantly downsized its development operations. In the opinion of management, all such matters have been adequately provided for, are without merit, or are such that if settled unfavorably would not have a material adverse effect on the Company's consolidated financial position and results of operations. 16. SUBSEQUENT EVENT On February 12, 1996, the Company entered into a merger agreement with JT Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8, 1996, the merger agreement was amended and restated. JTS was incorporated on February 3, 1994 to develop, market and manufacture hard disk drives. The merger requires shareholder approval and is expected to be consummated in the second quarter of 1996. In connection with the merger, the Company extended a bridge loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a stated interest rate of 8 1/2% per annum. If the merger is not consummated, the bridge loan is convertible at the option of Atari or JTS into shares of JTS Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock, subject to certain conditions. F-14 141 ATARI CORPORATION CONSOLIDATED BALANCE SHEET MARCH 31, 1996 AND DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1996 1995 --------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and equivalents (including $441 and $700 held as restricted balances at March 31, 1996 and December 31, 1995)................ $ 23,748 $ 28,941 Marketable securities............................................... -- 21,649 Accounts receivable (less allowances for returns and doubtful accounts: March 31, 1996 $4,006; December 31, 1995 $4,221)................. 601 2,468 Inventories (See Note 2)............................................ 5,526 10,934 Subordinated secured convertible note with JT Storage, Inc. (see Note 4)..................................................... 25,000 -- Other current assets................................................ 1,101 1,134 --------- --------- Total current assets........................................ 55,976 65,126 GAME SOFTWARE DEVELOPMENT COSTS -- Net................................ 861 758 EQUIPMENT AND TOOLING -- Net.......................................... 577 671 REAL ESTATE HELD FOR SALE............................................. 10,468 10,468 OTHER ASSETS.......................................................... 524 546 --------- --------- TOTAL................................................................. $ 68,406 $ 77,569 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................... $ 3,295 $ 4,954 Accrued Liabilities................................................. 5,481 5,088 --------- --------- TOTAL CURRENT LIABILITIES............................................. 8,776 10,042 --------- --------- LONG-TERM OBLIGATIONS................................................. 42,354 42,354 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value -- authorized, 10,000,000 shares; none outstanding................................................. -- -- Common stock, $.01 par value -- authorized, 100,000,000 shares; (outstanding: March 1996, 63,710,318; December 1995, 63,687,118)....................................... 637 637 Additional paid-in capital.......................................... 196,272 196,209 Unrealized gain on marketable securities............................ -- 7,088 Accumulated translation adjustments................................. (730) (663) Accumulated deficit................................................. (178,903) (178,098) --------- --------- Total shareholders' equity....................................... 17,276 25,173 --------- --------- TOTAL....................................................... $ 68,406 $ 77,569 ========= =========
See notes to consolidated financial statements. F-15 142 ATARI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS MARCH 31, 1996 AND MARCH 31, 1995 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED ----------------------- MARCH 31, MARCH 31, 1996 1995 --------- --------- NET REVENUE............................................................ $ 1,272 $ 4,874 COST AND EXPENSES: Cost of revenues..................................................... 1,211 3,846 Write-down of inventory.............................................. 5,000 -- Research and development............................................. 201 1,815 Marketing and distribution........................................... 758 2,576 General and administrative........................................... 1,251 1,795 ------- ------- Total operating expenses..................................... 8,421 10,032 ------- ------- OPERATING LOSS......................................................... (7,149) (5,158) Gain on sale of marketable securities.................................. 6,347 107 Exchange (loss) gain................................................... (60) 5 Other income(expense), net............................................. 293 201 Interest income........................................................ 332 953 Interest expense....................................................... (569) (581) ------- ------- Loss before income taxes and extraordinary credit...................... (806) (4,473) ------- ------- Provision for income taxes............................................. -- -- ------- ------- Loss before extraordinary credit....................................... (806) (4,473) ------- ------- Extraordinary credit -- gain on extinguishment of 5 1/4% convertible subordinated debentures (see Note 3)................................. -- 47 ------- ------- NET LOSS............................................................... $ (806) $(4,426) ======= ======= LOSS PER COMMON SHARE:................................................. $ (0.01) $ (0.07) ======= ======= Number of shares used in computations................................ 63,701 63,701
See notes to consolidated financial statements. F-16 143 ATARI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
QUARTER ENDED --------------------- MARCH 31, MARCH 31, 1996 1995 --------- --------- (UNAUDITED) OPERATING ACTIVITIES: Net (loss)............................................................... $ (805) $ (4,426) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities: Gain from extinguishment of 5 1/4% convertible subordinated debentures... -- (47) Depreciation and amortization............................................ 136 672 Gain on sale of marketable securities.................................... (6,347) (107) Provision for inventory valuation........................................ 5,000 -- Changes in operating assets and liabilities: Accounts receivable.................................................... 1,895 5,035 Inventories............................................................ 408 (4,051) Other assets........................................................... 44 243 Accounts payable....................................................... (1,664) (8,983) Accrued liabilities.................................................... 386 851 -------- -------- Net cash (used) by operations............................................ (947) (10,813) INVESTING ACTIVITIES: Sale of marketable securities............................................ 20,908 492 Proceeds from property sales............................................. 33 -- Property purchases....................................................... -- (51) Borrowing by JTS......................................................... (25,000) -- Stock dividend received on investment.................................... -- 82 Decrease in other assets................................................. 22 99 Increase in software development costs................................... (103) (2,864) -------- -------- Net cash (used) by investing activities.................................. (4,140) (2,242) FINANCING ACTIVITIES: Repayments of borrowings................................................. -- (100) Extinguishment of debt................................................... (75) (46) Issuance of common stock................................................. 63 84 -------- -------- Net cash (used) by financing activities.................................. (12) (62) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH & EQUIVALENTS..................................................... (94) 47 -------- -------- NET DECREASE IN CASH & EQUIVALENTS....................................... (5,193) (13,070) CASH & EQUIVALENTS: Beginning of period...................................................... 28,941 22,592 -------- -------- End of period............................................................ $ 23,748 $ 9,522 ======== ======== NON CASH INVESTING ACTIVITIES: Unrealized gain on marketable securities................................. $ -- $ 1,836
See notes to consolidated financial statements. F-17 144 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1995 Annual Report on Form 10-K, filed with the Securities and Exchange Commission. The unaudited financial statements included herein reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. The Company operates with a 52/53 week fiscal calendar. Both quarters covered by this report have 13 weeks and for simplicity of presentation, the calendar quarter date is used to represent the quarter end. The actual fiscal closing dates for the first quarter of 1996 and 1995 were March 30, and April 1, respectively. NOTE 2. INVENTORIES In the first quarter of 1996, the Company wrote-down inventory by $5.0 million relating to Jaguar products. These write-downs resulted from management's revised estimates of sales resulting from continued disappointing sales of Jaguar. Inventories consist of the following (in thousands):
MARCH 31, DECEMBER 31, 1996 1995 --------- ------------ Finished goods....................................... $ 5,049 $ 9,927 Raw materials and work-in-process.................... 477 1,007 ------ ------- Total...................................... $ 5,526 $ 10,934 ====== =======
NOTE 3. REPURCHASE OF 5 1/4% SUBORDINATED CONVERTIBLE DEBENTURES In the first quarter of 1995, the Company repurchased a portion of its 5 1/4% subordinated convertible debentures. The Company repurchased 100 bonds at face value of $1,000 each, and recorded an extraordinary credit of $47,250. NOTE 4. MERGER WITH JT STORAGE, INC. On February 12, 1996, the Company entered into a merger agreement with JT Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8, 1996, the merger agreement was amended and restated. JTS was incorporated on February 3, 1994 to develop, market and manufacture hard disk drives. The merger requires shareholder approval and is expected to be consummated in the second quarter of 1996. In connection with the merger, the Company extended a bridge loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a stated interest rate of 8 1/2% per annum. If the merger is not consummated, the bridge loan is convertible at the option of Atari or JTS into shares of JTS Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock, subject to certain conditions. F-18 145 REPORT OF ARTHUR ANDERSEN LLP To the Board of Directors of JTS Corporation: We have audited the accompanying balance sheets of JTS Corporation (a Delaware corporation), formerly JT Storage, Inc., as of January 28, 1996 and January 29, 1995, and the related statements of operations, stockholders' deficit and cash flows for the year ended January 28, 1996 and the period from inception (February 3, 1994) to January 29, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JTS Corporation as of January 28, 1996 and January 29, 1995, and the results of its operations and its cash flows for the year ended January 28, 1996 and the period from inception (February 3, 1994) to January 29, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN, LLP San Jose, California April 4, 1996 F-19 146 JTS CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JANUARY 28, JANUARY 29, 1996 1995 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................................... $ 547 $ -- Trade accounts receivable, less allowance for doubtful accounts of $730 and $4, respectively........................................ 1,286 13 Receivable from Moduler Electronics................................. 6,892 1,033 Other receivables................................................... 812 28 Inventories......................................................... 2,093 358 Prepaid and other current assets.................................... 240 154 ------- ------ Total current assets........................................ 11,870 1,586 ------- ------ EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost: Machinery and equipment............................................. 9,231 2,254 Leasehold improvements.............................................. 398 -- Furniture and fixtures.............................................. 1,145 92 Less -- Accumulated depreciation and amortization................... (2,831) (335) ------- ------ 7,943 2,011 ------- ------ $ 19,813 $ 3,597 ======= ====== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Bank line of credit................................................. $ 4,323 $ 743 Note payable to stockholder......................................... 1,000 -- Accounts payable -- Trade............................................................ 7,226 1,780 Moduler Electronics.............................................. 9,546 366 Accrued payroll and bonus........................................... 978 249 Other accrued liabilities........................................... 2,523 540 Current portion of capitalized lease obligations and long-term debt............................................................. 1,520 146 ------- ------ Total current liabilities................................... 27,116 3,824 LONG-TERM LIABILITIES: Capitalized lease obligations and long-term debt, net of current portion.......................................................... 3,485 61 Convertible notes payable to related parties........................ -- 1,902 Convertible notes payable........................................... -- 3,219 ------- ------ Total liabilities........................................... 30,601 9,006 ------- ------ COMMITMENTS AND CONTINGENCIES (NOTE 6) REDEEMABLE SERIES A PREFERRED STOCK: $.000001 par value; 31,200 shares authorized (increased to 70,000 shares in February 1996); 27,785 shares issued and outstanding in 1996, liquidation value of $29,716............................... 27,785 -- ------- ------ STOCKHOLDERS' DEFICIT: Common stock, $.000001 par value; 60,000 shares authorized (increased to 90,000 shares in February 1996); 7,367 and 4,833 shares issued and outstanding in 1996 and 1995, respectively..... -- -- Additional paid-in capital.......................................... 6,004 -- Deferred compensation............................................... (4,320) -- Notes receivable from stockholders.................................. (623) -- Accumulated deficit................................................. (39,634) (5,409) ------- ------ Total stockholders' deficit................................. (38,573) (5,409) ------- ------ $ 19,813 $ 3,597 ======= ======
The accompanying notes to financial statements are an integral part of these balance sheets. F-20 147 JTS CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIOD 52 WEEKS ENDED FROM INCEPTION TO JANUARY 28, 1996 JANUARY 29, 1995 ---------------- ----------------- REVENUES: Product sales............................................... $ 13,502 $ -- Technology license revenue.................................. 5,275 -- -------- ------- 18,777 -- COST OF PRODUCT SALES......................................... 28,548 -- -------- ------- GROSS MARGIN (DEFICIT)........................................ (9,771) -- -------- ------- OPERATING EXPENSES: Research and development.................................... 13,375 3,740 Selling, general and administrative......................... 5,579 1,495 Manufacturing start-up costs................................ 3,812 -- -------- ------- Total operating expenses............................ 22,766 5,235 -------- ------- OPERATING LOSS................................................ (32,537) (5,235) OTHER INCOME (EXPENSE): Interest income............................................. 108 -- Interest expense............................................ (589) (144) Other, net.................................................. (32) (30) -------- ------- NET LOSS...................................................... $(33,050) $(5,409) ======== ======= NET LOSS PER COMMON SHARE..................................... $ (7.17) $ (1.12) ======== ======= SHARES USED IN COMPUTING NET LOSS PER SHARE................... 4,611 4,833 ======== =======
The accompanying notes to financial statements are an integral part of these statements. F-21 148 JTS CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE --------------- PAID-IN DEFERRED FROM ACCUMULATED SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT TOTAL ------ ------ ---------- ------------ ------------ ----------- -------- BALANCE AT INCEPTION, FEBRUARY 3, 1994........ -- $ -- $ -- $ -- $ -- $ -- $ -- Issuance of common stock to founders at $.000001 per share... 4,350 -- -- -- -- -- -- Issuance of common stock at $.000001 in exchange for technology license... 483 -- -- -- -- -- -- Net loss for the period............... -- -- -- -- -- (5,409) (5,409) ----- --- ------ ------- ----- -------- -------- BALANCE, JANUARY 29, 1995.................... 4,833 -- -- -- -- (5,409) (5,409) Exchange of common stock for Redeemable Series A preferred stock.... (483 ) -- -- -- -- (1,000) (1,000) Issuance costs of Redeemable Series A preferred stock...... -- -- -- -- -- (175) (175) Shares issued under the stock option plan.... 17 -- 4 -- -- -- 4 Shares issued under restricted stock purchase agreements........... 3,000 -- 6,000 (5,250) (623) -- 127 Amortization of deferred compensation......... -- -- -- 930 -- -- 930 Net loss................ -- -- -- -- -- (33,050) (33,050) ----- --- ------ ------- ----- -------- -------- BALANCE, JANUARY 28, 1996.................... 7,367 $ -- $6,004 $ (4,320) $ (623) $ (39,634) $(38,573) ===== === ====== ======= ===== ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-22 149 JTS CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD 52 WEEKS ENDED FROM INCEPTION TO JANUARY 28, 1996 JANUARY 29, 1995 ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................................... $(33,050) $(5,409) Adjustments to reconcile net loss to net cash used in operating activities -- Receivable from Moduler Electronics........................ (5,859) (1,033) Payable to Moduler Electronics for finished goods inventory................................................ 9,180 366 Depreciation and amortization expense...................... 2,496 551 Reserve for bad debts...................................... 726 4 Issuance of preferred stock for services rendered.......... 30 -- Payables converted to note payable and subsequently to preferred stock.......................................... 300 1,902 Amortization of deferred compensation...................... 930 -- Changes in assets and liabilities: Trade receivables........................................ (1,999) (17) Other receivables........................................ (757) (28) Inventories.............................................. (1,735) (312) Prepaid and other current assets......................... (86) (154) Accounts payable......................................... 5,446 1,780 Accrued liabilities...................................... 2,712 686 -------- ------- Net cash used in operating activities................. (21,666) (1,664) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment............................ (3,132) (1,984) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank line of credit............................. 3,580 743 Proceeds from issuance of common stock........................ 104 -- Proceeds from issuance of preferred stock..................... 18,556 -- Preferred stock issuance costs................................ (175) -- Payments on capital lease obligations......................... (408) (10) Payments on long-term debt.................................... (90) (90) Proceeds from notes payable................................... 3,778 3,005 -------- ------- Net cash provided by financing activities............. 25,345 3,648 -------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS......................... 547 -- CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD............ -- -- -------- ------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.................. $ 547 $ -- ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest........................................ $ 449 $ -- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Sale of common stock for notes................................ $ 750 $ -- Equipment purchased under capital leases...................... 5,296 82 Conversion of notes payable to preferred stock................ 9,199 -- Issuance of convertible debt upon Kalok acquisition........... -- 214 Equipment ($280) and inventory ($49) acquired net of related accrued liabilities of $104 from Kalok..................... -- 225 Issuance of debt upon acquisition of Kalok.................... -- 225 Exchange of TEAC common stock to preferred stock.............. 1,000 --
The accompanying notes to financial statements are an integral part of these statements. F-23 150 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND OPERATIONS: JTS Corporation (the "Company"), a Delaware corporation, formerly JT Storage, Inc. (Note 12), was incorporated on February 3, 1994 to develop, market and manufacture hard disk drives. The Company was a development stage company prior to the commencement of production shipments in October 1995. Accordingly, the Company ceased to be in the development stage at that time. Moduler Electronics (India) Private Limited ("Moduler Electronics"), a company owned by the family of a major stockholder manufactured, on a contract basis, all of the Company's products. In April 1996, the Company acquired 90% of Moduler Electronics (Note 10). On February 4, 1994, as part of a settlement in United States Bankruptcy Court, the Company acquired certain assets and assumed certain liabilities of Kalok Corporation ("Kalok") in exchange for a note payable to the Kalok Bankruptcy estate (Note 5) and a warrant to Kalok's unsecured creditors (Note 7). Liabilities assumed of $543,172 exceeded the fair market value of assets acquired by approximately $215,000 which, due to uncertainties regarding its realization, was expensed in the accompanying 1995 statement of operations. In connection with the settlement agreement, the Company acquired certain proprietary disk drive technology from TEAC Corporation ("TEAC") in exchange for 482,850 shares of common stock, which represented 10% of the outstanding Common Stock of the Company. No value was assigned to the acquired technology as it had no cost basis to TEAC and the common stock was deemed to have nominal value. On February 3, 1995, the Company agreed to issue 1,000,000 shares of Redeemable Series A preferred stock to TEAC in exchange for the return of the 482,850 shares of common stock and the cancellation of a shareholder agreement with TEAC (Note 8). The Company has continued to develop its technology and manufacturing capabilities during fiscal 1996. This development has resulted in substantial increases in accounts receivable, accounts payable, bank borrowings, and a net working capital deficit of $15,246,000 as of January 28, 1996. Operations subsequent to year end indicate the Company has continued to suffer losses and its working capital deficit has continued to increase. These factors raise a substantial doubt about the ability of the Company to continue as a going concern. The Company's management is pursuing plans to merge with Atari Corporation ("Atari"). In the opinion of management, the merger, if successful, would raise cash adequate to fund operations for at least the next 12 months. Thereafter, the Company will require additional funding. Subsequent to year end, Atari extended a $25 million loan to the Company of which $19.7 million had been used as of April 4, 1996. In the event the merger (Note 10) is not consummated, the loan will, at Atari's option, either be due September 30, 1996 or converted into the Company's preferred stock. In addition, Moduler Electronics received approval of additional financing from another Indian bank resulting in total unused credit facilities of approximately $12 million, subject to certain conditions. 2. ACCOUNTING POLICIES: Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Revenue Recognition and Product Warranty Revenue from product sales is generally recognized upon shipment to customers. The Company warrants its products against defects in design, materials and workmanship generally for three years. A provision for estimated future costs relating to warranty expense is recorded when products are shipped. F-24 151 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Inventories Inventories include direct materials at third party component manufacturers (other than Moduler Electronics) and are recorded at the lower of cost (first-in, first-out) or market and consist of the following (in thousands):
1996 1995 ------ ---- Raw materials................................. $2,093 $309 Finished goods................................ -- 49 ----- -- ------- $2,093 $358 ======= =======
Equipment and Leasehold Improvements Property and equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives of three years. Repairs and maintenance costs are expensed as incurred. Major renewals and betterments which substantially extend the useful life of the asset are capitalized. The Company had equipment with an historical cost of approximately $4,400,000 and $530,000 located at Moduler Electronics at January 28, 1996 and January 29, 1995, respectively. Research and Development Research and development costs are expensed as incurred and consist primarily of salaries, materials and supplies. Income Taxes The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with maturities of less than three months to be cash equivalents. Fiscal year The fiscal year of the Company is a 52- or 53-week period ending on the Sunday closest to January 31. The fiscal year for the year ended January 28, 1996 was a 52-week period. Reclassifications Certain reclassifications have been made to prior period financial statements to conform to the current presentation. Income from Technology License In February 1995, the Company entered into a technology transfer and perpetual license agreement. Under this agreement, the Company granted non-exclusive, perpetual rights to manufacture and sell certain of its products. In connection with the agreement, the Company was obligated to achieve certain milestones F-25 152 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) regarding the successful completion of engineering tests, the delivery of working models and the commencement of volume production. As of January 28, 1995 the Company had delivered a working prototype and accordingly, recognized income of $5,275,000 in connection with achieving specified milestones in fiscal 1996. The remaining income of $1,125,000 will be recognized as future milestones are achieved. Funds received under this agreement are not reimbursable to the licensee. Net Loss Per Common Share Net loss per common share is based on the weighted average number of shares of common stock outstanding during the periods. The outstanding shares and earnings per share have been restated for all periods presented to reflect the impact of the stock split described in Note 7. 3. INCOME TAXES: The significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
1996 1995 -------- ------- Deferred tax assets: Accounts receivable reserves............................ $ 292 $ -- Inventory reserves...................................... 1,731 -- Items not currently deductible principally manufacturing start-up costs related to Moduler Electronics........ 2,327 181 Net operating loss carryforwards........................ 9,930 1,819 Tax credit carryforwards................................ 600 135 --------- -------- Total deferred tax assets................................. 14,880 2,135 Valuation allowance....................................... (14,828) (2,135) --------- -------- Deferred tax assets, net of valuation allowance........... 52 -- Deferred tax liabilities -- accelerated depreciation...... (52) -- --------- -------- Net deferred tax assets................................... $ -- $ -- ========= ========
Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the net deferred tax assets such that a valuation allowance has been recorded to completely offset the net deferred tax assets. Such factors include recurring operating losses from inception, recent increases in expense levels to support the Company's growth, and the fact that the market in which the Company competes is intensely competitive and is characterized by rapidly changing technology. For income tax reporting purposes, the Company has Federal and State net operating loss carryforwards of approximately $27,000,000 and $13,500,000, respectively, and Federal and State research and development tax credit carryforwards of approximately $350,000 and $250,000, respectively, all of which will expire on various dates through 2011. The Internal Revenue Code contains provisions which may limit the amount of tax carryforwards available to be used in any given year upon the occurrence of certain events, including changes in ownership interests. F-26 153 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. RELATED PARTY TRANSACTIONS: Moduler Electronics Transactions As discussed in Note 1, the Company uses Moduler Electronics to manufacture all of the Company's products. The Company purchased finished goods from Moduler Electronics amounting to approximately $14 million in fiscal 1996 and the majority of the accounts payable balance to Moduler Electronics at January 28, 1996 is a result of these purchases. The Company made cash advances totalling approximately $2.5 million and also sold fixed assets and inventory totalling approximately $8.3 million to Moduler Electronics in fiscal 1996. The advances were made to fund the manufacturing start-up of disk drives for the Company. Because the Company intended to (and subsequently did) acquire 90% of Moduler Electronics (Note 10) and the ultimate realizability of these advances is subject to the achievement by Moduler Electronics of successful operations, the Company has expensed 90% of Moduler's Electronics' fiscal 1996 net loss in order to reflect its investment in Moduler Electronics' start-up operations. The Company entered into an agreement with Moduler Electronics whereby the Company has undertaken to bear all inventory loss and the cost of any future warranty claims, product return and rework charges. In fiscal 1996, the Company assumed approximately $3,448,000 and $171,000 of inventory reserve and warranty costs, respectively. Notes Receivable From Stockholders In January 1996, the Company loaned certain executive officers $750,000 which was used by the officers to purchase 3,000,000 shares of common stock under restricted stock purchase agreements. The notes bear interest at an annual rate of 5.91% and the principal and interest is payable in four annual installments. The notes are with full recourse and are collateralized by the stock purchased. As of February 28, 1996, $127,500 had been collected on these notes. The remaining balance of $622,500 is included in stockholders' deficit in the 1996 accompanying balance sheet. Note Payable to Stockholders In January and February 1996, the Company entered into unsecured loan agreements totalling $1,965,000 with certain stockholders. The notes bear interest at 10% per annum and the principal and interest are due on July 15, 1996. Convertible Notes Payable As of January 29, 1995, the Company had $5,121,186 outstanding under certain convertible notes payable. These notes were converted into 5,121,186 shares of redeemable preferred stock in February 1995. The Company also had $2,764,953 outstanding under certain convertible notes payable in June 1995 which were converted into 2,764,953 shares of redeemable preferred stock in August 1995. 5. NOTES PAYABLE: Bank Line of Credit In December 1995, the Company established a line of credit for $5 million. As of April 4, 1996, $4,323,000 was outstanding under the line. The line of credit is collateralized by certain assets, bears interest at 9.5%, is due monthly and the principal is due on June 30, 1996. The line of credit contains certain financial covenants, among others, relating to minimum financial ratios and minimum tangible net worth. The Company was not in compliance with these covenants at January 28, 1996. The bank has waived compliance F-27 154 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) with these covenants until such time as the merger with Atari occurs (Note 10); however, the Company may not draw further on the line. Capitalized Lease Obligations and Long-Term Debt In conjunction with the purchase of certain assets of Kalok (see Note 1), the Company issued a non-interest bearing note payable to the Kalok bankruptcy estate for $225,000. The note is payable in 10 equal quarterly installments of $22,500, with the final payment due July 1, 1996. In fiscal 1995, the Company entered into equipment lease agreements under which it can lease up to $6.5 million of equipment through July 1996. Payments are due in equal monthly installments over a 36 to 48 month period. As of January 28, 1996, the cost of the leased assets was $5,377,588 and the related accumulated depreciation was $1,087,644. The leases bear interest between 11.5% and 18.2%. The following is a schedule of future payments under the note payable to Kalok and equipment leases together with the present value of the net minimum lease payments at January 28, 1996:
YEARS ENDING ----------------------------------------------- AMOUNT -------------- (IN THOUSANDS) 1997........................................... $ 2,077 1998........................................... 2,021 1999........................................... 2,198 2000........................................... 285 -------- Total net minimum lease payments............... 6,581 Less -- Amount representing interest........... (1,576) -------- Present value of net minimum lease payment..... 5,005 Less -- Current portion........................ (1,520) -------- Long term portion.............................. $ 3,485 ========
6. COMMITMENTS AND CONTINGENCIES: Lease Commitments The Company leases its facilities and certain equipment under non-cancelable operating leases. The future payments under these leases at January 28, 1996 are as follows:
YEARS ENDING ----------------------------------------------- AMOUNT -------------- (IN THOUSANDS) 1997........................................... $ 583 1998........................................... 578 1999........................................... 553 2000........................................... 571 2001........................................... 243 ------ $2,528 ======
Total rent expense for the periods ended January 29, 1995 and January 28, 1996 was approximately $180,000 and $425,000, respectively. Royalty Obligation As discussed in note 1 the Company licenses certain technology from TEAC. In the event the Company commences selling certain products incorporating certain TEAC Technology it will incur a royalty obligation of up to 2% of sales for a certain period. The Company was not marketing any products incorporating TEAC developed technology and accordingly, no royalties were due as of January 28, 1996. F-28 155 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMON STOCK: Stock Split and Capitalization In February 1995, the Board of Directors approved a 4,350-for-1 common stock split. All share and per share amounts in the accompanying financial statements have been restated to reflect this split. In February 1996 the Company amended its certificate of incorporation and authorized 90,000,000 and 70,000,000 shares of common and Redeemable Series A Preferred Stock, respectively. Warrants The Company has issued warrants to purchase 100,000 shares of common stock to the unsecured creditors of Kalok Corporation in conjunction with the Company's acquisition of Kalok's assets. The warrants may be exercised for a one-year period commencing on the earlier of the closing of an initial public offering or the public registration of the Company's stock. The exercise price of the warrant is 25% of the initial public offering price or the fair market value of the Company's stock if the Company becomes a public registrant absent an initial public offering. Such warrants were deemed to have nominal value at the issuance date and, accordingly, are carried at no value in the accompanying financial statements. The Company has also issued warrants to purchase 500,000 shares of common stock at $1.00 and $3.00 to the equipment lease company and the bank with which it has a line of credit, respectively. The warrants may be exercised at any time before various dates through 2001. In the event of any acquisition, the warrant to purchase 450,000 shares issued to the equipment lease company will terminate. Restricted Stock Purchase Agreement The Company issued 3,000,000 shares of its common stock to certain officers in exchange for a $750,000 note receivable (Note 4). The Company has the right to repurchase the unvested portion of the shares at the original purchase price. The Company's right to repurchase these shares lapses over 48 months. Such shares, however, will automatically vest in the event there are certain changes of control of the Company. The merger (Note 10) constitutes a change of control. As of January 28, 1996, 2,469,271 shares issued were subject to repurchase. In connection with the issuance of the common stock the Company recorded deferred compensation of $5,250,000 for the difference between the per share sales price of $.25 and $2.00 (the per share fair market value at the date of grant for financial reporting purposes). The Company will recognize the deferred compensation as expense over the related vesting period. Stock Option Plan The Company has reserved 4,300,000 shares of common stock for issuance under its 1995 Stock Option Plan. Under the plan, either incentive or nonstatutory stock options may be granted to purchase shares of common stock. Nonstatutory stock options may be granted to employees, nonemployee members of the Board of Directors and consultants at prices not less than 85% of the fair value of the stock at the date of the grant, as determined by the Board. Incentive stock options may be granted only to employees at prices not lower than the fair value of the stock at the date of grant, as determined by the Board. Options granted under the plan are generally exercisable at any time, and expire no later than ten years from the date of grant. Options granted vest at a rate of 25% per annum. The following table presents the option activity under the Option Plan for the period from inception to January 28,1996. F-29 156 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OPTION NUMBER OF PRICE OPTIONS PER SHARE --------- --------- Options outstanding at January 29, 1995..................... -- -- Granted..................................................... 3,996,675 $ .25 Exercised................................................... (16,729 ) $ .25 Forfeited................................................... (219,199 ) $ .25 --------- ---- Options outstanding at January 28, 1996..................... 3,760,747 $ .25 --------- ---- Exercisable at January 28, 1996............................. 627,193 $ .25 ========= ====
In February and March 1996, the Company issued options to purchase 486,000 shares of common stock to various employees. Such options are ratably exercisable ranging from $.25 to $2.95 per share and vest ratably over a four year period. In March 1996, two officers purchased 1,000,000 shares of the Company's Common Stock each at a purchase price of $1.00 per share. All of such shares are subject to a right of repurchase which lapses after five years of service with the Company provided, however, that the right of repurchase will lapse at the rate of one-eighth in September 1996 and 1/48(th) per month thereafter if the merger with Atari closes (Note 10). Common Stock Reserved for Future Issuance As of January 28, 1996, the Company has reserved the following shares of common stock for issuance in connection with: Conversion of redeemable preferred stock................. 27,785,370 Conversion of redeemable preferred stock expected to be issued in connection with the Moduler Electronics acquisition............................................ 1,911,000 Stock option plan........................................ 4,283,271 Warrants to purchase common stock........................ 600,000 ---------- 34,579,641 ==========
8. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK: In fiscal 1996, the Company issued 27.8 million shares of Series A preferred stock at $1.00 per share for cash and conversion of certain notes payable. The Company also issued 30,000 shares of Series A preferred stock to a consultant for services. The Company also issued 1,000,000 shares of preferred stock to TEAC in exchange for 482,850 shares of the Company's common stock and the termination of the TEAC stockholder agreement. The exchange with TEAC was accounted for as an equity transaction and the value of the preferred stock issued was charged to accumulated deficit in the accompanying 1996 statement of operations. The rights, restrictions and preferences of the preferred stock are as follows: - Annual dividends of $.09 per share per annum, when and if declared by the Board of Directors. Dividends are cumulative and are payable, at the option of the Company, in cash or shares of common stock. - In the event of any liquidation, dissolution or winding up of the Company, the holders of preferred stock shall be entitled to receive proceeds equal to $1.00 per share plus the greater of (i) all cumulative unpaid dividends or (ii) any declared and unpaid dividends for preferred stock then held by them. This distribution will occur prior to any distribution to the common shareholders. At January 28, 1996, the liquidation preference was $29,715,761. F-30 157 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - Upon the election of the holders of a majority of the outstanding shares of preferred stock, 33%, 33% and 34% of the stock will be redeemed in cash by the Company on February 4, 2000, February 4, 2001, and February 4, 2002, respectively. The redemption price shall be equal to $1.00 plus all accrued but unpaid dividends. - The following table represents the redemption amounts required under the agreement:
YEAR --------------------------------------------- AMOUNT -------------- (IN THOUSANDS) 2000......................................... $ 9,905 2001......................................... 9,905 2002......................................... 9,906 ------- $ 29,716 =======
- At the option of the holder, each preferred share is convertible into one share of common stock. The conversion rate is subject to change upon the occurrence of certain events. The preferred stockholders have agreed to convert each share of preferred stock into one share of common stock prior to the closing of the merger with Atari (Note 10). - The preferred stock converts automatically into common stock at the earlier of (i) the closing of an underwritten public offering of the Company's common stock at a price of not less than $5.00 per share and an aggregate offering price of greater than $10,000,000, or (ii) upon the affirmative election of the holders of at least 66.7% of the then outstanding preferred stock. - The holders of preferred stock are entitled to one vote for each share of common stock into which such share may be converted. 9. EXPORT SALES AND SIGNIFICANT CUSTOMERS: The Company operates in a single industry segment. The Company markets its products in the United States and in foreign countries through its sales personnel, independent sales representatives and original equipment manufacturers. The Company's geographic sales as a percent of 1996 net revenues are as follows: United States.......................................... 19% Europe................................................. 81% --- 100% ===
Sales to major customers as a percentage of 1996 product sales are as follows: Olidata................................................. 34% Connexe................................................. 12% Liuski.................................................. 11% Aashima................................................. 10%
10. PROPOSED MERGER AND ACQUISITION: Atari Corporation On February 12, 1996, the Company entered into a merger agreement with Atari providing for the merger of the Company and Atari. The merger requires shareholder approval and is expected to be consummated in the second quarter of calendar year 1996. In connection with the merger, Atari extended a bridge loan to the Company in the amount of $25.0 million maturing on September 30, 1996 with a stated interest rate of 8 1/2% per annum. If the merger is not consummated, the bridge loan is convertible at the option of Atari or the F-31 158 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Company into shares of the Company's Series A preferred stock and warrants to acquire the Company's Series A preferred stock, subject to certain conditions. Moduler Electronics In March 1995, the Company agreed to acquire the hard disk drive division of Moduler Electronics for 1,911,673 shares of the Company's Series A preferred stock and a warrant to purchase 500,000 shares of the Company's common stock at an exercise price of $.25 per share. The Company subsequently assumed operational and management control of certain portions of the hard disk drive business of Moduler Electronics. The verbal agreement contemplated that prior to the Company's acquisition, Moduler Electronics would divest itself of certain voice coil assembly and other operations not directly involved in its hard disk drive business. In April 1996, following Moduler Electronics' divestiture of its voice coil business and businesses unrelated to its hard disk drive operations, the Company acquired 90% of the outstanding capital stock of Moduler Electronics. Upon the closing of the transaction, the Company acquired the stock in consideration for 1,911,673 shares of the Company's Series A preferred stock and a warrant to purchase 750,000 shares of the Company's common stock at an exercise price of $0.25 per share. The warrant is immediately exercisable as to 500,000 shares of the Company's common stock and becomes exercisable with respect to the remaining 250,000 shares when there becomes available to Moduler Electronics certain borrowings and credit facilities in the amount of $29,000,000. Subject to the foregoing, the warrant may be exercised at any time until February 25, 2001. 11. RETIREMENT SAVING PLAN In January 1996, the Company adopted the Employee 401(K) Saving Plan ("the plan"). The plan covers substantially all of employees and allows participants to defer a portion of their annual compensation on a pre-tax basis. The plan permits, but does not require, additional matching contributions and profit sharing contributions to the plan by the Company on behalf of all participants. In fiscal 1996, the Company did not make any such contributions. 12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED): Change in Name On June 18, 1996, the Company changed its name to JTS Corporation from JT Storage, Inc. Litigation The Company has been served with a complaint filed in the Superior Court of the State of California in and for the County of Santa Clara by Venture Lending & Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment from its initial location to Madras, India, in alleged violation of the lease agreement. The complaint alleges fraud and breach of the lease agreement and seeks damages of approximately $4.6 million. F-32 159 JTS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 28, 1996 APRIL 28, ----------- 1996 --------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash, cash equivalent and restricted cash............................. $ 5,116 $ 547 Trade accounts receivable, less allowance for doubtful accounts of $1,086 and $730, respectively....................................... 9,608 1,286 Receivable from Moduler Electronics................................... -- 6,892 Other receivables..................................................... 1,182 812 Inventories........................................................... 12,983 2,093 Prepaid and other current assets...................................... 1,585 240 ------ ------ 30,474 11,870 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............................. 16,212 7,943 GOODWILL.............................................................. 185 -- ------ ------ TOTAL....................................................... $ 46,871 $ 19,813 ====== ====== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Bank line of credit................................................... $ 10,277 $ 4,323 Notes payable to stockholders......................................... 1,965 1,000 Note payable to Atari Corporation..................................... 25,000 -- Accounts payable -- Trade............................................................... 18,240 7,226 Moduler Electronics................................................. -- 9,546 Accrued liabilities................................................... 4,536 3,501 Current portion of capitalized lease obligation and long-term debt.... 1,651 1,520 ------ ------ 61,669 27,116 ------ ------ LONG-TERM OBLIGATIONS................................................. 6,381 3,485 ------ ------ REDEEMABLE SERIES A PREFERRED STOCK: $.000001 par value -- authorized 70,000 shares; outstanding: 29,687 and 27,785 shares, respectively..................................... 29,697 27,785 ------ ------ STOCKHOLDERS' DEFICIT: Common stock, $.000001 par value -- authorized 90,000 shares; outstanding: 9,421 and 7,367 shares, respectively................... -- -- Additional paid-in capital............................................ 8,213 6,004 Deferred compensation................................................. (3,990) (4,320) Notes receivable from stockholders.................................... (2,610) (623) Accumulated deficit................................................... (52,489) (39,634) ------ ------ (50,876) (38,573) ------ ------ TOTAL....................................................... $ 46,871 $ 19,813 ====== ======
See accompanying notes. F-33 160 JTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 28, 1996 APRIL 30, 1995 -------------- -------------- REVENUE: Product sales................................................... $ 17,481 $ 48 Technology license revenue...................................... 100 2,029 -------------- ------- 17,581 2,077 -------------- ------- COST AND EXPENSES: Cost of sales................................................... 19,434 43 Research and development........................................ 7,406 1,758 Selling, general and administrative............................. 3,103 718 -------------- ------- 29,943 2,519 -------------- ------- OPERATING LOSS (12,362) (442) Interest income................................................... 105 -- Interest expense.................................................. (542) -- Other expense, net................................................ (56) (2) -------------- ------- NET LOSS $(12,855) $ (444) ========== ========== NET LOSS PER COMMON SHARE......................................... $ (1.47) $(0.10) ========== ========== SHARES USED IN COMPUTING NET LOSS PER SHARE....................... 8,732 4,360 ========== ========== See accompanying notes.
F-34 161 JTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
QUARTER ENDED --------------------------------- APRIL 28, 1996 APRIL 30, 1995 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operations....................................... $(21,216) $ (3,228) CASH FLOWS FROM INVESTING ACTIVITIES: Property purchases................................................ (1,763) (1,654) Cash acquired from the Moduler acquisition........................ 1,634 -- -------- -------- Net cash used in investing activities............................. (129) (1,654) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of preferred stock......................... -- 8,855 Proceeds from note payable -- Atari Corporation................... 25,000 -- Other............................................................. 914 (841) -------- -------- Net cash provided by financing activities......................... 25,914 8,014 NET INCREASE IN CASH AND EQUIVALENTS.............................. 4,569 3,132 CASH AND EQUIVALENTS: Beginning of period............................................... 547 -- -------- -------- End of period..................................................... $ 5,116 $ 3,132 ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of preferred stock in connection with the Moduler acquisition..................................................... $ 1,912 $ -- Assets of $17,296 acquired net of related liabilities of $15,449 assumed from Moduler............................................ 1,847 -- ======== ========
See accompanying notes. F-35 162 JTS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. The condensed financial statements should be read in conjunction with the financial statements and notes thereto for the full year included elsewhere in this document. The Company operates with a 52/53 week fiscal calendar. Both quarters covered by this report have 13 weeks and for simplicity of presentation, the calendar quarter date is used to represent the quarter end. The actual fiscal closing date for the first quarter of 1996 and 1995 was April 28 and April 30, respectively. NOTE 2. ACQUISITION OF MODULER ELECTRONICS In April 1996, the Company acquired 90% of the outstanding shares of Moduler Electronics, a disk drive manufacturer. The Company acquired the stock in consideration for 1,911,673 shares of the Company's Series A preferred stock and a warrant to purchase 750,000 shares of the Company's common stock at an exercise price of $0.25 per share. The acquisition was accounted for as a purchase. In connection with the acquisition, net assets acquired were as follows: Inventories and other current assets.............................. $ 9,542 Equipment and leasehold improvements.............................. 7,754 Current liabilities assumed....................................... (12,681) Long-term liabilities assumed..................................... (2,768) -------- Net assets acquired..................................... $ 1,847 ========
The table below reflects condensed pro forma operating results of the combined companies for the three months then ended as if the acquisition took place at the beginning of each period.
APRIL 28, APRIL 30, 1996 1995 --------- --------- Revenues................................................ $ 17,581 $ 2,077 Net loss................................................ $ (12,820) $ (1,143)
NOTE 3. INVENTORIES Inventories consist of the following (in thousands):
APRIL 28, JANUARY 28, 1996 1996 --------- ----------- Raw materials.......................................... $ 9,355 $ 2,093 Work in process........................................ 3,353 -- Finished goods......................................... 275 -- ------- ------ $ 12,983 $ 2,093 ======= ======
NOTE 4. MERGER WITH ATARI CORPORATION On February 12, 1996, the Company entered into a merger agreement with Atari providing for the merger of the Company and Atari. On April 8, 1996, the merger agreement was amended and restated. The merger required shareholder approval and is expected to be consummated in the second quarter of 1996. In connection with the merger, Atari extended a bridge loan to the Company in the amount of $25.0 million maturing on September 30, 1996 with a stated interest rate of 8 1/2% per annum. If the merger is not consummated, the bridge loan is convertible at the option of Atari or the Company into shares of the Company's Series A preferred stock, subject to certain conditions. F-36 163 REPORT OF ARTHUR ANDERSEN LLP To Moduler Electronics (India) Private Limited: We have audited the accompanying statements of assets and liabilities of The Hard Disk Drive Division of Moduler Electronics (India) Private Limited as of January 28, 1996 and January 31, 1995, and the related statements of revenues and expenses and cash flows for the year ended January 28, 1996. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements referred to above have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the joint proxy statement of Atari Corporation and JTS Corporation, formerly JT Storage, Inc.) as described in Note 1, and are not intended to be a complete presentation of the assets, liabilities, revenues, expenses and cash flows of Moduler Electronics (India) Private Limited. In our opinion, the financial statements referred to above present fairly, in all material respects, the assets and liabilities of The Hard Disk Drive Division of Moduler Electronics (India) Private Limited as of January 28, 1996 and January 31, 1995, and the related revenues, expenses and cash flows for the year ended January 28, 1996 in conformity with generally accepted accounting principles in the United States of America. The accompanying financial statements have been prepared assuming that the Division will continue as a going concern. As discussed in Note 1 to the financial statements, the Division has suffered a loss from operations and has an excess of liabilities over assets that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. San Jose, California April 4, 1996 F-37 164 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED STATEMENTS OF ASSETS AND LIABILITIES (CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
JANUARY 28, JANUARY 31, 1996 1995 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................................... $ 488 $ 65 Restricted cash balances............................................ 380 197 Due from other business units, net.................................. -- 776 Advances to suppliers............................................... 249 12 Inventories......................................................... 5,983 1,296 Prepaid expenses and other current assets........................... 264 61 ------- ------ Total current assets........................................ 7,364 2,407 PLANT AND EQUIPMENT, at cost, net of accumulated depreciation......... 5,603 1,645 ------- ------ Total assets................................................ $12,967 $ 4,052 ------- ------ LIABILITIES CURRENT LIABILITIES: Secured short term borrowings....................................... $ 6,085 $ 367 Current portion of long term loans and capital lease obligations.... 105 67 Due to related parties, net......................................... 1,168 1,261 Accounts payable.................................................... 6,268 1,494 Accrued liabilities................................................. 197 46 ------- ------ Total current liabilities................................... 13,823 3,235 CAPITAL LEASE OBLIGATIONS, net of current portion..................... 21 -- SECURED LONG TERM LOANS, net of current portion....................... 2,742 200 ------- ------ Total liabilities........................................... 16,586 3,435 ------- ------ NET (LIABILITIES) ASSETS.............................................. $(3,619) $ 617 ======= ======
The accompanying notes to financial statements are an integral part of these statements. F-38 165 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED STATEMENT OF REVENUES AND EXPENSES FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996 (CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS) NET REVENUES...................................................................... $ 15,580 COST OF GOODS SOLD................................................................ (19,160) -------- Gross margin (deficit)....................................................... (3,580) OTHER INCOME/(EXPENSE): Interest and other income....................................................... 141 Foreign currency loss........................................................... (333) Interest expense................................................................ (464) -------- Net loss........................................................................ $ (4,236) ========
The accompanying notes to financial statements are an integral part of this statement. F-39 166 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996 (CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................................................................... $(4,236) Adjustments to reconcile net loss to net cash used in operating activities -- Depreciation expense.......................................................... 667 Write-off of plant and equipment.............................................. 558 Decrease/(increase) in current assets -- Due from other business units, net.......................................... 776 Advances to suppliers....................................................... (237) Inventories................................................................. (4,687) Prepaid expenses and other current assets................................... (203) Increase (decrease) in current liabilities -- Due to related parties, net................................................. (93) Accounts payable............................................................ 4,774 Accrued liabilities......................................................... 151 -------- Net cash used in operating activities.................................... (2,530) -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of plant and equipment................................................. (2,491) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net secured short term borrowings................................................ 5,718 Principal payments under secured long term loan.................................. (91) -------- Net cash provided by financing activities................................ 5,627 -------- NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH......................... 606 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period.................... 262 -------- CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period.......................... $ 868 ========
The accompanying notes to financial statements are an integral part of this statement. F-40 167 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS 1. OPERATIONS AND BASIS OF PRESENTATION: BASIS OF STATEMENTS The accompanying statements of assets and liabilities of the Hard Disk Drive Division ("the Division") of Moduler Electronics (India) Private Limited ("the Company") as of January 31, 1995 and January 28, 1996 and the related statements of revenues and expenses and of cash flows for the period from February 1, 1995 to January 28, 1996 ("the statements") have been prepared in conformity with generally accepted accounting principles in the United States of America, from the accounting books and records maintained by the Company at Madras, India. The statements have been prepared for the purpose of inclusion in the registration statement on Form S-4 to be filed by JTS Corporation ("JTS", formerly JT Storage, Inc.) in compliance with the rules and regulations of the Securities and Exchange Commission. The Form S-4 filing of JTS is pursuant to its proposed acquisition of Atari Corporation ("Atari"). In April 1996, JTS acquired 90% of the outstanding equity shares of the Company. The Division is likely to be the only remaining business of the Company after the transfer of the Voice Coil Magnetic Assembly ("VCMA") business to an entity owned by the Chairman of the Company and his family members. As of April 4, 1996, this transfer had been made, subject to completion of legal documentation. Although the Company began business in fiscal 1986, the Division first began significant operations in fiscal 1996. Division operations prior to fiscal 1996 were insignificant; accordingly, the accompanying financial statements include the Statements of Assets and Liabilities of the Division as of January 28, 1996 and January 31, 1995 and the related Statement of Revenues and Expenses for the period from February 1, 1995 to January 28, 1996. These statements were prepared from the Balance Sheet and the Income Statement, respectively, of the total businesses of the Company, from which balances and transactions relating to the businesses that are being divested were excluded. The Division developed its disk drive manufacturing capabilities during fiscal 1996 which has resulted in an operating loss and a working capital deficit of $6,459,000. In addition, the Company will require additional capital in order to achieve volume production. The Division's disk drive production is dedicated exclusively to JTS and JTS has recently completed its acquisition of 90% of the Division. The auditors' report on the JTS financial statements dated April 4, 1996 contains a paragraph regarding a substantial doubt regarding the ability of JTS to continue as a going concern. These factors raise a substantial doubt about the Division's ability to continue as a going concern. As discussed above, JTS plans to merge with Atari. In the opinion of management, the Atari merger, if successful, would raise capital adequate to fund operations for the next 12 months. Since the Company did not maintain separate accounting records for the Division, certain estimates, which management believed to be reasonable, were required in order to segregate the Division's account balances as of January 31, 1995 as well as to reflect the proposed divestiture of other businesses as of January 28, 1996. The segregation of account balances relating to the Division was made on the following bases: - Identification basis -- Account balances relating to assets, liabilities, revenues and expenses ("account balances") pertaining to the Division were specifically identified and segregated. - Agreed basis -- Account balances which have been specifically agreed to be assumed by the Division were identified and segregated. - Transfer basis -- Account balances pertaining to other businesses which were being divested, were identified and excluded. F-41 168 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - Allocation basis -- Account balances related to expenses incurred by the Company for the Division have been included in total as the Division was the significant portion of the Company's operations for fiscal 1996. INCORPORATION The Company was incorporated on March 24, 1986 as a private company under the Indian Companies Act, 1956 in the state of Maharashtra. The Company is owned principally by Asperal Holdings, Inc. and Dexar Holdings, Inc., companies registered in Panama, which have a 45% equity stake each. The remaining 10% of the Company's outstanding equity shares are owned by the Chairman of the Company, Mr. Manohar Lal Tandon, and his relatives ("the Tandon Family"). The Company was established to operate a 100 percent Export Oriented Unit ("EOU") in the Madras Export Processing Zone ("MEPZ"), a free trade zone established by the Government of India at Madras, Tamil Nadu, India. The Company's industrial unit is located in a government provided low cost standard design factory within the MEPZ. The Company initially undertook the manufacture of computer hard disk drive components such as Head Gimble Assemblies ("HGA") and Head Stack Assemblies ("HSA"). During the first five years of operations, the Company diversified its product line to include two other products, namely, VCMA and Switch Mode Power Supplies ("SMPS"). During fiscal 1994, the Company closed its SMPS division and established another EOU for the assembly of hard disk drives. Under the approval obtained from the Government of India in September 1994, the Company was originally licensed to manufacture, on an average, 286,000 hard disk drives annually. In November 1995, the Company obtained a revised approval to manufacture, on an average, 807,000 hard disk drives and 418,000 subassemblies (i.e., HGAs and HSAs) annually. In December 1994, the Company discontinued production of HGAs and HSAs for customers other than JTS, with which it began collaborations to manufacture hard disk drives. Though the Division started shipping nominal quantities in January 1995, commercial production of hard disk drives commenced only in October 1995. The Company continued to produce VCMAs until January 18, 1996 when the VCMA business was transferred to a related party. Prior to its divestiture, a portion of the voice coil assemblies produced by the VCMA business was used in the manufacture of hard disk drives, while the rest were sold to a related party. Except for the VCMA business, the Company operated as a captive manufacturer for JTS during fiscal 1996. With its association, JTS has assumed operational and management control of certain portions of the Division and has provided financing for the hard disk drive business and corporate support in areas such as process engineering, tooling, vendor selection and financial management. Since assuming operational control, JTS has employed several expatriates consisting of disk drive industry professionals who have filled senior positions in engineering, manufacturing, quality control and materials management functions of the Division. Export Oriented Unit In order to encourage export oriented businesses and foreign currency inflows, the Government of India offers special incentives to EOUs established in export processing zones such as state grants and subsidies, exemptions relating to import licenses, exemptions from payment of customs duty on imported inputs and excise duty on local material procurements, and allotment of low cost factory space. Such EOUs are also exempted from payment of corporate income taxes for a block of five years during the first eight years of operations, subject to fulfillment of certain conditions. Currently, export earnings received in convertible foreign currency continue to be exempt from tax, even after the tax holiday period. F-42 169 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Current Operations The Division currently manufactures hard disk drives with different capacity points, based on technical know-how and designs provided by JTS. The Division's products are marketed through JTS under the trade names Palladium and Nordic, and are sold to original equipment manufacturers and system integrators who incorporate the products into desktop and notebook computers. The Division remained in development stage until October 1995 when it first started shipping commercial quantities. Sources of Supply Many components incorporated in, or used in the manufacture of, the Division's products are currently sourced from a single supplier. JTS procures components for the Division, which it purchases from third party manufacturers and in turn sells or consigns to the Division. JTS' customers have placed certain restrictions on vendor and design changes. The Division purchases all of its components and equipment pursuant to purchase orders placed from time to time and has no guaranteed supply arrangements. In the past, there have been certain instances of supply shortages which had caused delays in manufacturing and loss of sales. Supply shortages resulting from a change in suppliers could cause a delay in manufacturing and possible loss of sales, which would have a material adverse impact on the Division's operating results. Further, the Division produces in-house a number of critical subassemblies incorporated in the final hard disk drive product. Failure to produce these subassemblies in adequate quantity or quality could also adversely impact the operating results of the Division. Manufacturing Relationships In the past, the Company has sold subassemblies and other components to Xyratex in Havant, United Kingdom for the manufacture of hard disk drives under a subcontract manufacturing agreement between Xyratex and JTS. With the commencement of commercial production of hard disk drive products by the Company in October 1995, the Division stopped supplying Xyratex. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Foreign Currency Translation The Division has determined the United States ("US") dollar to be its functional currency, in accordance with the Statement of Financial Accounting Standards No 52, "Foreign Currency Translation", based on indicators such as cash flows, sales market, sales price, expense, financing and inter-company transactions and arrangements. Since the Division's books are maintained in Indian rupees which is not its functional currency, account balances were first remeasured in US dollar. Since the Division's functional and reporting currencies are the same, the remeasurement process is intended to produce the same result as if the Division's books had been maintained in the functional currency, and obviates separate translation. Nonmonetary assets and liabilities such as inventories, plant and equipment and accumulated depreciation thereon have been remeasured using historical currency exchange rates prevailing at the dates transactions relating to such elements were recognized in the statements. Expenses related to such nonmonetary assets and liabilities such as manufacturing overhead costs included in cost of goods sold have been remeasured using average exchange rates for the period to approximate remeasurement at the historical exchange rates prevailing at the dates those elements were recognized in the statements. All other monetary assets and liabilities that are not denominated in the Division's functional currency have been translated at the current exchange rates prevailing on the dates of the statements. Exchange gains F-43 170 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) and losses from such translation of monetary assets and liabilities have been recognized in determining net loss for the current period. Certain expenses and cash flows have been translated at average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements were recognized in the statements. Gains and losses on foreign currency transactions have been included in determining net loss for the current period in the Statement of Revenues and Expenses. Pervasiveness of Estimates The preparation of statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the statements and the related amounts of revenues and expenses during the reporting period. The Company has maintained its books of accounts in accordance with Indian accounting standards and in the local currency, the Indian rupee. As discussed above, the Division's statements have been remeasured into US dollar in accordance with the Statement of Financial Accounting Standards No 52. As discussed in Note 1, certain assumptions and estimates which, management believed to be reasonable, were required to segregate the Division's account balances from those relating to the rest of the Company's businesses as of January 31, 1995 and to reflect the divestiture of other businesses as of January 28, 1996. Actual results could have been different from these estimates and remeasurements. Revenue Recognition Revenues on product sales are recognized at the time of shipment and include incentives provided by the Government of India on export sales. Substantially, all shipments are sent directly to JTS' end customers, but are invoiced by the Division to JTS, which in turn bills and collects from the end customers. The Division's accounts receivables as of the dates of the statements comprised of receivables outstanding from JTS arising from sale of hard disk drives and receivables from a related party arising from sale of VCMAs. The Company has not experienced bad debts associated with either of these customers in the past, and accordingly, has not recorded an allowance for doubtful accounts. Due from Other Business Units, Net As of January 31, 1995, due from other business units represent the excess of assets over liabilities of the Company's businesses excluding the Division. Such receivables are expected to be collected within the next twelve months. Inventories Inventories include direct materials, freight thereon, direct labor and related manufacturing overhead costs. The Division values its inventories at cost, determined on first in, first out ("FIFO") basis, or market value, whichever is lower. F-44 171 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Inventories consist of the following (in thousands):
JANUARY 28, JANUARY 31, 1996 1995 ----------- ----------- Raw materials......................................... $ 2,520 $ 1,225 Work-in-process....................................... 1,660 71 Finished goods........................................ 1,803 -- ------ ------ $ 5,983 $ 1,296 ====== ======
JTS and the Division have an agreement whereby JTS has undertaken to bear all inventory losses the Division might incur by repurchasing such inventories from the Division at their carrying value. As of January 28, 1996, JTS assumed inventory valued at $2,747,802, which is netted against the inventory balance shown above. Plant and Equipment Plant and equipment is recorded at cost and depreciation is computed using the straight line method over the estimated useful lives of the assets. Plant and equipment consist of the following (in thousands):
ESTIMATED USEFUL LIFE JANUARY 28, JANUARY 31, (YEARS) 1996 1995 ----------- ----------- ----------- Machinery and equipment............................ 2 - 7 $ 6,703 $ 2,237 Furniture, fixtures and miscellaneous assets....... 2 - 6 288 129 ----- ------- ------ 6,991 2,366 Less -- Accumulated depreciation................... (1,388) (721) ------- ------ $ 5,603 $ 1,645 ======= ======
Costs of normal repairs and maintenance are expensed as incurred. Major replacements or betterments of plant and equipment are capitalized. When items are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in determining net loss. The amount expensed for repairs and maintenance for the period from February 1, 1995 to January 28, 1996 was $494,104. The Division has certain specialized manufacturing equipment used in its operations. Income Tax Under the Indian Income Tax Act, 1961, the Division, being an EOU located in an export processing zone, is exempted from payment of corporate income taxes for a block of five years during the first eight years of operations, subject to fulfillment of certain conditions. The Division continues to be exempt from income tax to the extent of income attributable to the export sales of the Division. As the Division did not have any taxable income for the period from February 1, 1995 to January 28, 1996, no provision for income tax has been made. F-45 172 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Warranty Costs The Division manufactures disk drive products to customer specifications and components for such disk drives are sourced from vendors specified by JTS. JTS generally provides a three year limited warranty on the Palladium and Nordic drives manufactured by the Division and has agreed to bear the costs of all warranty claims, product returns and rework charges. Accordingly, no warranty cost has been recorded in the Division's statements as of January 28, 1996 and January 31, 1995. Prior to the divestiture of the Company's VCMA business, voice coil products were manufactured and sold principally to a related party which provided product specifications and mandated specific component sources. No provision has been provided for any warranty costs on the voice coils sold prior to the divestiture since the related party, to which the VCMA business is being sold, has agreed to assume any claims related to such products. Supplemental Disclosure of Cash Flow Information For the purposes of the Statement of Cash Flows, the Division considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. The carrying amounts reported in the statements of assets and liabilities for cash and cash equivalents approximate their fair values. Cash paid for interest for the period from February 1, 1995 to January 28, 1996 was $404,522. During fiscal 1996, the Company entered into capital lease obligations amounting to $36,170. The Company also financed the purchase of equipment amounting to $2,657,145 with secured long-term loans (Note 5). During the period from February 1, 1995 to January 28, 1996, the Division received equipment and inventories amounting to $2,569,471 and $6,748,512, respectively, from related parties. These were recorded as due to related parties in the Statement of Cash Flows since they are non-cash transactions. 3. RESTRICTED CASH BALANCES: Restricted cash balances comprise margin money deposits with banks amounting to $380,013 and $197,578 as of January 28, 1996 and January 31, 1995 respectively. These deposits are maintained as security against letters of credit issued by banks on behalf of the Division (see Note 4 below). During the period from February 1, 1995 to January 28, 1996, rates of interest on these deposits ranged from 9 to 12% per annum. 4. SECURED SHORT TERM BORROWINGS: The Company has entered into an agreement with a consortium of three Indian Government owned commercial banks to obtain working capital credit facilities. The consortium was established in February 1995. While the three banks have agreed to a total extension of credit and an allocation of participation, each bank independently sanctions its portion of the participation. The lead bank in the consortium, Indian Bank, has fully sanctioned its limit, while the other two banks have only partially sanctioned their participation as of January 28, 1996. The credit agreement with the consortium has four separate facilities, namely, export sales accounts receivable bill discounting ("bill discounting"), exports sales order based inventory packing credit ("packing credit"), foreign letters of credit ("letters of credit" or "LC"), and letters of guarantee ("guarantee"). Bill discounting is a post-shipment credit facility used to finance export receivables. Under the Company's bill discounting lines, export invoices are presented to the bank, upon which the bank advances funds for the full value of the invoice. Bills are typically discounted for ninety days. This facility is self- F-46 173 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) liquidating in nature whereby advances made by the bank to the Company against bills discounted are settled through direct retirement of bills by the foreign customers. Under the packing credit advance which is a pre-shipment facility, the bank finances procurement of inventories and other costs incurred for fulfillment of the Division's export orders. The advances under this facility are liquidated using the proceeds of bills discounted by the Division. The Division has been fully utilizing its sanctioned credit limits on its bill discounting and packing credit facilities, and therefore the total credit availed by the Division facilitates a continuous rotation of its inventory and invoice financing requirements. Under the letter of credit facility, the bank guarantees timely payments to the Division's foreign suppliers. Letter of credit is a non-funded limit which, when issued, results in a contingent liability to the Division. The Division is obligated to pay the bank at the time the bank remits money against documents presented by the foreign supplier. Contingent liabilities arising from the use of letters of credit have not been included in the Division's statements but have been disclosed in Note 7 below. Letters of guarantee are provided by the bank on behalf of the Division to third parties with which it has business dealings, to guarantee due performance of contracts as well as fulfillment of monetary obligations by the Division. F-47 174 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Following table summarizes details relating to the credit facilities described above (in thousands):
STATE BANK OF STATE BANK OF INDIAN BANK TRAVANCORE HYDERABAD --------------- ------------- ------------- PARTICULARS 1996 1995 1996 1995 1996 1995 - --------------------------------------------------- ------ ------ ------ ---- ----- ----- 1. Available lines of credit (a) Bill Discounting............................. $3,925 $ 972 $1,389 $ -- $ 139 $ 222 (b) Packing Credit............................... 834 556 -- -- 83 -- (c) Letters of Credit............................ 2,431 1,111 1,216 -- 361 361 (d) Letters of Guarantee......................... 28 28 -- -- -- -- 2. Amount outstanding (a) Bill Discounting............................. 3,878 165 1,277 -- 143 -- (b) Packing Credit............................... 503 202 -- -- 80 -- (c) Advances for overdue letters of credit....... 204 -- -- -- -- -- (d) Letters of Credit............................ 2,268 -- 784 -- 279 -- (e) Letters of Guarantee......................... -- -- -- -- -- -- 3. Amount by which sanctioned limits have been exceeded (a) Bill Discounting............................. -- -- -- -- 4 -- (b) Packing Credit............................... -- -- -- -- -- -- (c) Letters of Credit............................ -- -- -- -- -- -- (d) Letters of Guarantee......................... -- -- -- -- -- -- 4. Interest rates (a) Bill Discounting --if availed in US Dollars................... 7.5% 6.5% 7.5% -- 7.5% 6.5% --if availed in Indian Rupees................ 13-15% 13-15% 13-15% -- 13-15% 13-15% (b) Packing Credit --if availed in US Dollars................... 7.5% 6.5% -- -- 6.5% -- --if availed in Indian Rupees................ 13-15% 13-15% -- -- 13-15% -- 5. Margin (a) Packing Credit............................... 25% 10% -- -- 25% -- (b) Letters of Credit............................ 10% 10% 10% -- 10% 10% (c) Letters of Guarantee......................... 10-50% 10-50% -- -- -- --
Bill discounting agreements are secured by export receivables. Packing credit agreements are secured by a first charge on the Company's stocks of raw materials, work in process and finished goods inventories. Outstanding letters of credit are secured by a charge on goods covered under the letter of credit and a lien on deposits made by the Company with the banks. Letters of guarantee are secured by counter guarantees issued by the Company and a lien on deposits made by the Company with the banks. All the above agreements and facilities are fully covered by the personal guarantee of the Chairman of the Company. The banks have sought for a second collateral on the Company's plant and equipment, present and future, which have already been used as collateral for the Company's secured long term loans (see Note 5 below). As of the date of the statements, the Company was in the process of fulfilling this requirement. F-48 175 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) According to the terms stipulated in the credit facility sanction letter of Indian Bank, the Company's owners were required to contribute unsecured loans of approximately $1.8 million and increase the paid-in capital of the Company to $611,281 (from $69,463) before September 30, 1995. The Company has not fulfilled this requirement as of the date of the statements. However, the Company has obtained an undertaking from JTS, that advances made to the Division by JTS to the extent of $2,558,650, will not be withdrawn or adjusted, either in part or full, against the bills drawn by the Division, and, in due course, will be converted into equity capital/unsecured loan. 5. SECURED LONG TERM LOANS: The Company has entered into term loan agreements with the Industrial Credit and Investment Corporation of India Limited ("ICICI"), a term lending institution in India. In September 1992, the Company was sanctioned a rupee loan of approximately $571,429 for the purpose of augmenting its existing manufacturing facilities. Approximately $304,713 was available to the Company to borrow as of January 31, 1995, subsequent to which the Company decided not to fully avail of this loan before the last date of withdrawal, February 15, 1995. The loan is repayable in Indian rupees in 12 equal quarterly installments of approximately $19,450 each commencing from May 1995. Interest on outstanding amounts are payable quarterly at the rate of 20% per annum. In October 1994, the Company was sanctioned an additional loan by the ICICI, for approximately $2,550,000, denominated in four foreign currencies, for the import of capital equipment. The Division had not borrowed against the loan as of January 31, 1995, and had utilized the loan for a US dollar equivalent amount of $2,625,758 as of January 28, 1996. As of January 28, 1996 there were immaterial unutilized balances in three of the four foreign currencies under the loan, which were cancelled by ICICI on February 22, 1996 based on a written request by the Company. The loan is repayable in US dollar in 13 equal quarterly installments of $201,981 each commencing from April 1997. Interest on outstanding amounts is payable quarterly at the rate of US dollar LIBOR plus 2.75% per annum. For the period from February 1, 1995 to January 28, 1996, the interest rates on this loan ranged from 8.7 to 9.5% per annum. Both loans are secured by all of the Company's property and equipment and are fully covered by the personal guarantee of the Chairman of the Company. According to the terms of the agreement for the foreign currency loan, the Company's promoters were required to contribute unsecured loans of approximately $1.8 million and increase the paid-in capital of the Company to $611,281 (from $69,463). Though this amount has not been contributed by the owners as of the date of the statements, the Company has obtained an undertaking from JTS, that advances made to the Division by JTS to the extent of $2,558,650, will not be withdrawn or adjusted, either in part or full, against the bills drawn by the Division, and, in due course, will be converted into equity capital/unsecured loan. In addition to the ICICI term loans, the Company has entered into a term loan agreement with Corporation Bank, a Government owned commercial bank in India, for the purchase of automobiles. As of January 28, 1996, the Division had utilized approximately $31,386 of the total sanctioned amount of $41,678. The loan is secured by the automobiles and is repayable in thirty equal monthly installments of $1,047 each. F-49 176 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Future repayments under the Division's long-term loans are as follows (in thousands):
YEAR ENDING LOAN REPAYMENTS --------------------------------------------- --------------- 1997 (current portion of long term loans).... $ 90 1998......................................... 898 1999......................................... 834 2000......................................... 808 2001......................................... 202 ------ $ 2,832 ======
6. DUE TO RELATED PARTIES, NET:
1996 1995 ------ ------ (IN THOUSANDS) Due from related parties Ultra Tek Devices Limited.................................. $ 62 $ 80 Tantec Magnetics........................................... 318 -- Eastern Peripherals Limited................................ -- 65 Memory Electronics......................................... -- 18 Golden Computers Limited................................... -- 120 Advance Technology Devices................................. -- 92 ------ ------ Total............................................ 380 375 ------ ------ Due to related parties JTS........................................................ 1,158 667 Nidec Corporation.......................................... 367 -- Tandon Family.............................................. 14 16 Tantec Magnetics........................................... -- 271 Tandon Associates, Inc..................................... -- 603 Reliable Consultancy Services Private Limited.............. -- 1 Tancom Electronics......................................... 9 78 ------ ------ Total............................................ 1,548 1,636 ------ ------ Net due to related parties................................. $1,168 $1,261 ====== ======
See Note 8 for a description of the relationships and the nature of transactions between the Division and the above related parties. F-50 177 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: Capital Leases The Company has purchased automobiles through certain capital lease agreements. The gross amount of assets acquired under capital leases and capitalized was $38,673 as of January 28, 1996. Following is a schedule of aggregate future minimum lease payments under these capital leases together with the present value of net minimum lease payments as of January 28, 1996 (in thousands):
FUTURE MINIMUM YEAR ENDING LEASE PAYMENTS --------------------------------------------------------------- -------------- 1997........................................................... $ 19 1998........................................................... 15 1999........................................................... 14 --- Total net minimum lease payments............................... 48 Less -- Amount representing interest........................... 12 --- Present value of net minimum lease payments.................... 36 Less -- Current portion........................................ 15 --- $ 21 ===
Purchases Open letters of credit for import of raw materials in the normal course of business amounted to $3,594,360 as of January 28, 1996 (see Note 4 above). Obligations to Employees The Company has made certain statutory minimum contributions towards employee obligations as required by labor laws enacted by the Government of India. These include, inter alia, minimum wages, provident fund, employee state insurance, bonus, gratuity, earned leave and labor welfare fund. 8. RELATED PARTY TRANSACTIONS: As discussed in Note 1 above, the Division has functioned as a manufacturing arm of JTS since its association with JTS. Apart from JTS, the Division's related parties include Xyratex (former subcontractor of JTS), Nidec Corporation (supplier to the Company and an equity investee in JTS), and entities which are owned and/or controlled by the Chairman of the Company or his relatives. JTS loaned manufacturing equipment with an historical cost of approximately $4,400,000 and $530,000 located at the Division at January 28, 1996 and January 31, 1995. The Division's related party transactions during the period from February 1, 1995 to January 28, 1996 primarily consist of transactions with JTS and Xyratex. These transactions include, inter alia, purchase of fixed assets and raw materials from JTS, receipt of certain fixed assets on loan basis from JTS, receipt of certain raw material free of cost from JTS, sale of disk drives to JTS, advances received from JTS, remittances made to JTS, assumption of obsolete inventories and warranty costs by JTS, sale of subassemblies and raw material to Xyratex, and purchase of tools from Xyratex. Since the VCMA business was part of the Company until January 28, 1996, transactions between the Division and the VCMA business have not been considered as related party transactions. F-51 178 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The net balances due from or to each related party as of January 28, 1996 and January 31, 1995 for sales, purchases, advances, transfers and sharing of expenses are disclosed in Note 6 above. Summarized information relating to such transactions for the period from February 1, 1995 to January 28, 1996 are presented below (in thousands):
NAME OF THE RELATED PARTY NATURE OF TRANSACTION AMOUNT ------------------------------------- -------------------------------------- ------- Nidec Corporation.................... Purchase of raw material $ 701 Payment for purchase of raw material 522 Tandon Associates, Inc............... Payment for purchases 957 Tancom Electronics................... Purchase of plant and equipment 42 Sale of raw material 41 Proceeds from sale of raw material 55 Charges for common expenses received 3 Advance to Tancom 10 JTS.................................. Purchase of plant and equipment 2,569 Purchase of raw material 6,621 Payment for purchase of raw material 1,052 Advance against export 2,559 Product sales 14,892 Receipt from product sales 8,495 Assumption of obsolete inventories and 2,919 warranty costs by JTS Tantec Magnetics..................... Purchase of raw material 110 Product sales 465
The Company has been capitalized since inception with 200,000 shares of equity stock at a par value of Indian rupees 10 each and 5,000 shares of preferred stock at a par value of Indian rupees 100 each. The Company's lone preferred stock shareholder is the son of the Chairman of the Company. As part of the transfer of the Company's VCMA business to a related party and the proposed acquisition of the Division by JTS, it was decided in March 1995 to retire the preferred stock of the Company. Effective January 28, 1996, all preferred shares were retired for a consideration of Indian rupees 500,000 ($13,893). As of January 28, 1996, this amount has been included in "Due to related parties, net" (see Note 6 above). F-52 179 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. OTHER MATTERS: Technical Know-how and Collaboration Agreement Foreign currency transactions with parties outside India are subject to controls imposed by the Reserve Bank of India ("RBI"), India's central bank. Funds can only be remitted for payments against specific invoices for receipt of materials or equipment and certain additional limited uses. Except for payments below $5,000, cash in advance or deposit payments are not freely permitted to parties outside the country. As part of the Company's disk drive EOU project approval, the Government has allowed the Company to pay $2 million to JTS for technical know-how fees. The Company is yet to finalize its agreement with JTS for the payment of technical know-how fees as of the date of the statements. The Division has not recorded any liability for possible future payment of technical know-how fees due to the anticipated acquisition of the Company by JTS. The Company's term loan agreements with ICICI contains certain restrictions on the timing and period of payment of technical know-how fees. Divestiture of Voice Coil Business The Company transferred the VCMA business, after write-offs of approximately $350,000 of related party balances, to Tancom Electronics ("Tancom") as of January 28, 1996. Such transfer included plant and equipment and inventories of the VCMA business, along with certain other assets and liabilities. Tancom is owned and controlled by the Chairman of the Company and his family members and is therefore considered a related party. Retained earnings attributable to the VCMA business since April 1, 1994 less advances made to certain related parties were also transferred to Tancom. The Division expects to continue to purchase voice coil assemblies from Tancom, provided their prices remain competitive. The Division has not entered into any agreement mandating the purchase of voice coil assemblies from Tancom. As of January 28, 1996, the total value of assets transferred to Tancom was $558,146 and the total value of liabilities transferred totalled $28,148. Retained earnings of the VCMA business transferred to Tancom totalled $418,493. Accounts receivable of $428,080 and accounts payable of $236,163 relating to the voice coil business, outstanding as of January 28, 1996 has been included in the Statement of Assets and Liabilities of the Division due to regulatory constraints on transfer of foreign currency receivables and payables. All of the accounts receivables of the VCMA business are owing from Tantec Magnetics, a related party to the Company. 10. SUBSEQUENT EVENTS: New Long Term Loan On February 20, 1996, the Company was sanctioned an additional foreign currency loan of $10 million, to be reduced to the extent of participation by other institutions, by the ICICI for the proposed expansion of its disk drive business. The Company had received a letter of intent ("letter") from the ICICI the terms and conditions of which have to be agreed upon by the Company within 30 days before a formal foreign currency loan agreement ("loan agreement") could be executed by both parties. Interest on this proposed loan shall be payable at the lending rates of the ICICI prevailing on the date of execution of the loan agreement. Lending rates of the ICICI are US dollar LIBOR, plus a fixed percent, if the funds are provided out of the floating rate US dollar funds, and a fixed rate per annum, if the funds are provided out of fixed rate US dollar funds. According to the letter, this loan will be secured by a first charge on all of the Company's equipment, both present and future, subject to any prior charge on specified equipment in favor of the Company's banks. The Company is also required to provide an irrevocable and unconditional guarantee from the Chairman in favor of ICICI for due repayment of the loan along with all interest and any other moneys. Further, for the loan to F-53 180 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED (CURRENCY: UNITED STATES DOLLAR) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) become effective, the Company would have to raise $5,584,885 by issue of equity shares to promoters, obtain an unsecured loan of $3,601,000 and state subsidies of $236,177 to meet a part of the cost of the project. On March 18, 1996, the Company entered into a loan agreement with the ICICI for $7 million towards their participation in the total sanctioned amount of $10 million. The loan is repayable in US dollar in 12 equal quarterly installments of $583,333 each commencing form May 20, 1998. The Company has procured an irrevocable and unconditional guarantee from the Chairman of the Company as required by the letter of intent. The funding of this loan by ICICI is dependent upon the Company's compliance with the pre-disbursement conditions relating to raising of additional equity capital and obtaining of unsecured loans and state subsidies, mentioned above. If the Company does not comply with these pre-disbursement conditions, the previously obtained loans from ICICI (see Note 5) could be held in default and ICICI may have the right to recall the earlier loans, besides not funding the current loan. F-54 181 APPENDIX A AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION 182 AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN ATARI CORPORATION AND JT STORAGE, INC. APRIL 8, 1996 183 TABLE OF CONTENTS
PAGE ---- ARTICLE I -- THE MERGER............................................................. 1 1.1 The Merger....................................................................... 1 1.2 Closing; Effective Time.......................................................... 2 1.3 Effect of the Merger............................................................. 2 1.4 Certificate of Incorporation; Bylaws............................................. 2 1.5 Directors and Executive Officers................................................. 2 1.6 Effect on Capital Stock.......................................................... 2 1.7 Surrender of Certificates........................................................ 3 1.8 No Further Ownership Rights in Atari Stock....................................... 4 1.9 Lost, Stolen or Destroyed Certificates........................................... 4 1.10 Tax Consequences................................................................. 4 1.11 Taking of Necessary Action; Further Action....................................... 4 ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF JTS................................. 4 2.1 Organization, Standing and Power................................................. 5 2.2 Capital Structure................................................................ 5 2.3 Authority........................................................................ 6 2.4 Financial Statements............................................................. 7 2.5 Absence of Certain Changes....................................................... 7 2.6 Absence of Undisclosed Liabilities............................................... 7 2.7 Litigation....................................................................... 7 2.8 Restrictions on Business Activities.............................................. 7 2.9 Governmental Authorization....................................................... 8 2.10 Title to Property................................................................ 8 2.11 Intellectual Property............................................................ 8 2.12 Environmental Matters............................................................ 8 2.13 Tax.............................................................................. 9 2.14 Employee Benefit Plans........................................................... 9 2.15 Certain Agreements Affected by the Merger........................................ 10 2.16 Employee Matters................................................................. 10 2.17 Interested Party Transactions.................................................... 10 2.18 Insurance........................................................................ 10 2.19 Compliance With Laws............................................................. 11 2.20 Minute Books..................................................................... 11 2.21 Complete Copies of Materials..................................................... 11 2.22 Brokers' and Finders' Fees....................................................... 11 2.23 Registration Statement; Proxy Statement/Prospectus............................... 11 2.24 Vote Required.................................................................... 11 2.25 Board Approval................................................................... 12 2.26 Underlying Documents............................................................. 12 2.27 Representations Complete......................................................... 12 ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF ATARI.............................. 12 3.1 Organization, Standing and Power................................................. 12 3.2 Capital Structure................................................................ 12 3.3 Authority........................................................................ 13 3.4 SEC Documents; Financial Statements.............................................. 13 3.5 Absence of Certain Changes....................................................... 14
i 184 TABLE OF CONTENTS -- (CONTINUED)
PAGE ---- 3.6 Absence of Undisclosed Liabilities............................................... 14 3.7 Litigation....................................................................... 14 3.8 Restrictions on Business Activities.............................................. 14 3.9 Governmental Authorization....................................................... 15 3.10 Title to Property................................................................ 15 3.11 Intellectual Property............................................................ 15 3.12 Environmental Matters............................................................ 15 3.13 Tax.............................................................................. 16 3.14 Employee Benefit Plans........................................................... 16 3.15 Certain Agreements Affected by the Merger........................................ 17 3.16 Employee Matters................................................................. 17 3.17 Interested Party Transactions.................................................... 17 3.18 Insurance........................................................................ 17 3.19 Compliance With Laws............................................................. 18 3.20 Minute Books..................................................................... 18 3.21 Complete Copies of Materials..................................................... 18 3.22 Broker's and Finders' Fees....................................................... 18 3.23 Registration Statement; Proxy Statement/Prospectus............................... 18 3.24 Opinion of Financial Advisor..................................................... 18 3.25 Board Approval................................................................... 18 3.26 Vote Required.................................................................... 18 3.27 Underlying Documents............................................................. 18 3.28 Representations Complete......................................................... 19 ARTICLE IV -- CONDUCT PRIOR TO THE EFFECTIVE TIME................................... 19 4.1 Conduct of Business of JTS and Atari............................................. 19 4.2 Conduct of Business of JTS....................................................... 20 4.3 Conduct of Business of Atari..................................................... 20 4.4 No Other JTS Negotiations........................................................ 21 4.5 No Other Atari Negotiations...................................................... 22 ARTICLE V -- ADDITIONAL AGREEMENTS.................................................. 22 5.1 Proxy Statement/Prospectus; Registration Statement............................... 22 5.2 Meetings of Stockholders......................................................... 23 5.3 Access to Information............................................................ 23 5.4 Public Disclosure................................................................ 23 5.5 Consents; Cooperation............................................................ 23 5.6 Continuity of Interest Certificates.............................................. 24 5.7 Voting Agreements................................................................ 24 5.8 FIRPTA........................................................................... 24 5.9 Legal Requirements............................................................... 24 5.10 Blue Sky Laws.................................................................... 24 5.11 Atari Employee Benefit Plans..................................................... 24 5.12 Atari Debentures................................................................. 25 5.13 Form S-8......................................................................... 25 5.14 Tax-Free Reorganization; Tax Returns............................................. 25 5.15 Registration Rights.............................................................. 25
ii 185 TABLE OF CONTENTS -- (CONTINUED)
PAGE ---- 5.16 Indemnification of Officers and Directors........................................ 25 5.17 Listing of JTS Common Stock...................................................... 25 5.18 Atari Consent to JTS Transaction with Moduler.................................... 25 5.19 Atari SEC Documents.............................................................. 25 5.20 Best Efforts and Further Assurances.............................................. 25 ARTICLE VI -- CONDITIONS TO THE MERGER.............................................. 26 6.1 Conditions to Obligations of Each Party to Effect the Merger..................... 26 6.2 Additional Conditions to Obligations of JTS...................................... 27 6.3 Additional Conditions to the Obligations of Atari................................ 28 ARTICLE VII -- TERMINATION, AMENDMENT AND WAIVER.................................... 29 7.1 Termination...................................................................... 29 7.2 Effect of Termination............................................................ 29 7.3 Expenses......................................................................... 29 7.4 Amendment........................................................................ 30 7.5 Extension; Waiver................................................................ 30 ARTICLE VIII -- GENERAL PROVISIONS.................................................. 30 8.1 Non-Survival at Effective Time................................................... 30 8.2 Absence of Third Party Beneficiary Rights........................................ 30 8.3 Notices.......................................................................... 30 8.4 Interpretation................................................................... 31 8.5 Counterparts..................................................................... 31 8.6 Entire Agreement; Nonassignability; Parties in Interest.......................... 31 8.7 Severability..................................................................... 31 8.8 Remedies Cumulative.............................................................. 31 8.9 Governing Law.................................................................... 32 8.10 Rules of Construction............................................................ 32 8.11 Amendment and Restatement........................................................ 32
iii 186 SCHEDULES JTS Disclosure Schedule Atari Disclosure Schedule Schedule 5.6(a) -- JTS Significant Stockholders Schedule 5.6(b) -- Atari Significant Shareholders Schedule 5.7(a) -- JTS Voting Agreement Signatories Schedule 5.7(b) -- Atari Voting Agreement Signatories Schedule 5.15 -- Registration Rights Holders
iv 187 EXHIBITS Exhibit A Form of Amended and Restated Certificate of Incorporation Exhibit B Form of Amended and Restated Bylaws Exhibit C-1 Form of JTS Voting Agreement Exhibit C-2 Form of Atari Voting Agreement
v 188 AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of April 8, 1996, by and between Atari Corporation, a Nevada corporation ("Atari"), and JT Storage, Inc., a Delaware corporation ("JTS"). RECITALS A. Atari is in the business of designing, manufacturing and selling computers, computer peripheral products and video games. B. JTS is in the business of designing, manufacturing and selling computer peripheral products including mass storage computer disc drives. C. The Boards of Directors of JTS and Atari believe it is in the best interests of their respective companies and the stockholders of their respective companies that JTS and Atari combine into a single company through the statutory merger of Atari with and into JTS (the "Merger") and, in furtherance thereof, have approved the Merger. D. In connection with the Merger, among other things, the outstanding shares of Atari Common Stock, $.01 par value ("Atari Common Stock"), shall be converted into shares of JTS Common Stock, $.000001 par value ("JTS Common Stock"), at the rate set forth herein. E. JTS and Atari desire to make certain representations and warranties and other agreements in connection with the Merger. F. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and to cause the Merger to qualify as a reorganization under the provisions of Section 368(a)(1)(A) of the Code. G. This Agreement amends and restates that certain Agreement and Plan of Reorganization by and among Atari, JTS and JTS Acquisition Corporation dated as of February 12, 1996. NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement, a Certificate of Merger prepared in accordance with Delaware Law (as defined herein) and Nevada Law (as defined herein) and reasonably acceptable to counsel to JTS and counsel to Atari (the "Certificate of Merger"), and the applicable provisions of the Delaware General Corporation Law ("Delaware Law") and Nevada General Corporation Law ("Nevada Law"), Atari shall be merged with and into JTS, the separate corporate existence of Atari shall cease and JTS shall continue as the surviving corporation. JTS as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." 1.2 Closing; Effective Time. The closing of the transactions contemplated hereby (the "Closing") shall take place as soon as practicable after the satisfaction or waiver of each of the conditions set forth in Article VI hereof or at such other time as the parties hereto agree (the "Closing Date"). The Closing shall take place at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, or at such other location as the parties hereto agree. In connection with the Closing, the parties hereto shall cause the Merger to be consummated by filing the Certificate of Merger with (i) the Secretary of State of the State of Delaware and with the Recorder of the County in which the registered office of JTS is located, in 189 accordance with the relevant provisions of Delaware Law and (ii) the Secretary of State of the State of Nevada, in accordance with the relevant provisions of Nevada Law (the time of such filings being the "Effective Time"). 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of Delaware Law and Nevada Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of Atari shall vest in the Surviving Corporation, and all debts, liabilities and duties of Atari shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Certificate of Incorporation; Bylaws. (a) At the Effective Time, the Certificate of Incorporation of JTS, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by Delaware Law and such Certificate of Incorporation; provided, however, that the Certificate of Incorporation of the Surviving Corporation shall be amended and restated in the form attached hereto as Exhibit A. (b) The Bylaws of JTS, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended; provided, however, that the Bylaws of the Surviving Corporation shall be amended and restated in the form attached hereto as Exhibit B. 1.5 Directors and Executive Officers. At the Effective Time, the directors of the Surviving Corporation shall be Sirjang Lal Tandon, David T. Mitchell, Jean D. Deleage, Alan Azan, Roger W. Johnson, LipBu Tan, Jack Tramiel and Michael Rosenberg. The executive officers of JTS immediately prior to the Effective Time shall constitute the only executive officers of the Surviving Corporation as of the Effective Time, unless otherwise designated by JTS. 1.6 Effect on Capital Stock. By virtue of the Merger and without any action on the part of JTS, Atari or the holders of any of the following securities: (a) Conversion of Atari Common Stock. At the Effective Time, each share of Atari Common Stock issued and outstanding immediately prior to the Effective Time (other than any shares of Atari Common Stock to be canceled pursuant to Section 1.6(b)) will be canceled and extinguished and be converted automatically into the right to receive one (1) share of JTS Common Stock (the "Exchange Ratio"). (b) Cancellation of Certain Stock. At the Effective Time, each share of Atari Common Stock owned by JTS or any direct or indirect wholly-owned subsidiary of JTS immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. (c) Atari Stock Options. At the Effective Time, all options to purchase Atari Common Stock then outstanding under the Atari Amended 1986 Stock Option Plan (the "Atari Stock Option Plan") shall be assumed by JTS in accordance with Section 5.11. (d) Atari Debentures. At the Effective Time, JTS shall assume all obligations of Atari under Atari's 5 1/4% Convertible Subordinated Debentures Due 2002 (the "Atari Debentures"), and such debentures shall be convertible into shares of JTS Common Stock in accordance with Section 5.12. (e) Federated Debentures. To the extent required by that certain Indenture dated as of April 15, 1985 from the The Federated Group, Inc. to Security Pacific National Bank, as trustee, together with the first supplemental indenture thereto dated as of September 24, 1987, at the Effective Time, JTS shall assume any obligations of Atari under the 7 1/2% Convertible Subordinated Debentures due April 15, 2010 of The Federated Group, Inc. (the "Federated Debentures"). (f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Atari Common Stock or JTS Common Stock), reorganization, recapitalization or other like change with 2 190 respect to Atari Common Stock, JTS Common Stock or JTS Series A Preferred Stock, $.000001 par value ("JTS Series A Preferred Stock"), occurring after the date hereof and prior to the Effective Time. (g) Fractional Shares. No fraction of a share of JTS Common Stock will be issued, but in lieu thereof each holder of shares of Atari Common Stock who would otherwise be entitled to a fraction of a share of JTS Common Stock (after aggregating all fractional shares of JTS Common Stock to be received by such holder) shall receive from JTS an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the closing price of a share of Atari Common Stock on the trading day immediately prior to the Effective Time, as reported by the American Stock Exchange. 1.7 Surrender of Certificates. (a) Exchange Agent. Registrar and Transfer Company, Cranford, NJ, shall act as exchange agent (the "Exchange Agent") in the Merger. (b) JTS to Provide Common Stock and Cash. Promptly after the Effective Time, JTS shall make available to the Exchange Agent for exchange in accordance with this Article I, through such procedures as JTS may reasonably adopt, (i) the shares of JTS Common Stock issuable pursuant to Section 1.6(a) in exchange for shares of Atari Common Stock outstanding immediately prior to the Effective Time and (ii) cash in an amount sufficient to permit payment of cash in lieu of fractional shares pursuant to Section 1.6(g). (c) Exchange Procedures. Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each holder of record of a certificate or certificates (the "Certificates") which immediately prior to the Effective Time represented outstanding shares of Atari Common Stock, whose shares were converted into the right to receive shares of JTS Common Stock (and cash in lieu of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon receipt of the Certificates by the Exchange Agent, and shall be in such form and have such other provisions as JTS may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of JTS Common Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by JTS, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of JTS Common Stock and payment in lieu of fractional shares which such holder has the right to receive pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be canceled. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of Atari Common Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of JTS Common Stock into which such shares of Atari Common Stock shall have been so converted and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 1.6. (d) Distributions With Respect to Unexchanged Shares. No dividends or other distributions with respect to JTS Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of JTS Common Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of JTS Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of any such dividends or other distributions with a record date after the Effective Time theretofore payable (but for the provisions of this Section 1.7(d)) with respect to such shares of JTS Common Stock. (e) Transfers of Ownership. If any certificate for shares of JTS Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to JTS or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of JTS 3 191 Common Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of JTS or any agent designated by it that such tax has been paid or is not payable. (f) No Liability. Notwithstanding anything to the contrary in this Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to any person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.8 No Further Ownership Rights in Atari Stock. All shares of JTS Common Stock issued upon the surrender for exchange of shares of Atari Common Stock in accordance with the terms hereof (including any cash paid in lieu of fractional shares) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Atari Common Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Atari Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of JTS Common Stock (and cash in lieu of fractional shares) as may be required pursuant to Section 1.6; provided, however, that JTS may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against JTS, the Surviving Corporation or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.10 Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368 of the Code. 1.11 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Atari, the officers and directors of Atari are fully authorized in the name of the corporation or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement. 1.12 Dissenting JTS Shares. (a) Notwithstanding any provision of this Agreement to the contrary, any shares of JTS Common Stock or JTS Series A Preferred Stock held by a holder who has exercised dissenters' rights for such shares in accordance with Delaware Law or California General Corporation Law to the extent such law is applicable by virtue of Section 2115 thereof ("California Law") and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting Shares"), shall be entitled to such rights as are granted by Delaware Law or California Law. (b) JTS shall give Atari (i) prompt notice of any written demands received by JTS for an appraisal of shares of capital stock of JTS pursuant to Section 262 of Delaware Law or Chapter 13 of California Law, withdrawals of such demands, and any other related instruments served pursuant to Delaware Law or California Law and received by JTS and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. JTS shall not, except with the prior written consent of Atari, voluntarily make any payment with respect to any such demands or offer to settle or settle any such demands. ARTICLE II REPRESENTATIONS AND WARRANTIES OF JTS In this Agreement, any reference to any event, change, condition or effect being "material" with respect to any entity or group of entities means any material event, change, condition or effect related to the condition 4 192 (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of such entity or group of entities. In this Agreement, any reference to a "Material Adverse Effect" with respect to any entity or group of entities means any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects of such entity and its subsidiaries, taken as a whole. In this Agreement, any reference to a party's "knowledge" means such party's actual knowledge after due and diligent inquiry. Except as disclosed in a document of even date herewith and delivered by JTS to Atari prior to the execution and delivery of this Agreement and referring to the representations and warranties in this Agreement (the "JTS Disclosure Schedule"), JTS represents and warrants to Atari as follows: 2.1 Organization, Standing and Power. Each of JTS and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of JTS and its subsidiaries has the corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. JTS has delivered a true and correct copy of the Certificate of Incorporation and Bylaws or other charter documents, as applicable, of JTS and each of its subsidiaries, each as amended to date, to Atari. Neither JTS nor any of its subsidiaries is in violation of any of the provisions of its Certificate of Incorporation or Bylaws or equivalent organizational documents. JTS is the owner of all outstanding shares of capital stock of each of its subsidiaries and all such shares are duly authorized, validly issued, fully paid and nonassessable. All of the outstanding shares of capital stock of each such subsidiary are owned by JTS free and clear of all liens, charges, claims or encumbrances or rights of others. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of any such subsidiary, or otherwise obligating JTS or any such subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire any such securities. Except as disclosed in the JTS Disclosure Schedule, JTS does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. 2.2 Capital Structure. The authorized capital stock of JTS consists of 90,000,000 shares of Common Stock, $.000001 par value, and 70,000,000 shares of Preferred Stock, $.000001 par value, all of which is designated Series A Preferred Stock, of which there were issued and outstanding as of the close of business on April 5, 1996, 9,204,741 shares of Common Stock and 29,696,370 shares of Series A Preferred. The JTS Disclosure Schedule contains a true and complete list of the holders of JTS Common Stock and JTS Series A Preferred Stock and the number of shares held by each such holder on April 5, 1996. There are no other outstanding shares of capital stock or voting securities. Each outstanding share of JTS Series A Preferred Stock is convertible into one (1) share of JTS Common Stock. All outstanding shares of JTS Common Stock and JTS Series A Preferred Stock are duly authorized, validly issued, fully paid and non-assessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to preemptive rights or rights of first refusal created by statute, the Certificate of Incorporation or Bylaws of JTS or any agreement to which JTS is a party or by which it is bound. As of the close of business on April 5, 1996, JTS has reserved (i) 4,300,000 shares of JTS Common Stock for issuance to employees and consultants pursuant to the JTS 1995 Stock Option Plan (the "JTS Stock Option Plan"), of which 37,554 shares have been issued pursuant to option exercises and 3,680,358 shares are subject to outstanding, unexercised options, (ii) 600,000 shares of JTS Common Stock for issuance upon the exercise of outstanding, unexercised JTS Warrants and (iii) 32,500,000 shares of JTS Series A Preferred Stock and JTS Common Stock for issuance upon conversion of the note issued to Atari on February 13, 1996 and upon exercise of the warrants issuable to Atari pursuant to such note. Since April 5, 1996, JTS has not issued or granted additional options under the JTS Stock Option Plan. Other than pursuant to this Agreement, there are no other options, warrants, calls, rights, commitments or agreements of any character to which JTS is a party or by which it is bound obligating JTS to issue, deliver, sell, repurchase or redeem, or cause to be 5 193 issued, delivered, sold, repurchased or redeemed, any shares of capital stock of JTS or obligating JTS to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. The terms of the JTS Stock Option Plan and the JTS Warrants permit the assumption or substitution of options or warrants, as applicable, to purchase Atari Common Stock as provided in this Agreement, without the consent or approval of the holders of such securities, the JTS stockholders, or otherwise. True and complete copies of all agreements and instruments relating to or issued under the JTS Stock Option Plan or JTS Warrants have been made available to Atari and such agreements and instruments have not been amended, modified or supplemented, and there are no agreements to amend, modify or supplement such agreements or instruments in any case from the form made available to Atari. The shares of JTS Common Stock to be issued pursuant to the Merger will be duly authorized, validly issued, fully paid, and non-assessable. 2.3 Authority. JTS has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of JTS, subject only to the approval of the Merger by JTS's stockholders as contemplated by Section 6.1(a). This Agreement has been duly executed and delivered by JTS and constitutes the valid and binding obligation of JTS. The execution and delivery of this Agreement by JTS does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Certificate of Incorporation or Bylaws of JTS or any of its subsidiaries, as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to JTS or any of its subsidiaries or any of their properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to JTS or any of its subsidiaries in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger as provided in Section 1.2, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the securities laws of any foreign country; (iii) such filings as may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"); and (iv) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole, and would not prevent, alter or materially delay any of the transactions contemplated by this Agreement. The JTS Disclosure Schedule sets forth a full and complete list of all necessary consents, waivers and approvals of third parties applicable to the operations of JTS that are required to be obtained by JTS in connection with the execution and delivery of this Agreement or the Merger Agreement by JTS or the consummation by JTS of the transactions contemplated hereby or thereby, except any such consents, waivers and approvals, which, if not obtained, would not have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. Prior to the Closing Date, JTS will obtain all such consents. The Stock Purchase Agreement dated as of April 4, 1996 between JTS and Lunenburg, S.A., a Panama corporation, together with all documents executed in connection therewith (the "Moduler Agreement"), has been duly executed and delivered by JTS, the transactions contemplated thereby have been consummated, and the Moduler Agreement constitutes a valid and binding obligation of JTS. JTS has provided to Atari a true, correct and complete copy of the Moduler Agreement, and has performed all obligations required to be performed by it to date under the Moduler Agreement. To JTS' best knowledge, (a) the other parties to the Moduler Agreement have performed all obligations required to be performed by them to date under such agreement, (b) as to such other parties, the Moduler Agreement is valid, binding and enforceable in accordance with its terms and (c) the Moduler Agreement is in full force and effect with no default or dispute or basis therefor existing with respect thereto. 6 194 2.4 Financial Statements. JTS has furnished to Atari its audited consolidated balance sheet, consolidated statements of operations and consolidated statements of stockholders equity and cash flows as of and for the year ended January 28, 1996, and the audited statement of assets and liabilities, statement of revenues and expenses and cash flows of The Hard Disk Drive Division of Moduler as of and for the year ended January 28, 1996 (collectively, the "JTS Financial Statements"). The JTS Financial Statements, including the notes thereto, were complete and correct in all material respects as of their respective dates, complied as to form in all material respects with applicable accounting requirements as of their respective dates, and have been prepared in accordance with generally accepted accounting principles applied on a basis consistent throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto). The JTS Financial Statements are in accordance with the books and records of JTS and fairly present the consolidated financial condition and operating results of JTS and its subsidiaries at the dates and during the periods indicated therein. There has been no change in JTS accounting policies except as described in the notes to the JTS Financial Statements. 2.5 Absence of Certain Changes. Since January 28, 1996, (the "JTS Balance Sheet Date"), JTS has conducted its business in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition (whether or not covered by insurance) that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect to JTS and its subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer of any material asset of JTS or any of its subsidiaries other than in the ordinary course of business and consistent with past practice; (iii) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by JTS or any revaluation by JTS of any of its or any of its subsidiaries' assets; (iv) any issuance or agreement to issue or any commitment to issue any equity security, bond, note or other security of JTS or any of its subsidiaries; (v) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of JTS, or any direct or indirect redemption, purchase or other acquisition by JTS of any of its shares of capital stock; (vi) any material contract entered into by JTS or any of its subsidiaries, other than in the ordinary course of business and as provided to Atari, or any amendment or termination of, or default under, any material contract to which JTS or any of its subsidiaries is a party or by which it is bound; or (vii) any negotiation or agreement by JTS or any of its subsidiaries to do any of the things described in the preceding clauses (i) through (vii) (other than negotiations with Atari regarding the transactions contemplated by this Agreement). 2.6 Absence of Undisclosed Liabilities. JTS has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the JTS balance sheet and the Moduler statement of assets and liabilities, each as included in the JTS Financial Statements, and true, correct and complete copies of which have been provided to Atari, (collectively, the "JTS Balance Sheet"), (ii) those incurred in the ordinary course of business and not required to be set forth in the JTS Balance Sheet under generally accepted accounting principles, and (iii) those incurred in the ordinary course of business since the JTS Balance Sheet Date and consistent with past practice. 2.7 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of JTS or any of its subsidiaries, threatened against JTS or any of its subsidiaries or any of their respective properties or any of their respective officers or directors (in their capacities as such) that, individually or in the aggregate, could have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. There is no judgment, decree or order against JTS or any of its subsidiaries, or, to the knowledge of JTS and its subsidiaries, any of their respective directors or officers (in their capacities as such), that could prevent, enjoin, alter or delay any of the transactions contemplated by this Agreement, or that could have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. 2.8 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon JTS or any of its subsidiaries which has or could have the effect of prohibiting or materially impairing any current or future business practice of JTS or any of its subsidiaries, any acquisition of property by JTS or any of its subsidiaries or the conduct of business by JTS or any of its subsidiaries as currently conducted or as proposed to be conducted by JTS or any of its subsidiaries. 7 195 2.9 Governmental Authorization. JTS and each of its subsidiaries have obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which JTS or any of its subsidiaries currently operates or holds any interest in any of its properties or (ii) which is required for the operation of JTS's or any of its subsidiaries' business or the holding of any such interest (herein collectively called "JTS Authorizations"), and all of such JTS Authorizations are in full force and effect, except where the failure to obtain or have any of such JTS Authorizations could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. 2.10 Title to Property. JTS and its subsidiaries have good and marketable title to all of their respective properties, interests in properties and assets, real and personal, reflected in the JTS Balance Sheet or acquired after the JTS Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the JTS Balance Sheet Date thereof in the ordinary course of business), free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties and (iii) liens securing debt which is reflected on the JTS Balance Sheet. The plants, property and equipment of JTS and its subsidiaries that are used in the operations of their businesses are in good operating condition and repair. All properties used in the operations of JTS and its subsidiaries are reflected in the JTS Balance Sheet to the extent generally accepted accounting principles require the same to be reflected. The JTS Disclosure Schedule identifies each parcel of real property owned or leased by JTS or any of its subsidiaries. 2.11 Intellectual Property. JTS and its subsidiaries own, or are licensed or otherwise possess legally enforceable rights to use all patents, trademarks, trade names, service marks, copyrights, and any applications therefor, maskworks, net lists, schematics, technology, know-how, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material ("Intellectual Property") that are used or proposed to be used in the business of JTS and its subsidiaries as currently conducted or as proposed to be conducted by JTS and its subsidiaries. To the knowledge of JTS and its subsidiaries, there is no material unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of JTS or any of its subsidiaries, any trade secret material to JTS or any of its subsidiaries, or any Intellectual Property right of any third party to the extent licensed by or through JTS or any of its subsidiaries, by any third party, including any employee or former employee of JTS or any of its subsidiaries. Neither JTS nor any of its subsidiaries has entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions (i) listed on the JTS Disclosure Schedule or (ii) contained in purchase orders arising in the ordinary course of business. 2.12 Environmental Matters. (a) To the knowledge of JTS and its subsidiaries, no substance that is regulated by any foreign, federal, state or local governmental authority or that has been designated by any such authority to be radioactive, toxic, hazardous or otherwise a danger to health or the environment (herein a "Hazardous Material") is present in, on or under any property that JTS or any of its subsidiaries has at any time owned, operated, occupied or leased (herein a "JTS Facility"), except to the extent that such presence has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. (b) To the knowledge of JTS and its subsidiaries, neither JTS nor any of its subsidiaries has transported, stored, used, disposed of, manufactured, released or exposed its employees or any other person to Hazardous Materials ("Hazardous Materials Activity") in material violation of any applicable foreign, federal, state or local statute, rule, regulation, order or law. (c) To the knowledge of JTS and its subsidiaries, each of JTS and its subsidiaries is and at all times has been in compliance with all foreign, federal, state and local laws relating to emissions, discharges, releases or threatened releases of Hazardous Materials, except to the extent noncompliance with such laws has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. 8 196 (d) No action, proceeding, permit revocation, writ, injunction or claim is pending, or to the knowledge of JTS and its subsidiaries threatened, concerning the Hazardous Materials Activities of JTS or any of its subsidiaries and/or any JTS Facilities. Neither JTS nor any of its subsidiaries is aware of any fact or circumstance which could impose any material environmental liability upon JTS or any of its subsidiaries. 2.13 Taxes. JTS and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which JTS or any of its subsidiaries is or has been a member have timely filed all Tax Returns required to be filed by it, have paid all Taxes shown thereon to be due and has provided adequate accruals in accordance with generally accepted accounting principles in its financial statements for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. Except as disclosed in the JTS Disclosure Schedule, (i) no material claim for Taxes has become a lien against the property of JTS or any of its subsidiaries or is being asserted against JTS or any of its subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit of any Tax Return of JTS or any of its subsidiaries is being conducted by a Tax authority, (iii) no extension of the statute of limitations on the assessment of any Taxes has been granted by JTS or any of its subsidiaries and is currently in effect, and (iv) there is no agreement, contract or arrangement to which JTS or any of its subsidiaries is a party that may result in the payment of any amount that would not be deductible by reason of Sections 280G, 162 or 404 of the Code. Neither JTS nor any of its subsidiaries is a party to any tax sharing or tax allocation agreement nor does JTS or any of its subsidiaries owe any amount under any such agreement. As used herein, "Taxes" shall mean all taxes of any kind, including, without limitation, those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. JTS and each of its subsidiaries are in full compliance with all terms and conditions of any Tax exemptions or other Tax- sharing agreement or order of a foreign government and the consummation of the Merger shall not have any adverse effect on the continued validity and effectiveness of any such Tax exemptions or other Tax-sharing agreement or order. 2.14 Employee Benefit Plans. (a) The JTS Disclosure Schedule lists, with respect to JTS, any trade or business (whether or not incorporated) which is treated as a single employer with JTS (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code or any subsidiary of JTS (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) all loans to employees in excess of $50,000, loans to officers, and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, disability, employee relocation, cafeteria (Code section 125), life insurance or accident insurance plans, programs or arrangements, (iii) all bonus, deferred compensation or incentive plans, programs or arrangements, (iv) other material fringe or employee benefit plans, programs or arrangements that apply to senior management of JTS and that do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which current or contingent obligations of JTS of greater than $50,000 exist for the benefit of, or relating to, any current or former employee, consultant or director of JTS (together, the "JTS Employee Plans"), and a copy of each such JTS Employee Plan and each summary plan description and annual report on the Form 5500 series required to be filed with any government agency for each JTS Employee Plan for the three most recent Plan years has been delivered to Atari. (b) (i) None of the JTS Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any JTS Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Effect on JTS or its subsidiaries; (iii) all JTS Employee Plans have been administered in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code, orders, or governmental rules and regulations currently in effect with respect thereto and including all applicable requirements for notification to participants 9 197 or to the Department of Labor, Internal Revenue Service or Secretary of the Treasury), except as would not have, in the aggregate, a Material Adverse Effect on JTS or its subsidiaries, and JTS and each of its subsidiaries have performed all obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any material default or violation by any other party to, any of the JTS Employee Plans; (iv) each JTS Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has received a favorable determination letter from the Internal Revenue Service (the "IRS") as to such qualification, and nothing has occurred which could reasonably be expected to cause the loss of such qualification or exemption; (v) all material contributions required to be made by JTS or any of its subsidiaries to any JTS Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each JTS Employee Plan for the current plan years; and (vi) no JTS Employee Plan is covered by, and neither JTS nor any subsidiary has incurred or expects to incur any liability under Title IV of ERISA or Section 412 of the Code. (c) With respect to each JTS Employee Plan that constitutes a group health plan within the meaning of Section 5000(b)(1) of the Code or Section 607(1) of ERISA, JTS and each of its United States subsidiaries have complied with the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and the proposed regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect on JTS and its subsidiaries. 2.15 Certain Agreements Affected by the Merger. Neither the execution and delivery of this Agreement nor the consummation of the transaction contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of JTS or any of its subsidiaries, (ii) increase any benefits otherwise payable by JTS or (iii) result in the acceleration of the time of payment or vesting of any such benefits. 2.16 Employee Matters. Except as to matters which could not, in the aggregate, have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole, JTS and each of its subsidiaries are in compliance in all respects with all currently applicable laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, and is not engaged in any unfair labor practice. There are no pending claims against JTS or any of its subsidiaries under any workers compensation plan or policy or for long term disability. Neither JTS nor any of its subsidiaries has any material obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. There are no controversies pending or, to the knowledge of JTS or any of its subsidiaries, threatened, between JTS or any of its subsidiaries and any of their respective employees, which controversies have or could have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. Neither JTS nor any of its subsidiaries is a party to any collective bargaining agreement or other labor unions contract nor does JTS nor any of its subsidiaries know of any activities or proceedings of any labor union or organize any such employees. 2.17 Interested Party Transactions. Except as disclosed in the JTS Disclosure Schedule, neither JTS nor any of its subsidiaries is indebted to any director, officer, employee or agent of JTS or any of its subsidiaries (except for amounts due as normal salaries and in reimbursement of ordinary expenses), and no such person is indebted to JTS or any of its subsidiaries. Except as disclosed in the JTS Disclosure Schedule, no officer, director or stockholder of JTS or any affiliate of such person has, either directly or indirectly, (i) an interest in any corporation, partnership, firm or other person or entity which furnishes or sells services or products which are similar to those furnished or sold by JTS or (ii) a beneficial interest in a contract or agreement to which JTS is a party or by which JTS may be bound. For purposes of this Section 2.17, there shall be disregarded any interest which arose solely from the ownership of less than a one percent (1%) equity interest in a corporation whose stock is regularly traded on a national securities exchange or over-the-counter market. 2.18 Insurance. JTS and each of its subsidiaries have policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of JTS and its 10 198 subsidiaries. There is no claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and JTS and its subsidiaries are otherwise in compliance with the terms of such policies and bonds. JTS has no knowledge of any threatened termination of, or premium increase with respect to, any of such policies. 2.19 Compliance With Laws. Each of JTS and its subsidiaries has complied with, are not in violation of, and have not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not be reasonably expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. 2.20 Minute Books. The minute books of JTS and its subsidiaries made available to Atari contain a complete and accurate summary of all meetings of directors and stockholders or actions by written consent since the time of incorporation of JTS and the respective subsidiaries through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects. 2.21 Complete Copies of Materials. JTS has delivered or made available true and complete copies of each document which has been requested by Atari or its counsel in connection with their legal and accounting review of JTS and its subsidiaries. 2.22 Brokers' and Finders' Fees. JTS has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. 2.23 Registration Statement; Proxy Statement/Prospectus. The information supplied by JTS for inclusion in the registration statement on Form S-4 (or such other or successor form as shall be appropriate, the "Registration Statement") pursuant to which the shares of JTS Common Stock to be issued in the Merger will be registered with the Securities and Exchange Commission (the "SEC") shall not at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The information supplied by JTS for inclusion in the proxy statement/prospectus to be sent to the stockholders of JTS and Atari in connection with the meeting of JTS's stockholders to consider the Merger (the "JTS Stockholders Meeting") and in connection with the meeting of Atari's stockholders to consider the Merger (the "Atari Stockholders Meeting") (such proxy statement/prospectus as amended or supplemented is referred to herein as the "Proxy Statement") shall not, on the date the Proxy Statement is first mailed to JTS's stockholders and Atari's stockholders, at the time of the JTS Stockholders Meeting, at the time of the Atari Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the JTS Stockholders Meeting or the Atari Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event or information should be discovered by JTS which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, JTS shall promptly inform Atari. Notwithstanding the fore going, JTS makes no representation, warranty or covenant with respect to any information supplied by Atari which is contained in any of the foregoing documents. 2.24 Vote Required. The affirmative votes of the holders of (i) a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on the record date set for the JTS Stockholders Meeting, voting together, (ii) a majority of the shares of JTS Common Stock outstanding on the record date set for the JTS Stockholders Meeting, voting separately as a class, and (iii) at least two-thirds of the shares of JTS Series A Preferred outstanding on the record date set for the JTS Stockholders Meeting, voting separately as a class, are the only votes of the holders of any of JTS's capital stock necessary to approve this Agreement and the transactions contemplated hereby. 11 199 2.25 Board Approval. The Board of Directors of JTS has unanimously (i) approved this Agreement and the Merger, (ii) determined that the Merger is in the best interests of the stockholders of JTS and is on terms that are fair to such stockholders and (iii) recommended that the stockholders of JTS approve this Agreement and the Merger. 2.26 Underlying Documents. True and complete copies of all underlying documents set forth on the JTS Disclosure Schedule or described as having been disclosed or delivered to Atari pursuant to this Agreement have been furnished to Atari. 2.27 Representations Complete. None of the representations or warranties made by JTS herein or in any Schedule hereto, including the JTS Disclosure Schedule, or certificate furnished by JTS pursuant to this Agreement, when all such documents are read together in their entirety, contains or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ATARI Except as disclosed in the Atari SEC Documents (as defined in Section 3.4) or in a document of even date herewith and delivered by Atari to JTS prior to the execution and delivery of this Agreement and referring to the representations and warranties in this Agreement (the "Atari Disclosure Schedule"), Atari represents and warrants to JTS as follows: 3.1 Organization, Standing and Power. The Atari Disclosure Schedule identifies each subsidiary of Atari that is a "significant subsidiary" of Atari as defined by Rule 1-02(v) of Regulation S-X (the "Significant Subsidiaries"). Atari and each of its Significant Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of Atari and its Significant Subsidiaries has the corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. Atari has delivered a true and correct copy of the Articles of Incorporation and Bylaws or other charter documents, as applicable, of Atari and each of its Significant Subsidiaries, each as amended to date, to JTS. Neither Atari nor any of its Significant Subsidiaries is in violation of any of the provisions of its Articles of Incorporation or Bylaws or equivalent organizational documents. Atari is the owner of all outstanding shares of capital stock of each of its subsidiaries and all such shares are duly authorized, validly issued, fully paid and nonassessable. All of the outstanding shares of capital stock of each such subsidiary are owned by Atari free and clear of all liens, charges, claims or encumbrances or rights of others. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of any such subsidiary, or otherwise obligating Atari or any such subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire any such securities. Except as disclosed in the Atari SEC Documents (as defined in Section 3.4), Atari does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. 3.2 Capital Structure. The authorized capital stock of Atari consists of 100,000,000 shares of Common Stock, $.01 par value, and 10,000,000 shares of Preferred Stock, $.01 par value, of which there were issued and outstanding as of the close of business on March 29, 1996, 63,727,318 shares of Common Stock and no shares of Preferred Stock. There are no other outstanding shares of capital stock or voting securities of Atari, other than shares of Atari Common Stock issued after March 29, 1996 upon the exercise of options issued under the Atari 1986 Stock Option Plan (the "Atari Stock Option Plan"). All outstanding shares of Atari have been duly authorized, validly issued, fully paid and are nonassessable and free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to 12 200 preemptive rights or rights of first refusal created by statute, the Articles of Incorporation or Bylaws of Atari or any agreement to which Atari is a party or by which it is bound. As of the close of business on March 29, 1996, Atari has reserved 3,000,000 shares of Common Stock for issuance to employees, directors and consultants pursuant to the Atari Stock Option Plan, of which 599,674 shares have been issued pursuant to option exercises, and 899,125 shares are subject to outstanding, unexercised options. Since March 29, 1996, Atari has not issued or granted additional options under the Atari Stock Option Plan. There are no other options, warrants, calls, rights, commitments or agreements of any character to which Atari is a party or by which it is bound obligating Atari to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Atari or obligating Atari to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. 3.3 Authority. Atari has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Atari, subject only to the approval of the Merger by the Atari stockholders as contemplated by Section 6.1(a). This Agreement has been duly executed and delivered by Atari and constitutes the valid and binding obligations of Atari. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Articles of Incorporation or Bylaws of Atari or any of its Significant Subsidiaries, as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Atari or any of its Significant Subsidiaries or any of their properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by or with respect to Atari or any of its Significant Subsidiaries in connection with the execution and delivery of this Agreement by Atari or the consummation by Atari of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger as provided in Section 1.2, (ii) the filing with the SEC and the American Stock Exchange of the Proxy Statement relating to the Atari Stockholders Meeting, (iii) the filing of a Form 8-K and Form 10-C with the SEC and the American Stock Exchange within 15 days and 10 days, respectively, after the Closing Date, (iv) any filings as may be required under applicable state securities laws and the securities laws of any foreign country, (v) such filings as may be required under HSR, (vi) such filings as may be required under the rules and regulations of the American Stock Exchange, and (vii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole, and would not prevent, alter or materially delay any of the transactions contemplated by this Agreement. The Atari Disclosure Schedule sets forth a full and complete list of all necessary consents, waivers and approvals of third parties applicable to the operations of Atari that are required to be obtained by Atari in connection with the execution and delivery of this Agreement or the Merger Agreement by Atari or the consummation by Atari of the transactions contemplated hereby or thereby, except any such consents, waivers and approvals, which, if not obtained, would not have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. Prior to the Closing Date, Atari will obtain all such consents. 3.4 SEC Documents; Financial Statements. Atari has furnished to JTS a true and complete copy of each report, registration statement, definitive proxy statement, and other filings filed with the SEC by Atari since January 1, 1993 (other than filings pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any registration statement on Form S-8), and prior to the Effective Time, Atari will have furnished JTS with true and complete copies of any additional documents (other than filings pursuant to Section 16 of the Exchange Act, and any registration statement on Form S-8) filed with the SEC by Atari prior to the Effective Time (collectively, the "Atari SEC Documents"). As of their respective filing dates, the Atari SEC Documents complied in all material respects with the requirements of the Exchange Act and the Securities Act, and none of the Atari SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the 13 201 extent corrected by a subsequently filed Atari SEC Document. The financial statements of Atari, including the notes thereto, included in the Atari SEC Documents (the "Atari Financial Statements") were complete and correct in all material respects as of their respective dates, complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as of their respective dates, and have been prepared in accordance with generally accepted accounting principles applied on a basis consistent throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto or, in the case of unaudited statements included in Quarterly Reports on Form 10-Qs, as permitted by Form 10-Q of the SEC). The Atari Financial Statements are in accordance with the books and records of Atari and fairly present the consolidated financial condition and operating results of Atari and its subsidiaries at the dates and during the periods indicated therein (subject, in the case of unaudited statements, to normal, recurring year-end adjustments). There has been no change in Atari accounting policies except as described in the notes to the Atari Financial Statements. 3.5 Absence of Certain Changes. Since December 31, 1995 (the "Atari Balance Sheet Date"), Atari has conducted its business in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition (whether or not covered by insurance) that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect to Atari and its subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer of any material asset of Atari or any of its subsidiaries other than in the ordinary course of business and consistent with past practice; (iii) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by Atari or any revaluation by Atari of any of its assets; (iv) any issuance or agreement to issue or any commitment to issue any equity security, bond, note or other security of Atari or any of its subsidiaries; (v) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of Atari, or any direct or indirect redemption, purchase or other acquisition by Atari of any of its shares of capital stock; (vi) any material contract entered into by Atari, other than in the ordinary course of business and as provided to JTS, or any amendment or termination of, or default under, any material contract to which Atari is a party or by which it is bound; or (vii) any negotiation or agreement by Atari or any of its subsidiaries to do any of the things described in the preceding clauses (i) through (vii) (other than negotiations with JTS regarding the transactions contemplated by this Agreement). 3.6 Absence of Undisclosed Liabilities. Atari has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet included in Atari's Annual Report on Form 10-K for the period ended December 31, 1995 (the "Atari Balance Sheet"), (ii) those incurred in the ordinary course of business and not required to be set forth in the Atari Balance Sheet under generally accepted accounting principles, and (iii) those incurred in the ordinary course of business since the Atari Balance Sheet Date and consistent with past practice. 3.7 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Atari or any of its subsidiaries, threatened against Atari or any of its subsidiaries or any of their respective properties or any of their respective officers or directors (in their capacities as such) that, individually or in the aggregate, could have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. There is no judgment, decree or order against Atari or any of its subsidiaries or, to the knowledge of Atari or any of its subsidiaries, any of their respective directors or officers (in their capacities as such) that could prevent, enjoin, alter or delay any of the transactions contemplated by this Agreement, or that could have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. The outcome of the matter In re The Federated Group, Inc. Alleged Debtor U.S.B.C. (N.D.Cal. Div. 5) No. 92-50412-JRG Chapter 7, is not reasonably likely to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. 3.8 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon Atari or any of its subsidiaries which has or could have the effect of prohibiting or materially impairing any current or future business practice of Atari or any of its subsidiaries, any acquisition of property by Atari or any of its subsidiaries or the conduct of business by Atari or any of its subsidiaries as currently conducted or as proposed to be conducted by Atari or any of its subsidiaries. 14 202 3.9 Governmental Authorization. Atari and each of its subsidiaries have obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which Atari or any of its subsidiaries currently operates or holds any interest in any of its properties or (ii) which is required for the operation of Atari's or any of its subsidiaries' business or the holding of any such interest (herein collectively called "Atari Authorizations"), and all of such Atari Authorizations are in full force and effect, except where the failure to obtain or have any of such Atari Authorizations could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. 3.10 Title to Property. Atari and its Significant Subsidiaries have good and marketable title to all of their respective properties, interests in properties and assets, real and personal, reflected in the Atari Balance Sheet or acquired after the Atari Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the Atari Balance Sheet Date thereof in the ordinary course of business), free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties and (iii) liens securing debt which is reflected on the Atari Balance Sheet. The plants, property and equipment of Atari and its Significant Subsidiaries that are used in the operations of their businesses are in good operating condition and repair. All properties used in the operations of Atari and its Significant Subsidiaries are reflected in the Atari Balance Sheet to the extent generally accepted accounting principles require the same to be reflected. The Atari Disclosure Schedule identifies each parcel of real property owned or leased by Atari or any of its Significant Subsidiaries 3.11 Intellectual Property. Atari and its Significant Subsidiaries own, or are licensed or otherwise possess legally enforceable rights to use all Intellectual Property that are used or proposed to be used in the business of Atari and its Significant Subsidiaries as currently conducted or as proposed to be conducted by Atari and its subsidiaries, except to the extent that the failure to have such rights have not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. To the knowledge of Atari and its Significant Subsidiaries, there is no material unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of Atari or any of its subsidiaries, any trade secret material to Atari or any of its subsidiaries, or any Intellectual Property right of any third party to the extent licensed by or through Atari or any of its subsidiaries, by any third party, including any employee or former employee of Atari or any of its subsidiaries. Neither Atari nor any of its subsidiaries has entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions (i) listed on the Atari Disclosure Schedule or (ii) contained in purchase orders arising in the ordinary course of business. 3.12 Environmental Matters. (a) To the knowledge of Atari and its Significant Subsidiaries, no Hazardous Material is present in, on or under any property that Atari or any of its subsidiaries has at any time owned, operated, occupied or leased (herein an "Atari Facility"), except to the extent that such presence has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. (b) To the knowledge of Atari and its Significant Subsidiaries, neither Atari nor any of its subsidiaries has engaged in a Hazardous Materials Activity in material violation of any applicable foreign, federal, state or local statute, rule, regulation, order or law. (c) To the knowledge of Atari and its Significant Subsidiaries, each of Atari and its subsidiaries is and at all times has been in compliance with all foreign, federal, state and local laws relating to emissions, discharges, releases or threatened releases of Hazardous Materials, except to the extent noncompliance with such laws has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. (d) No action, proceeding, permit revocation, writ, injunction or claim is pending, or to the knowledge of Atari and its subsidiaries threatened, concerning the Hazardous Materials Activities of Atari or any of its 15 203 subsidiaries and/or any Atari Facilities. Neither Atari nor any of its Significant Subsidiaries is aware of any fact or circumstance which could impose any material environmental liability upon Atari or any of its subsidiaries. 3.13 Taxes. Atari and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which Atari or any of its subsidiaries is or has been a member have timely filed all Tax Returns required to be filed by it, have paid all Taxes shown thereon to be due and has provided adequate accruals in accordance with generally accepted accounting principles in its financial statements for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. Except as disclosed in the Atari SEC Documents, (i) no material claim for Taxes has become a lien against the property of Atari or any of its subsidiaries or is being asserted against Atari or any of its subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit of any Tax Return of Atari or any of its subsidiaries is being conducted by a Tax authority, (iii) no extension of the statute of limitations on the assessment of any Taxes has been granted by Atari or any of its subsidiaries and is currently in effect, and (iv) there is no agreement, contract or arrangement to which Atari or any of its subsidiaries is a party that may result in the payment of any amount that would not be deductible by reason of Sections 280G, 162 or 404 of the Code. Neither Atari nor any of its subsidiaries is a party to any tax sharing or tax allocation agreement nor does Atari or any of its subsidiaries owe any amount under any such agreement. As used herein, "Taxes" shall mean all taxes of any kind, including, without limitation, those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. Atari and each of its subsidiaries are in full compliance with all terms and conditions of any Tax exemptions or other Tax-sharing agreement or order of a foreign government and the consummation of the Merger shall not have any adverse effect on the continued validity and effectiveness of any such Tax exemption or other Tax-sharing agreement or order. 3.14 Employee Benefit Plans. (a) The Atari Disclosure Schedule lists, with respect to Atari, any ERISA affiliate of Atari or any subsidiary of Atari (i) all employee benefit plans (as defined in Section 3(3) of ERISA), (ii) all loans to employees in excess of $50,000, loans to officers, and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, disability, employee relocation, cafeteria (Code section 125), life insurance or accident insurance plans, programs or arrangements, (iii) all bonus, deferred compensation or incentive plans, programs or arrangements, (iv) other material fringe or employee benefit plans, programs or arrangements that apply to senior management of Atari and that do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which current or contingent obligations of Atari of greater than $50,000 exist for the benefit of, or relating to, any current or former employee, consultant or director of Atari (together, the "Atari Employee Plans"), and a copy of each such Atari Employee Plan and each summary plan description and annual report on the Form 5500 series required to be filed with any government agency for each Atari Employee Plan for the three most recent Plan years has been delivered to JTS. (b) (i) None of the Atari Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Atari Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Effect on Atari or its subsidiaries; (iii) all Atari Employee Plans have been administered in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code, orders, or governmental rules and regulations currently in effect with respect thereto and including all applicable requirements for notification to participants or to the Department of Labor, Internal Revenue Service or Secretary of the Treasury), except as would not have, in the aggregate, a Material Adverse Effect on Atari or its subsidiaries, and Atari and each of its subsidiaries have performed all obligations required to be performed by them under, are not in any material 16 204 respect in default under or violation of, and have no knowledge of any material default or violation by any other party to, any of the Atari Employee Plans; (iv) each Atari Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has received a favorable determination letter from the IRS as to such qualification, and nothing has occurred which could reasonably be expected to cause the loss of such qualification or exemption; (v) all material contributions required to be made by Atari or any of its subsidiaries to any Atari Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Atari Employee Plan for the current plan years; and (vi) no Atari Employee Plan is covered by, and neither Atari nor any subsidiary has incurred or expects to incur any liability under Title IV of ERISA or Section 412 of the Code. (c) With respect to each Atari Employee Plan that constitutes a group health plan within the meaning of Section 5000(b)(1) of the Code or Section 607(1) of ERISA, Atari and each of its United States subsidiaries have complied with the applicable health care continuation and notice provisions of COBRA and the proposed regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect on Atari and its subsidiaries. 3.15 Certain Agreements Affected by the Merger. Neither the execution and delivery of this Agreement nor the consummation of the transaction contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of Atari or any of its subsidiaries, (ii) increase any benefits otherwise payable by Atari or (iii) result in the acceleration of the time of payment or vesting of any such benefits. 3.16 Employee Matters. Except as to matters which could not, in the aggregate, have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole, Atari and each of its Significant Subsidiaries are in compliance in all respects with all currently applicable laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, and is not engaged in any unfair labor practice. There are no pending claims against Atari or any of its subsidiaries under any workers compensation plan or policy or for long term disability. Neither Atari nor any of its subsidiaries has any material obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. There are no controversies pending or, to the knowledge of Atari or any of its subsidiaries, threatened, between Atari or any of its subsidiaries and any of their respective employees, which controversies have or could have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. Neither Atari nor any of its subsidiaries is a party to any collective bargaining agreement or other labor unions contract nor does Atari nor any of its subsidiaries know of any activities or proceedings of any labor union or organize any such employees. 3.17 Interested Party Transactions. Except as disclosed in the Atari Disclosure Schedule or the Atari SEC Documents, neither Atari nor any of its subsidiaries is indebted to any director, officer, employee or agent of Atari or any of its subsidiaries (except for amounts due as normal salaries and in reimbursement of ordinary expenses), and no such person is indebted to Atari or any of its subsidiaries. Except as disclosed in the Atari Disclosure Schedule or the Atari SEC Documents, no officer, director or shareholder of Atari or any affiliate of such person has, either directly or indirectly, (i) an interest in any corporation, partnership, firm or other person or entity which furnishes or sells services or products which are similar to those furnished or sold by Atari or (ii) a beneficial interest in a contract or agreement to which Atari is a party or by which Atari may be bound. For purposes of this Section 3.17, there shall be disregarded any interest which arose solely from the ownership of less than a one percent (1%) equity interest in a corporation whose stock is regularly traded on a national securities exchange or over-thecounter market. 3.18 Insurance. Atari and each of its Significant Subsidiaries have policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Atari and its subsidiaries. There is no claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Atari and its Significant Subsidiaries are otherwise in compliance with the terms of such policies and bonds. Atari has no knowledge of any threatened termination of, or premium increase with respect to, any of such policies. 17 205 3.19 Compliance With Laws. Each of Atari and its Significant Subsidiaries has complied with, are not in violation of, and have not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not be reasonably expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. 3.20 Minute Books. The minute books of Atari and its subsidiaries made available to JTS contain a complete and accurate summary of all meetings of directors and stockholders or actions by written consent since the time of incorporation of Atari and the respective subsidiaries through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects. 3.21 Complete Copies of Materials. Atari has delivered or made available true and complete copies of each document which has been requested by JTS or its counsel in connection with their legal and accounting review of Atari and its subsidiaries. 3.22 Broker's and Finders' Fees. Atari has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.23 Registration Statement; Proxy Statement/Prospectus. The information supplied by Atari for inclusion in the Registration Statement shall not, at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The information supplied by Atari for inclusion in the Proxy Statement shall not, on the date the Proxy Statement is first mailed to JTS's stockholders and Atari's stockholders, at the time of the JTS Stockholders Meeting, at the time of the Atari Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the JTS Stockholders Meeting or the Atari Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event or information should be discovered by Atari which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, Atari will promptly inform JTS. Notwithstanding the foregoing, Atari makes no representation, warranty or covenant with respect to any information supplied by JTS which is contained in any of the foregoing documents. 3.24 Opinion of Financial Advisor. Atari has been advised in writing by its financial advisor, Montgomery Securities, that in such advisor's opinion, as of the date hereof, the consideration to be paid by Atari hereunder is fair, from a financial point of view, to Atari. 3.25 Board Approval. The Board of Directors of Atari has unanimously (i) approved this Agreement and the Merger, (ii) determined that the Merger is in the best interests of its stockholders and is on terms that are fair to such stockholders and (iii) recommended that its stockholders approve this Agreement and the Merger. 3.26 Vote Required. The affirmative vote of the holders of a majority of the shares of Atari Common Stock outstanding on the record date set for the Atari Stockholders Meeting is the only vote of the holders of any of Atari's capital stock necessary to approve this Agreement and the transactions contemplated hereby. No shareholder of Atari will be entitled to statutory dissenters rights under Nevada Law as a result of the Merger. 3.27 Underlying Documents. True and complete copies of all underlying documents set forth on the Atari Disclosure Schedule or described as having been disclosed or delivered to JTS pursuant to this Agreement have been furnished to JTS. 18 206 3.28 Representations Complete. None of the representations or warranties made by Atari herein or in any Schedule hereto, including the Atari Disclosure Schedule, or certificate furnished by Atari pursuant to this Agreement, or the Atari SEC Documents, when all such documents are read together in their entirety, contains or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1 Conduct of Business of JTS and Atari. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, each of JTS and Atari agrees (except to the extent expressly contemplated by this Agreement or as consented to in writing by the other), to carry on its and its subsidiaries' business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay and to cause its subsidiaries to pay debts and taxes when due (subject to good faith disputes over such debts or taxes) and to pay or perform other obligations when due. Each of JTS and Atari agrees to promptly notify the other of any event or occurrence not in the ordinary course of its or its subsidiaries' business, and of any event which could have a Material Adverse Effect on it and its subsidiaries, taken as a whole. Without limiting the foregoing, except as expressly contemplated by this Agreement, neither JTS nor Atari shall do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of the other: (a) Charter Documents. Cause or permit any amendments to its Certificate of Incorporation or Bylaws (except as contemplated by Section 1.4 hereof); (b) Issuance of Securities. Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than the issuance of shares of its Common Stock pursuant to the exercise of stock options, warrants or other rights therefor outstanding as of the date of this Agreement; provided, however, that in addition to any grants specifically described on the JTS Disclosure Schedule, JTS may, in the ordinary course of business consistent with past practice, grant options for the purchase of up to 250,000 shares of JTS Common Stock under the JTS Stock Option Plan and issue shares of JTS Common Stock upon the exercise of such options; and provided, further, that Atari may issue securities under the Atari Option Plan. (c) Dividends; Changes in Capital Stock. Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service to it or its subsidiaries; (d) Acquisitions. Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its and its parent's/subsidiaries' business, taken as a whole; (e) Taxes. Other than in the ordinary course of business, make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, file any material Return or any amendment to a material Return, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; 19 207 (f) Stock Option Plans, Etc. Accelerate, amend or change the period of exercisability of options, warrants or other rights granted under its employee stock plans or authorize cash payments in exchange for any options, warrants or other rights granted under any of such plans; (g) Other. Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(a) through (f) above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.2 Conduct of Business of JTS. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, except as expressly contemplated by this Agreement, JTS shall not do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of Atari: (a) Material Contracts. Enter into any material contract or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its material contracts, other than in the ordinary course of business consistent with past practice; (b) Intellectual Property. Transfer to any person or entity any rights to its Intellectual Property other than in the ordinary course of business consistent with past practice; (c) Dispositions. Sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material, individually or in the aggregate, to its and its subsidiaries' business, taken as a whole, except in the ordinary course of business consistent with past practice; (d) Indebtedness. Incur any indebtedness for borrowed money (except amounts borrowed under JTS's existing revolving credit line or drawdowns of existing credit facilities for working capital or construction purposes only) or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others; (e) Revaluation. Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and other than as disclosed in the JTS Disclosure Schedule; (f) Payment of Obligations. Pay, discharge or satisfy in an amount in excess of $50,000 in any one case or $250,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the JTS Financial Statements; (g) Termination or Waiver. Terminate or waive any right of substantial value, other than in the ordinary course of business; (h) Employee Benefit Plans. Adopt or amend any employee benefit or stock purchase or option plan; (i) Lawsuits. Commence a lawsuit other than (i) for the routine collection of bills, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with Atari prior to the filing of such a suit, (iii) in such cases in which the damages or legal fees are not reasonably expected to material, or (iv) for a breach of this Agreement; or (j) Other. Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.2(a) through (i) above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.3 Conduct of Business of Atari. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, except as expressly contemplated 20 208 by this Agreement, Atari shall not do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of JTS: (a) Material Contracts. Enter into any material contract or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its material contracts, other than in the ordinary course of business consistent with past practice; (b) Intellectual Property. Transfer to any person or entity any rights to its Intellectual Property other than in the ordinary course of business consistent with past practice; (c) Dispositions. Sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material, individually or in the aggregate, to its and its subsidiaries' business, taken as a whole, except in the ordinary course of business consistent with past practice; (d) Indebtedness. Incur any indebtedness for borrowed money (except amounts borrowed under JTS's existing revolving credit line or drawdowns of existing credit facilities for working capital or construction purposes only) or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others; (e) Revaluation. Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and other than as disclosed in the Atari Disclosure Schedule; (f) Payment of Obligations. Pay, discharge or satisfy in an amount in excess of $50,000 in any one case or $250,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the Atari Financial Statements; (g) Capital Expenditures. Make any capital expenditures, capital additions or capital improvements except in the ordinary course of business and consistent with past practice, and in any event not to exceed $25,000 per quarter; (h) Termination or Waiver. Terminate or waive any right of substantial value, other than in the ordinary course of business; (i) Employee Benefit Plans. Adopt or amend any employee benefit or stock purchase or option plan; (j) Lawsuits. Commence a lawsuit other than (i) for the routine collection of bills, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with JTS prior to the filing of such a suit, (iii) in such cases in which the damages or legal fees are not reasonably expected to material, or (iv) for a breach of this Agreement; or (k) Other. Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.3(a) through (j) above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.4 No Other JTS Negotiations. From and after the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, JTS shall not, directly or indirectly (i) solicit, initiate discussion or engage in negotiations with any person (whether such negotiations are initiated by JTS or otherwise) or take any other action intended or designed to facilitate the efforts of any person, other than Atari, relating to the possible acquisition of JTS or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets of otherwise) or any of its or their capital stock or any material portion of its or their assets (with any such efforts by any such person, including a firm proposal to make such an acquisition, to be referred to as a "JTS Acquisition Proposal") (ii) provide non-public information with respect to JTS or any of its subsidiaries to any person, other than Atari, relating to a possible 21 209 JTS Acquisition Proposal by any person, other than Atari, (iii) enter into an agreement with any person, other than Atari, providing for a possible JTS Acquisition Proposal, or (iv) make or authorize any statement, recommendation or solicitation in support of any possible JTS Acquisition Proposal by any person other than Atari. If JTS or any of its subsidiaries receives any unsolicited offer or proposal to enter negotiations relating to a JTS Acquisition Proposal, JTS shall immediately notify Atari thereof, including information as to the identity of the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be. JTS recognizes and acknowledges that a breach of this Section 4.4 may cause irreparable and material loss and damage to Atari as to which Atari may not have an adequate remedy at law or in damages and that, accordingly, JTS agrees that the issuance of an injunction or other equitable remedy is the appropriate remedy for any such breach. 4.5 No Other Atari Negotiations. From and after the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, Atari shall not, directly or indirectly (i) solicit, initiate discussion or engage in negotiations with any person (whether such negotiations are initiated by Atari or otherwise) or take any other action intended or designed to facilitate the efforts of any person, other than JTS, relating to the possible acquisition of Atari (whether by way of merger, purchase of capital stock, purchase of assets of otherwise) or any of its capital stock or any material portion of its assets (with any such efforts by any such person, including a firm proposal to make such an acquisition, to be referred to as an "Atari Acquisition Proposal") (ii) provide non-public information with respect to Atari to any person, other than JTS, relating to a possible Atari Acquisition Proposal by any person, other than JTS, (iii) enter into an agreement with any person, other than JTS, providing for a possible Atari Acquisition Proposal, or (iv) make or authorize any statement, recommendation or solicitation in support of any possible Atari Acquisition Proposal by any person other than JTS. If Atari receives any unsolicited offer or proposal to enter negotiations relating to an Atari Acquisition Proposal, Atari shall immediately notify JTS thereof, including information as to the identity of the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be. Atari recognizes and acknowledges that a breach of this Section 4.5 may cause irreparable and material loss and damage to JTS as to which JTS may not have an adequate remedy at law or in damages and that, accordingly, JTS agrees that the issuance of an injunction or other equitable remedy is the appropriate remedy for any such breach. Notwithstanding the foregoing, nothing contained in this Agreement (i) shall prevent the Board of Directors of Atari from referring any third party to this Section 4.5 or providing a copy of this Agreement (other than the JTS Disclosure Schedule) to any third party, (ii) shall prevent the Board of Directors of Atari from considering, negotiating, approving and recommending to the shareholders of Atari an unsolicited bona fide written Atari Acquisition Proposal which the Board of Directors of Atari determines in good faith (after consultation with its financial advisors and after consultation with outside counsel as to whether the Board of Directors is required to do so in order to discharge properly its fiduciary duties to shareholders under applicable law) would result in a transaction more favorable to the Company's shareholders from a financial point of view than the transaction contemplated by this Agreement (any such Atari Acquisition Proposal being referred to herein as a "Superior Atari Proposal"). ARTICLE V ADDITIONAL AGREEMENTS 5.1 Proxy Statement/Prospectus; Registration Statement. As promptly as practicable after the execution of this Agreement, JTS and Atari shall prepare, and Atari shall file with the SEC, preliminary proxy materials relating to the approval of the Merger and the transactions contemplated hereby by the stockholders of each of JTS and Atari and, as promptly as practicable following receipt of SEC comments thereon, JTS and Atari shall file with the SEC a Registration Statement on Form S-4 (or such other or successor form as shall be appropriate), which complies in form with applicable SEC requirements and shall use all reasonable efforts to cause the Registration Statement to become effective as soon thereafter as practicable. The Proxy Statement shall include the recommendation of the Board of Directors of JTS in favor of the Merger; provided that such recommendation may not be included or may be withdrawn if previously included if JTS's Board of Directors, upon written advice of its outside legal counsel, shall determine that to include such recommenda- 22 210 tion or not withdraw such recommendation if previously included would constitute a breach of the Board's fiduciary duty under applicable law. The Proxy Statement shall include the recommendation of the Board of Directors of Atari in favor of the Merger; provided that such recommendation may not be included or may be withdrawn if previously included if Atari's Board of Directors, upon written advice of its outside legal counsel, shall determine that to include such recommendation or not withdraw such recommendation if previously included would constitute a breach of the Board's fiduciary duty under applicable law. 5.2 Meetings of Stockholders. (a) JTS shall promptly after the date hereof take all action necessary in accordance with Delaware Law and its Certificate of Incorporation and Bylaws to convene the JTS Stockholders Meeting on or prior to June 30, 1996 or as soon thereafter as is practicable. JTS shall consult with Atari and use all reasonable efforts to hold the JTS Stockholders Meeting on the same day as the Atari Stockholders Meeting and shall not postpone or adjourn (other than for the absence of a quorum) the JTS Stockholders Meeting without the consent of Atari. JTS shall use its best efforts to solicit from stockholders of JTS proxies in favor of the Merger and shall take all other action necessary or advisable to secure the vote or consent of stockholders required to effect the Merger. (b) Atari shall promptly after the date hereof take all action necessary in accordance with Nevada Law and its Articles of Incorporation and Bylaws to convene the Atari Stockholders Meeting on or prior to June 30, 1996 or as soon thereafter as is practicable. Atari shall consult with JTS and shall use all reasonable efforts to hold the Atari Stockholders Meeting on the same day as the JTS Stockholders Meeting and shall not postpone or adjourn (other than for the absence of a quorum) the Atari Stockholders Meeting without the consent of JTS. Atari shall use its best efforts to solicit from stockholders of Atari proxies in favor of the Merger and shall take all other action necessary or advisable to secure the vote or consent of stockholders required to effect the Merger. 5.3 Access to Information. JTS shall afford Atari and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (i) all of JTS's and its subsidiaries' properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of JTS and its subsidiaries as Atari may reasonably request. JTS agrees to provide to Atari and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. Atari shall afford JTS and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (i) all of Atari's and its subsidiaries' properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of Atari and its subsidiaries as JTS may reasonably request. Atari agrees to provide to JTS and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 5.3 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger. 5.4 Public Disclosure. Atari and JTS shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except as may be required by law. 5.5 Consents; Cooperation. Each of Atari and JTS shall promptly apply for or otherwise seek, and use its best efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the Merger, including those required under HSR, and shall use its best efforts to obtain all necessary consents, waivers and approvals under any of its material contracts in connection with the Merger for the assignment thereof or otherwise. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to HSR or any other federal or state antitrust or fair trade law. 23 211 5.6 Continuity of Interest Certificates. (a) Schedule 5.6(a) sets forth those persons who hold one percent (1%) or more of the outstanding shares of JTS capital stock (the "JTS Significant Stockholders"). JTS shall provide Atari such information and documents as Atari shall reasonably request for purposes of reviewing such list. JTS shall use its best efforts to deliver or cause to be delivered to Atari, concurrently with the execution of this Agreement (and in each case prior to the Effective Time) from each of the JTS Significant Stockholders, an executed Continuity of Interest Certificate in a form reasonably satisfactory to counsel to Atari. The Surviving Company shall be entitled to place appropriate legends on the certificates evidencing any JTS Common Stock held by such JTS Significant Stockholders, and to issue appropriate stop transfer instructions to the transfer agent for JTS Common Stock, consistent with the terms of such Continuity of Interest Certificates. (b) Schedule 5.6(b) sets forth those persons who hold five percent (5%) or more of the outstanding shares of Atari capital stock (the "Atari Significant Stockholders"). Atari shall provide JTS such information and documents as JTS shall reasonably request for purposes of reviewing such list. Atari shall use its best efforts to deliver or cause to be delivered to JTS, concurrently with the execution of this Agreement (and in each case prior to the Effective Time) from each of the Atari Significant Stockholders, an executed Continuity of Interest Certificate in a form reasonably satisfactory to counsel to JTS. The Surviving Company shall be entitled to place appropriate legends on the certificates evidencing any JTS Common Stock to be received by such Atari Significant Stockholders pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for JTS Common Stock, consistent with the terms of such Continuity of Interest Certificates. 5.7 Voting Agreements. (a) Prior to or concurrently with the execution of this Agreement, each JTS stockholder named in Schedule 5.7(a) shall have executed and delivered to Atari a Voting Agreement substantially in the form of Exhibit C-1 attached hereto. (b) Prior to or concurrently with the execution of this Agreement, each Atari stockholder named in Schedule 5.7(b) shall have executed and delivered to JTS a Voting Agreement substantially in the form of Exhibit C-2 attached hereto. 5.8 FIRPTA. Promptly following the Closing, JTS and Atari shall deliver to the IRS appropriate notices that their capital stock is not a "U.S. Real Property Interest" as defined in and in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2). 5.9 Legal Requirements. Each of Atari and JTS will, and will cause their respective subsidiaries to, take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party hereto necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement and will take all reasonable actions necessary to obtain (and will cooperate with the other parties hereto in obtaining) any consent, approval, order or authorization of, or any registration, declaration or filing with, any Governmental Entity or other person, required to be obtained or made in connection with the taking of any action contemplated by this Agreement. 5.10 Blue Sky Laws. JTS shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the JTS Common Stock in connection with the Merger. Atari shall use its best efforts to assist JTS as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of JTS Common Stock in connection with the Merger. 5.11 Atari Employee Benefit Plans. At the Effective Time, each outstanding option to purchase shares of Atari Common Stock under the Atari Stock Option Plan whether vested or unvested, will be assumed by JTS. Each such option so assumed by JTS under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Atari Stock Option Plan immediately prior to the Effective Time, 24 212 except that (i) such option will be exercisable for that number of whole shares of JTS Common Stock equal to the product of the number of shares of Atari Common Stock that were issuable upon exercise of such option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of JTS Common Stock, and (ii) the per share exercise price for the shares of JTS Common Stock issuable upon exercise of such assumed option will be equal to the quotient determined by dividing the exercise price per share of Atari Common Stock at which such option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. It is the intention of the parties that the options so assumed by JTS qualify following the Effective Time as incentive stock options as defined in Section 422 of the Code to the extent such options qualified as incentive stock options prior to the Effective Time. 5.12 Atari Debentures. Each Atari Debenture, upon its surrender to JTS at any time at or following the Closing, shall be exchanged for a debenture in substantially identical form (i) representing the right to convert into that number of shares of JTS Common Stock equal to the number of shares of Atari Common Stock for which such debenture was previously convertible multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of JTS Common Stock, and (ii) with a per share conversion price for the shares of JTS Common Stock issuable upon exercise of such assumed debenture equal to the quotient determined by dividing the conversion price per share of JTS Common Stock at which such debenture was convertible immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. 5.13 Form S-8. JTS agrees to file, no later than five (5) days after the Closing, a registration statement on Form S-8 covering the shares of JTS Common Stock issuable pursuant to outstanding options under the Atari Stock Option Plan assumed by JTS. 5.14 Tax-Free Reorganization; Tax Returns. Atari and JTS shall each use its best efforts to cause the Merger to be treated as a "reorganization" within the meaning of Section 368(a)(1)(A) of the Code and shall report the Merger as such in all federal and, to the extent permitted, all state and local tax returns filed after the Effective Time of the Merger. 5.15 Registration Rights. At or prior to the Closing, JTS shall provide to the holders of Atari Common Stock listed on Schedule 5.15 hereto, the registration rights set forth in that certain Registration Rights Agreement dated as of February 3, 1995 by and among JTS and the entities listed on Exhibit A thereto, by amending such agreement in a form reasonably acceptable to counsel to Atari. 5.16 Indemnification of Officers and Directors. After the Effective Time, the Surviving Corporation shall (to the extent not prohibited by law) indemnify and hold harmless, and pay in advance expenses, costs, damages, settlements and fees to each director or officer of Atari serving as such as of the date hereof as provided in the Nevada law or the Articles of Incorporation or bylaws of Atari or any indemnification agreement to which Atari and such officer or director is a party, in each case as in effect at the date hereof, which provisions shall survive the Merger and shall continue in full force and effect after the Effective Time. 5.17 Listing of JTS Common Stock. Atari and JTS shall each use its best efforts to cause the JTS Common Stock to be approved for listing on the Nasdaq National Market or the American Stock Exchange, such that trading in JTS Common Stock shall commence on the first trading day following the Closing. 5.18 Atari Consent to JTS Transaction with Moduler. JTS covenants and agrees with Atari that JTS will not amend or modify the Moduler Agreement without the prior written consent of Atari. 5.19 Atari SEC Documents. Atari covenants and agrees with JTS that from and after the date hereof, Atari will timely file all reports which it is required to file with the SEC pursuant to the Exchange Act. 5.20 Best Efforts and Further Assurances. Each of the parties to this Agreement shall use its best efforts to effectuate the transactions contemplated hereby and to fulfill or cause to be fulfilled the conditions to closing under this Agreement. Each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary 25 213 or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. ARTICLE VI CONDITIONS TO THE MERGER 6.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by agreement of all the parties hereto: (a) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by (i) the holders of a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding as of the record date set for the JTS Stockholders Meeting, voting together, (ii) a majority of the shares of JTS Common Stock outstanding on the record date set for the JTS Stockholders Meeting, voting separtely as a class, (iii) the holders of at least two-thirds of the shares of JTS Series A Preferred outstanding as of the record date set for the JTS Stockholders Meeting, voting separately as a class, and (iv) the holders of a majority of the shares of Atari Common Stock outstanding as of the record date set for the Atari Stockholders Meeting. (b) Registration Statement Effective. The SEC shall have declared the Registration Statement effective. No stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose, and no similar proceeding in respect of the Proxy Statement, shall have been initiated or threatened by the SEC; and all requests for additional information on the part of the SEC shall have been complied with to the reasonable satisfaction of the parties hereto. (c) Exchange Act Registration Statement Effective. JTS shall have filed a Registration Statement on Form 8-A with the SEC pursuant to the Exchange Act (the "Form 8-A"). The SEC shall have declared the Form 8-A effective. No stop orders suspending the effectiveness of the Form 8-A or any part thereof shall have been issued and no proceeding for that purpose, shall have been initiated or threatened by the SEC. (d) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. In the event an injunction or other order shall have been issued, each party agrees to use its reasonable diligent efforts to have such injunction or other order lifted. (e) Governmental Approval. Atari and JTS and their respective subsidiaries shall have timely obtained from each Governmental Entity all approvals, waivers and consents, if any, necessary for consummation of or in connection with the Merger and the several transactions contemplated hereby, including such approvals, waivers and consents as may be required under the Securities Act, under state Blue Sky laws, and under HSR. (f) Tax Opinion. Atari and JTS shall have received substantially identical written opinions of Wilson Sonsini Goodrich & Rosati, P.C., and Cooley Godward Castro Huddleson & Tatum, in form and substance reasonably satisfactory to them, to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and such opinions shall not have been withdrawn. In rendering such opinions, counsel shall be entitled to rely upon representations of Atari and JTS and certain stockholders of Atari and JTS. 26 214 (g) Listing of JTS Common Stock. The JTS Common Stock shall have been approved for quotation on the Nasdaq National Market or the American Stock Exchange. (h) Limit on JTS Dissenting Shares. No more than 5.0% of the shares of JTS Common Stock and JTS Series A Preferred Stock shall be Dissenting Shares or entitled to exercise any dissenters or appraisal rights with respect to the Merger. (i) Continuity of Interest Certificates. Atari shall have received from each of the JTS Significant Stockholders an executed Continuity of Interest Certificate as contemplated by Section 5.6 hereof. JTS shall have received from each of the Atari Significant Shareholders an executed Continuity of Interest Certificate as contemplated by Section 5.6 hereof. (j) Supplemental Indentures. To the extent required by the indenture related to the Atari Debentures or the indenture related to the Federated Debentures, Atari and JTS shall have entered into supplemental indentures with the trustees for such debentures, such supplemental indentures to be in a form reasonably satisfactory to counsel to Atari and counsel to JTS. 6.2 Additional Conditions to Obligations of JTS. The obligations of JTS to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by JTS: (a) Representations, Warranties and Covenants. (i) The representations and warranties of Atari in this Agreement shall be true and correct in all respects on and as of the Effective Time as though such representations and warranties were made on and as of such time, except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries and (ii) Atari shall have performed and complied in all respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Effective Time, except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries. (b) Certificate of Atari. JTS shall have been provided with a certificate executed on behalf of Atari by its President and its Chief Financial Officer to the effect that, as of the Effective Time: (i) all representations and warranties made by Atari under this Agreement are true and complete in all respects except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries; and (ii) all covenants, obligations and conditions of this Agreement to be performed by Atari on or before such date have been so performed in all respects except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries. (c) Third Party Consents. JTS shall have been furnished with evidence satisfactory to it of the consent or approval of those persons whose consent or approval shall be required in connection with the Merger under any material contract of Atari or any of its Significant Subsidiaries or otherwise. (d) Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting JTS' conduct or operation of the business of Atari and its subsidiaries, following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (e) Legal Opinions. JTS shall have received legal opinions from Wilson Sonsini Goodrich & Rosati, P.C. and Atari's Nevada counsel, which opinions shall be reasonably satisfactory to counsel to JTS. 27 215 (f) No Material Adverse Changes. There shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of Atari and its subsidiaries, taken as a whole. 6.3 Additional Conditions to the Obligations of Atari. The obligations of Atari to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by Atari: (a) Representations, Warranties and Covenants. (i) The representations and warranties of JTS in this Agreement shall be true and correct in all respects on and as of the Effective Time as though such representations and warranties were made on and as of such time, except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries and (ii) JTS shall have performed and complied in all respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Effective Time, except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries. (b) Certificate of JTS. Atari shall have been provided with a certificate executed on behalf of JTS by its Chief Executive Officer and Chief Financial Officer to the effect that, as of the Effective Time: (i) all representations and warranties made by JTS under this Agreement are true and complete in all respects; except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries; and (ii) all covenants, obligations and conditions of this Agreement to be performed by JTS on or before such date have been so performed in all respects except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries. (c) Third Party Consents. Atari shall have been furnished with evidence satisfactory to it of the consent or approval of those persons whose consent or approval shall be required in connection with the Merger under any material contract of JTS or any of its subsidiaries or otherwise. (d) Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting JTS' conduct or operation of the business of JTS and its subsidiaries, following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (e) Legal Opinion. Atari shall have received a legal opinion from Cooley Godward Castro Huddleson & Tatum, which opinion shall be reasonably satisfactory to counsel to Atari. (f) No Material Adverse Changes. There shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of JTS and its subsidiaries, taken as a whole. (g) Conversion of JTS Series A Preferred Stock. Each outstanding share of JTS Series A Preferred Stock shall be converted into one (1) share of JTS Common Stock. (h) Right of First Refusal and Co-Sale Agreement. The provisions of the Right of First Refusal and Co-Sale Agreement dated as of February 3, 1995 by and among JTS and certain other parties, as amended, shall have terminated. 28 216 ARTICLE VII TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. Notwithstanding approval of this Agreement by the stockholders of JTS or Atari, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time: (a) by mutual written consent of JTS and Atari; (b) by Atari if (i) it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of JTS, which has or can reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole, and such breach has not been cured within five (5) days after written notice to JTS (provided that, no cure period shall be required for a breach which by its nature cannot be cured) or (ii) there shall be any final action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would prohibit JTS's ownership or operation of all or a material portion of the business of Atari or any of its subsidiaries, or compel Atari or any of Atari's subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold separate or otherwise relinquish all or a material portion of the business or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's subsidiaries as a result of the Merger. (c) by JTS if (i) it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Atari, which has or can reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole, and such breach has not been cured within five (5) days after written notice to Atari (provided that, no cure period shall be required for a breach which by its nature cannot be cured) or (ii) there shall be any final action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would prohibit JTS's ownership or operation of all or a material portion of the business of JTS or any of its subsidiaries, or compel Atari or any of Atari's subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold separate or otherwise relinquish all or a material portion of the business or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's subsidiaries as a result of the Merger. (d) by any party hereto if: (i) the Closing has not occurred by July 31, 1996, (ii) there shall be a final, non-appealable order of a federal or state court in effect preventing consummation of the Merger; (iii) there shall be any final action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity which would make consummation of the Merger illegal; (iv) if JTS's stockholders do not approve the Merger and this Agreement by the requisite vote at JTS Stockholders Meeting; (v) if Atari's stockholders do not approve the Merger and this Agreement by the requisite vote at the Atari Stockholders Meeting; or (vi) if the Atari Board of Directors shall have accepted, approved or recommended to the shareholders of Atari a Superior Atari Proposal. Where action is taken to terminate this Agreement pursuant to this Section 7.1, it shall be sufficient for such action to be authorized by the Board of Directors of the party taking such action and for such party to then notify the other parties in writing of such action. 7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Atari and JTS or their respective officers, directors, stockholders or affiliates, except to the extent that such termination results from the breach by a party hereto of any of its representations, warranties or covenants set forth this Agreement; provided that, the provisions of Section 7.3 (Expenses) and this Section 7.2 shall remain in full force and effect and survive any termination of this Agreement. 7.3 Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense, except that expenses incurred in connection with printing the Proxy Materials and the S-4 29 217 Registration Statement, registration and filing fees incurred in connection with the S-4 Registration Statement and the Proxy Materials and fees, costs and expenses associated with compliance with applicable state securities laws, listing of the JTS Common Stock on the Nasdaq National Market or the American Stock Exchange, and with HSR in connection with the Merger shall be shared equally by JTS and Atari. 7.4 Amendment. The boards of directors of the parties hereto may cause this Agreement to be amended at any time by execution of an instrument in writing signed on behalf of each of the parties hereto; provided that an amendment made subsequent to adoption of the Agreement by the stockholders of JTS or Atari shall not (i) alter or change the amount or kind of consideration to be received on conversion of the Atari Common Stock, (ii) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger, or (iii) alter or change any of the terms and conditions of the Agreement if such alteration or change would adversely affect the holders of Atari Common Stock. 7.5 Extension; Waiver. At any time prior to the Effective Time any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE VIII GENERAL PROVISIONS 8.1 Non-Survival at Effective Time. The representations, warranties and agreements set forth in this Agreement shall terminate at the Effective Time, except that the agreements set forth in Article I, Section 5.8 (FIRPTA), Section 5.11 (Employee Benefit Plans), Section 5.12 (Atari Debentures), Section 5.13 (Form S-8), Section 5.14 (Tax Free Reorganization; Tax Returns), Section 5.16 (Indemnification), Section 5.20 (Best Efforts and Further Assurances), 7.3 (Expenses), and this Article VIII shall survive the Effective Time. 8.2 Absence of Third Party Beneficiary Rights. No provisions of this Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, stockholder, partner or employee of any party hereto or any other person or entity unless specifically provided otherwise herein, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. 8.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Atari, to: Atari Corporation 455 South Mathilda Avenue Sunnyvale, California 94086 Attention: Jack Tramiel Facsimile No.: (408) 328-0909 Telephone No.: (408) 328-0900 30 218 with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Jeffrey D. Saper, Esq. Facsimile No.: (415) 493-6811 Telephone No.: (415) 493-9300 (b) if to JTS, to: JTS Corporation 166 Baypointe Parkway San Jose, California 95134 Attention: David T. Mitchell Facsimile No.: (408) 468-1619 Telephone No.: (408) 468-1800 with a copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square Palo Alto, California 94306 Attention: Andrei M. Manoliu, Esq. Facsimile No.: (415) 857-0663 Telephone No.: (415) 843-5000 8.4 Interpretation. When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 8.5 Counterparts. This Agreement may be executed in counterparts, both of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 8.6 Entire Agreement; Nonassignability; Parties in Interest. This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto, including the Exhibits, the Schedules, including the JTS Disclosure Schedule and the Atari Disclosure Schedule (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise. 8.7 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 8.8 Remedies Cumulative. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 31 219 8.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. Each of the parties hereto irrevocably consents to the exclusive jurisdiction of any court located in the County of Santa Clara, California, in connection with any matter based upon or arising out of this Agreement or the matters contemplated herein, agrees that process may be served upon them in any manner authorized by the laws of the State of California for such persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. 8.10 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 8.11 Amendment and Restatement. The parties hereto hereby consent and agree that this Agreement shall constitute an amendment and restatement of that certain Agreement and Plan of Reorganization by and among Atari, JTS and JTS Acquisition Corporation dated as of February 12, 1996. IN WITNESS WHEREOF, JTS and Atari have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized, all as of the date first written above. JT STORAGE, INC. By: /s/ David T. Mitchell ------------------------------------ President ATARI CORPORATION By: /s/ Sam Tramiel ------------------------------------ President 32 220 APPENDIX B-1 FORM OF ATARI VOTING AGREEMENT 221 APPENDIX B-1 ATARI CORPORATION AMENDED AND RESTATED VOTING AGREEMENT This AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement") is made and entered into as of April 8, 1996, by and among JT STORAGE, INC., a Delaware corporation ("JTS"), and the undersigned stockholder ("Stockholder") of ATARI CORPORATION, a Nevada corporation ("Atari"). RECITALS A. Whereas JTS and the Stockholder desire to amend that certain Voting Agreement, dated as of February 12, 1996, and related Irrevocable Proxy to Vote Stock of Atari Corporation dated as of February 12, 1996. B. Pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated as of April 8, 1996 (the "Reorganization Agreement") by and among JTS and Atari, Atari is merging with and into JTS (the "Merger"); C. The Reorganization Agreement amends and restates that certain Agreement and Plan of Reorganization dated as of February 12, 1996, by and among JTS, Atari and JT Acquisition Corporation ("Newco"); D. Pursuant to Section 5.7 of the Reorganization Agreement, in order to induce JTS to enter into the Reorganization Agreement, Atari has agreed to solicit the proxy of certain significant stockholders of Atari on behalf of JTS and to cause certain significant stockholders of Atari to execute and delivery Voting Agreements to JTS; E. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number of shares of the outstanding Common Stock, $0.01 par value per share, of Atari as is indicated on the signature page of this Agreement (the "Shares"); and F. In consideration of the execution of the Reorganization Agreement by JTS, Stockholder agrees not to transfer or otherwise dispose of any of the Shares, or any other shares of capital stock of Atari acquired by Stockholder hereafter and prior to the Expiration Date (as defined in Section 1.1 below), and agrees to vote the Shares and any other such shares of capital stock of Atari so as to facilitate consummation of the Merger. NOW, THEREFORE, the parties agree as follows: 1. AGREEMENT TO RETAIN SHARES. 1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer (except as may be specifically required by court order), sell, exchange, pledge (except in connection with a bona fide loan transaction, provided that any pledgee agrees not to transfer, sell, exchange, pledge or otherwise dispose of or encumber the Shares or any New Shares (as defined in Section 1.2) prior to the Expiration Date and to be subject to the Proxy (as defined in Section 3)) or otherwise dispose of or encumber the Shares or any New Shares, or to make any offer or agreement relating thereto, at any time prior to the Expiration Date. As used herein, the term ("Expiration Date") shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. 1.2 NEW SHARES. Stockholder agrees that any shares of capital stock of Atari that Stockholder purchases or with respect to which Stockholder otherwise acquires beneficial ownership after the date of this Agreement and prior to the Expiration Date ("New Shares") shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Shares. 2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of Atari called with respect to any of the following, and at every adjournment thereof, and on every action or approval by written consent of B-1-1 222 the stockholders of Atari with respect to any of the following, Stockholder shall vote the Shares and any New Shares in favor of approval of the Reorganization Agreement and the Merger and any matter that could reasonably be expected to facilitate the Merger. This Agreement is intended to bind Stockholder as a stockholder of Atari only with respect to the specific matters set forth herein and shall not prohibit Stockholder from acting in accordance with his or her fiduciary duties, if applicable, as an officer or director of Atari. 3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement, Stockholder agrees to deliver to JTS a proxy in the form attached hereto as Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in Section 78.355 of the Nevada General Corporation Law, covering the total number of Shares and New Shares beneficially owed or as to which beneficial ownership is acquired (as such term is defined in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder hereby represents, warrants and covenants to JTS that Stockholder (i) is the beneficial owner of the Shares, which at the date of this Agreement are and at all times up until the Expiration Date will be free and clear of any liens, claims, options, charges or other encumbrances; (ii) does not beneficially own any shares of capital stock of Atari other than the Shares (excluding shares as to which Stockholder currently disclaims beneficial ownership in accordance with applicable law); and (iii) has full power and authority to make, enter into and carry out the terms of this Agreement and the Proxy. 5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to execute and deliver any additional documents necessary or desirable, in the reasonable opinion of JTS, to carry out the purpose and intent of this Agreement. 6. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers that are reasonably required for the consummation of the Merger under the terms of any agreement to which Stockholder is a party or pursuant to any rights Stockholder may have. 7. TERMINATION. This Agreement and the Proxy delivered in connection herewith shall terminate and shall have no further force or effect as of the Expiration Date. 8. MISCELLANEOUS. 8.1 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by either of the parties without the prior written consent of the other. 8.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified, amended, altered or supplemented except by the execution and delivery of a written agreement executed by the parties hereto. 8.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto acknowledge that JTS will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or agreements of Stockholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to JTS upon any such violation, JTS shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to JTS at law or in equity. 8.5 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return B-1-2 223 receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to JTS, to: JTS Corporation 166 Baypointe Parkway San Jose, California 95134 Attention: David T. Mitchell Facsimile No.: (408) 468-1619 Telephone No.: (408) 468-1800 With a copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square 3000 El Camino Real Palo Alto, California 94306 Attention: Andrei M. Manoliu, Esq. Facsimile No.: (415) 857-0663 Telephone No.: (415) 843-5000 (b) if to Stockholder, to the address set forth below. 8.6 GOVERNING LAW. This Agreement and the Proxy shall be governed by, construed and enforced in accordance with the internal laws of the State of Nevada. 8.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire understanding of the parties in respect of the subject matter hereof and supersede all prior negotiations and understandings between the parties with respect to such subject matters. 8.8 COUNTERPART. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 8.9 EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. B-1-3 224 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. JT STORAGE, INC. By: -------------------------------------- Title: -------------------------------------- STOCKHOLDER By: -------------------------------------- Title: -------------------------------------- Stockholder's Address for Notice: -------------------------------------- -------------------------------------- Shares beneficially owned: ------------------------------------------------------------ shares of Atari Common Stock B-1-4 225 EXHIBIT A IRREVOCABLE PROXY TO VOTE STOCK OF ATARI CORPORATION The undersigned stockholder of Atari Corporation, a Nevada corporation ("Atari"), hereby irrevocably (to the full extent permitted by Section 78.355 of the Nevada General Corporation Law) appoints the members of the Board of Directors of JT Storage, Inc., a Delaware corporation ("JTS"), and each of them, as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the full extent that the undersigned is entitled to do so) with respect to all of the shares of capital stock of Atari that now are or hereafter may be beneficially owned by the undersigned, and any and all other shares or securities of Atari issued or issuable in respect thereof on or after the date hereof (collectively, the "Shares") in accordance with the terms of this Proxy. The Shares beneficially owned by the undersigned stockholder of Atari as of the date of this Proxy are listed below. Upon the undersigned's execution of this Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby revoked and the undersigned agrees not to grant any subsequent proxies with respect to the Shares until after the Expiration Date (as defined below). This Proxy is irrevocable (to the extent provided in Section 78.355 of the Nevada General Corporation Law), is granted pursuant to that certain Amended and Restated Voting Agreement dated as of the date hereof, by and among JTS and the undersigned stockholder (the "Voting Agreement") which amends and restates that certain Voting Agreement, dated as of February 12, 1996, by and among JTS and the undersigned stockholder, and is granted in consideration of JTS entering into that certain Amended and Restated Agreement and Plan of Reorganization by and among JTS and Atari (the "Reorganization Agreement") which amends and restates that certain Agreement and Plan of Reorganization by and among JTS, Atari and JTS Acquisition Corporation dated as of February 12, 1996. The Reorganization Agreement provides for the merger of Atari with and into JTS. As used herein, the term "Expiration Date" shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. The attorneys and proxies named above, and each of them are hereby authorized and empowered by the undersigned, at any time prior to the Expiration Date, to act as the undersigned's attorney and proxy to vote the Shares, and to exercise all voting and other rights of the undersigned with respect to the Shares (including, without limitation, the power to execute and deliver written consents pursuant to Section 78.320 of the Nevada General Corporation Law), at every annual, special or adjourned meeting of the stockholders of Atari and in every written consent in lieu of such meeting in favor of approval of the Merger and the Reorganization Agreement and in favor of any matter that could reasonably be expected to facilitate the Merger. The attorneys and proxies named above may not exercise this Proxy on any other matter except as provided above. The undersigned stockholder may vote the Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the undersigned. This Proxy is irrevocable to the extent provided in Section 78.355 of the Nevada General Corporation Law. Dated: April 8, 1996 (Signature of Stockholder) Shares beneficially owned: (Print Name of Stockholder) ________ shares of Atari Common Stock 226 APPENDIX B-2 FORM OF JTS VOTING AGREEMENT 227 APPENDIX B-2 JT STORAGE, INC. AMENDED AND RESTATED VOTING AGREEMENT This AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement") is made and entered into as of April 8, 1996, by and among ATARI CORPORATION, a Nevada corporation ("Atari"), and the undersigned stockholder ("Stockholder") of JT STORAGE, INC., a Delaware corporation ("JTS"). RECITALS A. Whereas Atari and the Stockholder desire to amend that certain Voting Agreement, dated as of February 12, 1996, and related Irrevocable Proxy to Vote Stock of JT Storage, Inc., dated as of February 12, 1996. B. Pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated as of April , 1996 (the "Reorganization Agreement") by and among JTS and Atari, Atari is merging with and into JTS (the "Merger"); C. The Reorganization Agreement amends and restates that certain Agreement and Plan of Reorganization dated as of February 12, 1996, by and among JTS, Atari and JT Acquisition Corporation; D. Pursuant to Section 5.7 of the Reorganization Agreement, in order to induce Atari to enter into the Reorganization Agreement, JTS has agreed to solicit the proxy of certain significant stockholders of JTS on behalf of Atari and to cause certain significant stockholders of JTS to execute and delivery Voting Agreements to Atari; E. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number of shares of the outstanding Common Stock, $0.000001 par value per share, of JTS as is indicated on the signature page of this Agreement (the "Shares"); and F. In consideration of the execution of the Reorganization Agreement by Atari, Stockholder agrees not to transfer or otherwise dispose of any of the Shares, or any other shares of capital stock of JTS acquired by Stockholder hereafter and prior to the Expiration Date (as defined in Section 1.1 below), and agrees to vote the Shares and any other such shares of capital stock of JTS so as to facilitate consummation of the Merger. NOW, THEREFORE, the parties agree as follows: 1. AGREEMENT TO RETAIN SHARES. 1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer (except as may be specifically required by court order), sell, exchange, pledge (except in connection with a bona fide loan transaction, provided that any pledgee agrees not to transfer, sell, exchange, pledge or otherwise dispose of or encumber the Shares or any New Shares (as defined in Section 1.2) prior to the Expiration Date and to be subject to the Proxy (as defined in Section 3)) or otherwise dispose of or encumber the Shares or any New Shares, or to make any offer or agreement relating thereto, at any time prior to the Expiration Date. As used herein, the term ("Expiration Date") shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. 1.2 NEW SHARES. Stockholder agrees that any shares of capital stock of JTS that Stockholder purchases or with respect to which Stockholder otherwise acquires beneficial ownership after the date of this Agreement and prior to the Expiration Date ("New Shares") shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Shares. B-2-1 228 2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of JTS called with respect to any of the following, and at every adjournment thereof, and on every action or approval by written consent of the stockholders of JTS with respect to any of the following, Stockholder shall vote the Shares and any New Shares in favor of approval of the Reorganization Agreement and the Merger and any matter that could reasonably be expected to facilitate the Merger. This Agreement is intended to bind Stockholder as a stockholder of JTS only with respect to the specific matters set forth herein and shall not prohibit Stockholder from acting in accordance with his or her fiduciary duties, if applicable, as an officer or director of Atari. 3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement, Stockholder agrees to deliver to Atari a proxy in the form attached hereto as Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in Section 212 of the Delaware General Corporation Law, covering the total number of Shares and New Shares beneficially owed or as to which beneficial ownership is acquired (as such term is defined in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder hereby represents, warrants and covenants to Atari that Stockholder (i) is the beneficial owner of the Shares, which at the date of this Agreement are and at all times up until the Expiration Date will be free and clear of any liens, claims, options, charges or other encumbrances; (ii) does not beneficially own any shares of capital stock of JTS other than the Shares (excluding shares as to which Stockholder currently disclaims beneficial ownership in accordance with applicable law); and (iii) has full power and authority to make, enter into and carry out the terms of this Agreement and the Proxy. 5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to execute and deliver any additional documents necessary or desirable, in the reasonable opinion of Atari, to carry out the purpose and intent of this Agreement. 6. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers that are reasonably required for the consummation of the Merger under the terms of any agreement to which Stockholder is a party or pursuant to any rights Stockholder may have. 7. TERMINATION. This Agreement and the Proxy delivered in connection herewith shall terminate and shall have no further force or effect as of the Expiration Date. 8. MISCELLANEOUS. 8.1 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by either of the parties without the prior written consent of the other. 8.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified, amended, altered or supplemented except by the execution and delivery of a written agreement executed by the parties hereto. 8.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto acknowledge that Atari will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or agreements of Stockholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to Atari upon any such violation, Atari shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to Atari at law or in equity. 8.5 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return B-2-2 229 receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Atari, to: Atari Corporation 455 South Mathilda Avenue Sunnyvale, California 94086 Attention: Jack Tramiel Facsimile No.: (408) 328-0909 Telephone No.: (408) 328-0900 With a copy to: Wilson, Sonsini, Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Jeffrey D. Saper, Esq. Facsimile No.: (415) 493-6811 Telephone No.: (415) 493-9300 (b) if to Stockholder, to the address set forth below. 8.6 GOVERNING LAW. This Agreement and the Proxy shall be governed by, construed and enforced in accordance with the internal laws of the State of Delaware. 8.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire understanding of the parties in respect of the subject matter hereof and supersede all prior negotiations and understandings between the parties with respect to such subject matters. 8.8 COUNTERPART. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 8.9 EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. B-2-3 230 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. ATARI CORPORATION By: -------------------------------------- Title: -------------------------------------- STOCKHOLDER By: -------------------------------------- Title: -------------------------------------- Stockholder's Address for Notice: -------------------------------------- -------------------------------------- Shares beneficially owned: ------------------------------------------------------ shares of JTS Common Stock ------------------------------------------------------ shares of JTS Series A Preferred Stock B-2-4 231 EXHIBIT A IRREVOCABLE PROXY TO VOTE STOCK OF JT STORAGE, INC. The undersigned stockholder of JT Storage, Inc. a Delaware corporation ("JTS"), hereby irrevocably (to the full extent permitted by Section 212 of the Delaware General Corporation Law) appoints the members of the Board of Directors of Atari Corporation, a Nevada corporation ("Atari"), and each of them, as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the full extent that the undersigned is entitled to do so) with respect to all of the shares of capital stock of JTS that now are or hereafter may be beneficially owned by the undersigned, and any and all other shares or securities of JTS issued or issuable in respect thereof on or after the date hereof (collectively, the "Shares") in accordance with the terms of this Proxy. The Shares beneficially owned by the undersigned stockholder of JTS as of the date of this Proxy are listed below. Upon the undersigned's execution of this Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby revoked and the undersigned agrees not to grant any subsequent proxies with respect to the Shares until after the Expiration Date (as defined below). This Proxy is irrevocable (to the extent provided in Section 212 of the Delaware General Corporation Law), is granted pursuant to that certain Amended and Restated Voting Agreement dated as of the date hereof, by and among Atari and the undersigned stockholder (the "Voting Agreement") which amends and restates that certain Voting Agreement, dated as of February 12, 1996, by and among Atari and the undersigned stockholder, and is granted in consideration of Atari entering into that certain Amended and Restated Agreement and Plan of Reorganization by and among JTS and Atari (the "Reorganization Agreement") which amends and restates that certain Agreement and Plan of Reorganization by and among JTS, Atari and JTS Acquisition Corporation dated as of February 12, 1996. The Reorganization Agreement provides for the merger of Atari with and into JTS. As used herein, the term "Expiration Date" shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. The attorneys and proxies named above, and each of them are hereby authorized and empowered by the undersigned, at any time prior to the Expiration Date, to act as the undersigned's attorney and proxy to vote the Shares, and to exercise all voting and other rights of the undersigned with respect to the Shares (including, without limitation, the power to execute and deliver written consents pursuant to Section 228 of the Delaware General Corporation Law), at every annual, special or adjourned meeting of the stockholders of JTS and in every written consent in lieu of such meeting in favor of approval of the Merger and the Reorganization Agreement and in favor of any matter that could reasonably be expected to facilitate the Merger. The attorneys and proxies named above may not exercise this Proxy on any other matter except as provided above. The undersigned stockholder may vote the Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the undersigned. This Proxy is irrevocable to the extent provided in Section 212 of the Delaware General Corporation Law. Dated: April 8, 1996 ---------------------------------------------- (Signature of Stockholder) ---------------------------------------------- Shares beneficially owned: (Print Name of Stockholder) ______ shares of JTS Common Stock ______ shares of JTS Series A Preferred Stock
232 APPENDIX C MONTGOMERY SECURITIES FAIRNESS OPINION 233 APPENDIX D-1 SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW 234 APPENDIX D-1 SECTION 262 DELAWARE GENERAL CORPORATION LAW APPRAISAL RIGHTS Section 262 Appraisal Rights. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to sec. 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to sec.sec. 251, 252, 254, 257, 258 or 263 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock which, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or (ii) held of record by more than 2,000 stockholders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of sec. 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to sec.sec. 251, 252, 254, 257, 258 and 263 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation; b. Shares of stock of any other corporation which at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 stockholders; c. Cash in lieu of fractional shares of the corporations described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock and cash in lieu of fractional shares described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under sec. 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof, that D-1-1 235 appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to sec. 228 or 253 of this title, the surviving or resulting corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the stockholders entitled to appraisal rights of the effective date of the merger or consolidation and that appraisal rights are available for any or all of the shares of the constituent corporation, and shall include in such notice a copy of this section. The notice shall be sent by certified or registered mail, return receipt requested, addressed to the stockholder at his address as it appears on the records of the corporation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of the notice, demand in writing from the surviving or resulting corporation the appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (b) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting for the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request or such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by one or more publications at least one week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware, or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the D-1-2 236 stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceeds until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholder of record at a date which is prior to the effective date for the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting Corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. D-1-3 237 APPENDIX D-2 CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW 238 APPENDIX D-2 CHAPTER 13 GENERAL CORPORATION LAW OF CALIFORNIA DISSENTERS RIGHTS SECTION 1300. Right to Require Purchase; "Dissenting Shares" and "Dissenting Shareholder" Defined. (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) of Section 1201, each shareholder of such corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action. but adjusted for any stock split or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (0) of Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to five percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger-. provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1301. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. SECTION 1301. Demand for Purchase. (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within ten (10) days alter the date of such approval accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of the price determined by the corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's fight under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any D-2-1 239 dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in clause (i) or (ii) of paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within thirty (30) days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. SECTION 1302. Endorsement of Shares. Within thirty (30) days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. SECTION 1303. Agreed Price; Time for Payment. (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the holders thereof shall be filed with the secretary of the corporation. (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within thirty (30) days after the amount thereof has been agreed or within thirty (30) days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. SECTION 1304. Dissenter's Action to Enforce Payment. (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six (6) months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. D-2-2 240 (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. SECTION 1305. Appraiser's Report; Payment; Costs. (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. (b) If a majority of the appraisers appointed fail to make and file a report within ten (10) days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). SECTION 1306. Dissenting Shareholder's Status as Creditor. To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5. SECTION 1307. Dividends Paid as Credit Against Payment. Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor. SECTION 1308. Continuing Rights and Privileges of Dissenting Shareholders. Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. D-2-3 241 SECTION 1309. Termination of Dissenting Shareholder Status. Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys' fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six (6) months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. SECTION 1310. Suspension of Proceedings for Payment Pending Litigation. If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. SECTION 1311. Exempt Shares. This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. SECTION 1312. Attacking Validity of Reorganization or Merger. (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof, but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholder's shares pursuant to this chapter, but if the shareholder institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon ten (10) days' prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. D-2-4 242 (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled. D-2-5 243 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the Delaware General Corporation Law, the Registrant will have broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws will provide that the Registrant will indemnify its directors and executive officers and may indemnify other officers to the fullest extent permitted by law. Under its Bylaws, indemnified parties will be entitled to indemnification for negligence, gross negligence and otherwise to the fullest extent permitted by law. The Bylaws also will require the Registrant to advance litigation expenses in the case of stockholder derivative actions or other actions, against an undertaking by the indemnified party to repay such advances if it is ultimately determined that the indemnified party is not entitled to indemnification. In addition, the Registrant's Certificate of Incorporation will provide that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Registrant and its stockholders. This provision in the Certificate of Incorporation will not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant for acts or omissions not in good faith or involving intentional misconduct, for knowing violation of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also will not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into indemnity agreements with each of its directors and executive officers. Such indemnity agreements contain provisions that are in some respects broader than the specific indemnification provisions contained in Delaware law. II-1 244 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER - ------- 2.1 -- Amended and Restated Agreement and Plan of Reorganization, dated April 8, 1996, between JTS and Atari 2.2 -- Form of Agreement of Merger of JTS Corporation and Atari Corporation 3.1 -- Restated Certificate of Incorporation, as amended, JTS Corporation 3.2 -- Form of Amended and Restated Certificate of Incorporation to be filed immediately prior to the consummation of the Merger of JTS Corporation 3.3 -- Bylaws of JTS Corporation 3.4 -- Form of Amended and Restated Bylaws of JTS Corporation 4.1 -- Form of Specimen Common Stock Certificate of JTS Corporation 4.2 -- Form of Amended and Restated Registration Rights Agreement 4.3 -- Atari and Security Pacific National Bank Indenture, dated April 29, 1987 4.4 -- Federated Group/Security Pacific National Bank Indenture, dated April 15, 1985 4.5 -- First Supplemental Federated Group/Security Pacific National Bank Indenture, dated September 24, 1987 4.6 -- Warrant to Purchase 450,000 shares of JTS Common Stock, dated March 25, 1994, issued to Venture Lending & Leasing, Inc. 4.7 -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18, 1995, issued to Silicon Valley Bank 4.8 -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4, 1996, issued to Lunenburg S.A. 5.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to legality of securities being registered 8.1 -- Form of Opinion of Cooley Godward Castro Huddleson & Tatum as to certain tax matters 8.2 -- Form of Opinion of Wilson Sonsini Goodrich & Rosati as to certain tax matters 9.1 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares between JTS and certain stockholders of Atari 9.2 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares between Atari and certain stockholders of JTS 10.1 -- Amended and Restated 1995 Stock Option Plan and forms of stock option agreements 10.2 -- 1996 Non-Employee Directors' Plan and form of stock option agreement 10.3 -- 401(k) Plan, adopted March 15, 1996 10.4 -- Form of Indemnity Agreement 10.5 -- Employment Contract of Kenneth D. Wing, dated June 15, 1995 10.6 -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996 10.7 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and David T. Mitchell and related Promissory Note 10.8 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and David T. Mitchell and related Promissory Note 10.9 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and Sirjang Lal Tandon and related Promissory Note 10.10 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and Kenneth D. Wing and related Promissory Note 10.11 -- Restricted Stock Purchase Agreement, dated January 5, 1996, between JTS and W. Virginia Walker and related Promissory Note
II-2 245
EXHIBIT NUMBER - ------- 10.12 -- Restricted Stock Purchase Agreement dated January 2, 1996, between JTS and David Pearce and related Promissory Note 10.13 -- Form of convertible promissory note between JTS and certain principal stockholders of JTS 10.14 -- Form of promissory note between JTS and certain principal stockholders of JTS 10.15 -- Subordinated Secured Convertible Promissory Note, dated February 13, 1996, and related Security Agreement dated February 13, 1996, between JTS and Atari 10.16 -- Stock Purchase Agreement, dated April 4, 1996, between JTS and Lunenburg S.A. 10.17 -- Technical Know-How License Agreement, dated June 14, 1996, between JTS and Moduler 10.18 -- Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust 10.19+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated September 15, 1992 10.20+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated October 11, 1994 10.21+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated March 18, 1996 10.22 -- Agreed Order Compromising Controversies, dated February 4, 1994, as amended January 26, 1995 10.23 -- TEAC Master Agreement, dated February 4, 1994 10.24+ -- TEAC License Agreement, dated February 4, 1994, as amended on February 3, 1995 10.25+ -- Development Agreement, dated June 16, 1994, between JTS and Compaq, as amended on February 3, 1995 and December 5, 1995 10.26+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and Compaq 10.27+ -- Technology Transfer and License Agreement, dated February 3, 1995, between JTS and Western Digital 10.28+ -- Agreement between JTS and Pont Peripherals Corporation, dated January 31, 1995, between JTS and Pont 10.29+ -- Business Loan Agreement, Promissory Note and Collateral, Assignment, Patent Mortgage and Security Agreement, dated December 18, 1995, between JTS and Silicon Valley Bank 21.1 -- List of Subsidiaries 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of Counsel. Reference is made to Exhibits 5.1, 8.1 and 8.2 23.4 -- Consent of Montgomery Securities. Reference is made to Appendix C. 24.1 -- Powers of Attorney. Reference is made to page II-6. 27.1 -- Financial Data Schedule 99.1 -- Form of JTS Proxy 99.2 -- Form of Atari Proxy
- --------------- + Exhibits for which confidential treatment has been requested II-3 246 (b) Financial Statement Schedules JTS Corporation: Schedule II: Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. No financial statement schedules are required of Atari Corporation. (c) Item 4(b) Reports See Appendix C to the Joint Proxy Statement/Prospectus. ITEM 22. UNDERTAKINGS (1) The Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the Registrant undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (2) The Registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filled as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) The Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Joint Proxy Statement/Prospectus pursuant to Items 4,10(b), 11 or 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (4) The Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. (5) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Certificate of Incorporation and the Bylaws of the Registrant and the Delaware General Corporation Law, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the question has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 247 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, JTS Corporation has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, County of Santa Clara, State of California, on the 18th day of June, 1996. JTS Corporation By /s/ DAVID T. MITCHELL David T. Mitchell President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David T. Mitchell and W. Virginia Walker, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments and registration statements filed pursuant to Rule 462 or otherwise) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- ---------------------------------------- -------------- /s/ DAVID T. MITCHELL President, Chief Executive June 18, 1996 David T. Mitchell Officer and Director (Principal Executive Officer) /s/ W. VIRGINIA WALKER Executive Vice President, Finance June 18, 1996 W. Virginia Walker and Administration, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) /s/ SIRJANG LAL TANDON Chairman of the Board and June 18, 1996 Sirjang Lal Tandon Corporate Technical Strategist /s/ JEAN D. Director June 18, 1996 DELEAGE Jean D. Deleage ______________ Director June 18, 1996 Lip-Bu Tan /s/ ALAIN L. Director June 18, 1996 AZAN Alain L. Azan /s/ ROGER W. JOHNSON Director June 18, 1996 Roger W. Johnson
II-5 248 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE We have audited in accordance with generally accepted auditing standards, the financial statements of JTS Corporation included in this registration statement, and have issued our report thereon dated April 4, 1996. Our audit was made for the purpose forming an opinion on those statements taken as a whole. The schedule listed in the index above is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California April 4, 1996 S-1 249 SCHEDULE II JTS CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JANUARY 28, 1996 AND THE PERIOD FROM INCEPTION (FEBRUARY 3, 1994) TO JANUARY 29, 1995 (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES WRITE-OFFS PERIOD ---------- ---------- ---------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Period ended: January 29, 1995.............................. $ -- $ 4 $ -- $ 4 January 28, 1996.............................. $ 4 $ 726 $ -- $ 730 SALES RETURN RESERVE: Period ended: January 29, 1995.............................. $ -- $ -- $ -- $ -- January 28, 1996.............................. $ -- $1,088 $ -- $1,088 ACCRUED WARRANTY: Period ended: January 29, 1995.............................. $ -- $ 328 $ -- $ 328 January 28, 1996.............................. $328 $ 306 $ -- $ 634
S-2 250 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------------------------ JTS CORPORATION ------------------------ VOLUME I - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 251 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------------------------ JTS CORPORATION ------------------------ VOLUME II - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 252 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------ ---------------------------------------------------------------- ------------ 2.1 -- Amended and Restated Agreement and Plan of Reorganization, dated April 8, 1996, between JTS and Atari 2.2 -- Form of Agreement of Merger of JTS Corporation and Atari Corporation 3.1 -- Restated Certificate of Incorporation, as amended, JTS Corporation 3.2 -- Form of Amended and Restated Certificate of Incorporation to be filed immediately prior to the consummation of the Merger of JTS Corporation 3.3 -- Bylaws of JTS Corporation 3.4 -- Form of Amended and Restated Bylaws of JTS Corporation 4.1 -- Form of Specimen Common Stock Certificate of JTS Corporation 4.2 -- Form of Amended and Restated Registration Rights Agreement 4.3 -- Atari and Security Pacific National Bank Indenture, dated April 29, 1987 4.4 -- Federated Group/Security Pacific National Bank Indenture, dated April 15, 1985 4.5 -- First Supplemental Federated Group/Security Pacific National Bank Indenture, dated September 24, 1987 4.6 -- Warrant to Purchase 450,000 shares of JTS Common Stock, dated March 25, 1994, issued to Venture Lending & Leasing, Inc. 4.7 -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18, 1995, issued to Silicon Valley Bank 4.8 -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4, 1996, issued to Lunenburg S.A. 5.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to legality of securities being registered 8.1 -- Form of Opinion of Cooley Godward Castro Huddleson & Tatum as to certain tax matters 8.2 -- Form of Opinion of Wilson Sonsini Goodrich & Rosati as to certain tax matters 9.1 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares between JTS and certain stockholders of Atari 9.2 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares between Atari and certain stockholders of JTS 10.1 -- Amended and Restated 1995 Stock Option Plan and forms of stock option agreements 10.2 -- 1996 Non-Employee Directors' Plan and form of stock option agreement 10.3 -- 401(k) Plan, adopted March 15, 1996 10.4 -- Form of Indemnity Agreement 10.5 -- Employment Contract of Kenneth D. Wing, dated June 15, 1995 10.6 -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996 10.7 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and David T. Mitchell and related Promissory Note 10.8 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and David T. Mitchell and related Promissory Note 10.9 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and Sirjang Lal Tandon and related Promissory Note 10.10 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and Kenneth D. Wing and related Promissory Note 10.11 -- Restricted Stock Purchase Agreement, dated January 5, 1996, between JTS and W. Virginia Walker and related Promissory Note 10.12 -- Restricted Stock Purchase Agreement dated January 2, 1996, between JTS and David Pearce and related Promissory Note 10.13 -- Form of convertible promissory note between JTS and certain principal stockholders of JTS
253
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------ ---------------------------------------------------------------- ------------ 10.14 -- Form of promissory note between JTS and certain principal stockholders of JTS 10.15 -- Subordinated Secured Convertible Promissory Note, dated February 13, 1996, and related Security Agreement dated February 13, 1996, between JTS and Atari 10.16 -- Stock Purchase Agreement, dated April 4, 1996, between JTS and Lunenburg S.A. 10.17 -- Technical Know-How License Agreement, dated June 14, 1996, between JTS and Moduler 10.18 -- Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust 10.19+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated September 15, 1992 10.20+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated October 11, 1994 10.21+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated March 18, 1996 10.22 -- Agreed Order Compromising Controversies, dated February 4, 1994, as amended January 26, 1995 10.23 -- TEAC Master Agreement, dated February 4, 1994 10.24+ -- TEAC License Agreement, dated February 4, 1994, as amended on February 3, 1995 10.25+ -- Development Agreement, dated June 16, 1994, between JTS and Compaq, as amended on February 3, 1995 and December 5, 1995 10.26+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and Compaq 10.27+ -- Technology Transfer and License Agreement, dated February 3, 1995, between JTS and Western Digital 10.28+ -- Agreement between JTS and Pont Peripherals Corporation, dated January 31, 1995, between JTS and Pont 10.29+ -- Business Loan Agreement, Promissory Note and Collateral, Assignment, Patent Mortgage and Security Agreement, dated December 18, 1995, between JTS and Silicon Valley Bank 21.1 -- List of Subsidiaries 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of Counsel. Reference is made to Exhibits 5.1, 8.1 and 8.2 23.4 -- Consent of Montgomery Securities. Reference is made to Appendix C. 24.1 -- Powers of Attorney. Reference is made to page II-6. 27.1 -- Financial Data Schedule 99.1 -- Form of JTS Proxy 99.2 -- Form of Atari Proxy
- --------------- + Exhibits for which confidential treatment has been requested EX-2.1 2 AMENDED & RESTATED AGREEMENT & PLAN OF REORG 1 EXHIBIT 2.1 AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN ATARI CORPORATION AND JT STORAGE, INC. April 8, 1996 2 TABLE OF CONTENTS
PAGE ARTICLE I - THE MERGER........................................................ 2 1.1 The Merger.................................................. 2 1.2 Closing; Effective Time..................................... 2 1.3 Effect of the Merger........................................ 2 1.4 Certificate of Incorporation; Bylaws........................ 2 1.5 Directors and Executive Officers............................ 3 1.6 Effect on Capital Stock..................................... 3 1.7 Surrender of Certificates................................... 4 1.8 No Further Ownership Rights in Atari Stock.................. 5 1.9 Lost, Stolen or Destroyed Certificates...................... 5 1.10 Tax Consequences............................................ 5 1.11 Taking of Necessary Action; Further Action.................. 5 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF JTS............................ 6 2.1 Organization, Standing and Power............................ 6 2.2 Capital Structure........................................... 7 2.3 Authority................................................... 8 2.4 Financial Statements........................................ 9 2.5 Absence of Certain Changes.................................. 9 2.6 Absence of Undisclosed Liabilities.......................... 9 2.7 Litigation.................................................. 10 2.8 Restrictions on Business Activities......................... 10 2.9 Governmental Authorization.................................. 10 2.10 Title to Property........................................... 10 2.11 Intellectual Property....................................... 11 2.12 Environmental Matters....................................... 11 2.13 Tax......................................................... 11 2.14 Employee Benefit Plans...................................... 12 2.15 Certain Agreements Affected by the Merger................... 13 2.16 Employee Matters............................................ 13 2.17 Interested Party Transactions............................... 14 2.18 Insurance................................................... 14 2.19 Compliance With Laws........................................ 14 2.20 Minute Books................................................ 14 2.21 Complete Copies of Materials................................ 14 2.22 Brokers' and Finders' Fees.................................. 15 2.23 Registration Statement; Proxy Statement/Prospectus.......... 15
-i- 3 TABLE OF CONTENTS (continued)
Page 2.24 Vote Required................................................ 15 2.25 Board Approval............................................... 15 2.26 Underlying Documents......................................... 15 2.27 Representations Complete..................................... 16 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF ATARI.......................... 16 3.1 Organization, Standing and Power............................. 16 3.2 Capital Structure............................................ 16 3.3 Authority.................................................... 17 3.4 SEC Documents; Financial Statements.......................... 18 3.5 Absence of Certain Changes................................... 18 3.6 Absence of Undisclosed Liabilities........................... 19 3.7 Litigation................................................... 19 3.8 Restrictions on Business Activities.......................... 19 3.9 Governmental Authorization................................... 19 3.10 Title to Property............................................ 19 3.11 Intellectual Property........................................ 20 3.12 Environmental Matters........................................ 20 3.13 Tax.......................................................... 21 3.14 Employee Benefit Plans....................................... 21 3.15 Certain Agreements Affected by the Merger.................... 22 3.16 Employee Matters............................................. 22 3.17 Interested Party Transactions................................ 23 3.18 Insurance.................................................... 23 3.19 Compliance With Laws......................................... 23 3.20 Minute Books................................................. 23 3.21 Complete Copies of Materials................................. 24 3.22 Broker's and Finders' Fees................................... 24 3.23 Registration Statement; Proxy Statement/Prospectus........... 24 3.24 Opinion of Financial Advisor................................. 24 3.25 Board Approval............................................... 24 3.26 Vote Required................................................ 24 3.27 Underlying Documents......................................... 24 3.28 Representations Complete..................................... 25
-ii- 4 TABLE OF CONTENTS (continued)
Page ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME.............................. 25 4.1 Conduct of Business of JTS and Atari........................ 25 4.2 Conduct of Business of JTS.................................. 26 4.3 Conduct of Business of Atari................................ 27 4.4 No Other JTS Negotiations................................... 28 4.5 No Other Atari Negotiations................................. 29 ARTICLE V - ADDITIONAL AGREEMENTS............................................. 30 5.1 Proxy Statement/Prospectus; Registration Statement.......... 30 5.2 Meetings of Stockholders.................................... 30 5.3 Access to Information....................................... 31 5.4 Public Disclosure........................................... 31 5.5 Consents; Cooperation....................................... 31 5.6 Continuity of Interest Certificates......................... 31 5.7 Voting Agreements........................................... 32 5.8 FIRPTA...................................................... 32 5.9 Legal Requirements.......................................... 32 5.10 Blue Sky Laws............................................... 32 5.11 Atari Employee Benefit Plans................................ 33 5.12 Atari Debentures............................................ 33 5.13 Form S-8.................................................... 33 5.14 Tax-Free Reorganization; Tax Returns........................ 33 5.15 Registration Rights......................................... 33 5.16 Indemnification of Officers and Directors................... 33 5.17 Listing of JTS Common Stock................................. 34 5.18 Atari Consent to JTS Transaction with Moduler............... 34 5.19 Atari SEC Documents......................................... 34 5.20 Best Efforts and Further Assurances......................... 34 ARTICLE VI - CONDITIONS TO THE MERGER......................................... 34 6.1 Conditions to Obligations of Each Party to Effect the Merger 34 6.2 Additional Conditions to Obligations of JTS................. 36 6.3 Additional Conditions to the Obligations of Atari........... 37 -iii-
5 TABLE OF CONTENTS (continued)
Page ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER.............................. 38 7.1 Termination................................................ 38 7.2 Effect of Termination...................................... 39 7.3 Expenses................................................... 39 7.4 Amendment.................................................. 39 7.5 Extension; Waiver.......................................... 40 ARTICLE VIII - GENERAL PROVISIONS............................................ 40 8.1 Non-Survival at Effective Time............................. 40 8.2 Absence of Third Party Beneficiary Rights.................. 40 8.3 Notices.................................................... 40 8.4 Interpretation............................................. 41 8.5 Counterparts............................................... 41 8.6 Entire Agreement; Nonassignability; Parties in Interest.... 41 8.7 Severability............................................... 42 8.8 Remedies Cumulative........................................ 42 8.9 Governing Law.............................................. 42 8.10 Rules of Construction...................................... 42 8.11 Amendment and Restatement.................................. 42
-iv- 6 SCHEDULES JTS Disclosure Schedule Atari Disclosure Schedule Schedule 5.6(a) - JTS Significant Stockholders Schedule 5.6(b) - Atari Significant Shareholders Schedule 5.7(a) - JTS Voting Agreement Signatories Schedule 5.7(b) - Atari Voting Agreement Signatories Schedule 5.15 - Registration Rights Holders -v- 7 EXHIBITS Exhibit A Form of Amended and Restated Certificate of Incorporation Exhibit B Form of Amended and Restated Bylaws Exhibit C-1 Form of JTS Voting Agreement Exhibit C-2 Form of Atari Voting Agreement -vi- 8 AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of April 8, 1996, by and between Atari Corporation, a Nevada corporation ("Atari"), and JT Storage, Inc., a Delaware corporation ("JTS"). RECITALS A. Atari is in the business of designing, manufacturing and selling computers, computer peripheral products and video games. B. JTS is in the business of designing, manufacturing and selling computer peripheral products including mass storage computer disc drives. C. The Boards of Directors of JTS and Atari believe it is in the best interests of their respective companies and the stockholders of their respective companies that JTS and Atari combine into a single company through the statutory merger of Atari with and into JTS (the "Merger") and, in furtherance thereof, have approved the Merger. D. In connection with the Merger, among other things, the outstanding shares of Atari Common Stock, $.01 par value ("Atari Common Stock"), shall be converted into shares of JTS Common Stock, $.000001 par value ("JTS Common Stock"), at the rate set forth herein. E. JTS and Atari desire to make certain representations and warranties and other agreements in connection with the Merger. F. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and to cause the Merger to qualify as a reorganization under the provisions of Section 368(a)(1)(A) of the Code. G. This Agreement amends and restates that certain Agreement and Plan of Reorganization by and among Atari, JTS and JTS Acquisition Corporation dated as of February 12, 1996. NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: -1- 9 ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement, a Certificate of Merger prepared in accordance with Delaware Law (as defined herein) and Nevada Law (as defined herein) and reasonably acceptable to counsel to JTS and counsel to Atari (the "Certificate of Merger"), and the applicable provisions of the Delaware General Corporation Law ("Delaware Law") and Nevada General Corporation Law ("Nevada Law"), Atari shall be merged with and into JTS, the separate corporate existence of Atari shall cease and JTS shall continue as the surviving corporation. JTS as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." 1.2 Closing; Effective Time. The closing of the transactions contemplated hereby (the "Closing") shall take place as soon as practicable after the satisfaction or waiver of each of the conditions set forth in Article VI hereof or at such other time as the parties hereto agree (the "Closing Date"). The Closing shall take place at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, or at such other location as the parties hereto agree. In connection with the Closing, the parties hereto shall cause the Merger to be consummated by filing the Certificate of Merger with (i) the Secretary of State of the State of Delaware and with the Recorder of the County in which the registered office of JTS is located, in accordance with the relevant provisions of Delaware Law and (ii) the Secretary of State of the State of Nevada, in accordance with the relevant provisions of Nevada Law (the time of such filings being the "Effective Time"). 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of Delaware Law and Nevada Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of Atari shall vest in the Surviving Corporation, and all debts, liabilities and duties of Atari shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Certificate of Incorporation; Bylaws. (a) At the Effective Time, the Certificate of Incorporation of JTS, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by Delaware Law and such Certificate of Incorporation; provided, however, that the Certificate of Incorporation of the Surviving Corporation shall be amended and restated in the form attached hereto as Exhibit A. (b) The Bylaws of JTS, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended; provided, however, that the Bylaws of the Surviving Corporation shall be amended and restated in the form attached hereto as Exhibit B. -2- 10 1.5 Directors and Executive Officers. At the Effective Time, the directors of the Surviving Corporation shall be Sirjang Lal Tandon, David T. Mitchell, Jean D. Deleage, Alan Azan, Roger W. Johnson, LipBu Tan, Jack Tramiel and Michael Rosenberg. The executive officers of JTS immediately prior to the Effective Time shall constitute the only executive officers of the Surviving Corporation as of the Effective Time, unless otherwise designated by JTS. 1.6 Effect on Capital Stock. By virtue of the Merger and without any action on the part of JTS, Atari or the holders of any of the following securities: (a) Conversion of Atari Common Stock. At the Effective Time, each share of Atari Common Stock issued and outstanding immediately prior to the Effective Time (other than any shares of Atari Common Stock to be canceled pursuant to Section 1.6(b)) will be canceled and extinguished and be converted automatically into the right to receive one (1) share of JTS Common Stock (the "Exchange Ratio"). (b) Cancellation of Certain Stock. At the Effective Time, each share of Atari Common Stock owned by JTS or any direct or indirect wholly-owned subsidiary of JTS immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. (c) Atari Stock Options. At the Effective Time, all options to purchase Atari Common Stock then outstanding under the Atari Amended 1986 Stock Option Plan (the "Atari Stock Option Plan") shall be assumed by JTS in accordance with Section 5.11. (d) Atari Debentures. At the Effective Time, JTS shall assume all obligations of Atari under Atari's 5 1/4% Convertible Subordinated Debentures Due 2002 (the "Atari Debentures"), and such debentures shall be convertible into shares of JTS Common Stock in accordance with Section 5.12. (e) Federated Debentures. To the extent required by that certain Indenture dated as of April 15, 1985 from the The Federated Group, Inc. to Security Pacific National Bank, as trustee, together with the first supplemental indenture thereto dated as of September 24, 1987, at the Effective Time, JTS shall assume any obligations of Atari under the 7 1/2% Convertible Subordinated Debentures due April 15, 2010 of The Federated Group, Inc. (the "Federated Debentures"). (f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Atari Common Stock or JTS Common Stock), reorganization, recapitalization or other like change with respect to Atari Common Stock, JTS Common Stock or JTS Series A Preferred Stock, $.000001 par value ("JTS Series A Preferred Stock"), occurring after the date hereof and prior to the Effective Time. (g) Fractional Shares. No fraction of a share of JTS Common Stock will be issued, but in lieu thereof each holder of shares of Atari Common Stock who would otherwise be entitled to a fraction of a share of JTS Common Stock (after aggregating all fractional shares of JTS Common Stock to be received by such holder) shall receive from JTS an amount of cash (rounded to the nearest whole -3- 11 cent) equal to the product of (i) such fraction, multiplied by (ii) the closing price of a share of Atari Common Stock on the trading day immediately prior to the Effective Time, as reported by the American Stock Exchange. 1.7 Surrender of Certificates. (a) Exchange Agent. Registrar and Transfer Company, Cranford, NJ, shall act as exchange agent (the "Exchange Agent") in the Merger. (b) JTS to Provide Common Stock and Cash. Promptly after the Effective Time, JTS shall make available to the Exchange Agent for exchange in accordance with this Article I, through such procedures as JTS may reasonably adopt, (i) the shares of JTS Common Stock issuable pursuant to Section 1.6(a) in exchange for shares of Atari Common Stock outstanding immediately prior to the Effective Time and (ii) cash in an amount sufficient to permit payment of cash in lieu of fractional shares pursuant to Section 1.6(g). (c) Exchange Procedures. Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each holder of record of a certificate or certificates (the "Certificates") which immediately prior to the Effective Time represented outstanding shares of Atari Common Stock, whose shares were converted into the right to receive shares of JTS Common Stock (and cash in lieu of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon receipt of the Certificates by the Exchange Agent, and shall be in such form and have such other provisions as JTS may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of JTS Common Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by JTS, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of JTS Common Stock and payment in lieu of fractional shares which such holder has the right to receive pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be canceled. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of Atari Common Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of JTS Common Stock into which such shares of Atari Common Stock shall have been so converted and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 1.6. (d) Distributions With Respect to Unexchanged Shares. No dividends or other distributions with respect to JTS Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of JTS Common Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of JTS Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of any such dividends or other distributions with a -4- 12 record date after the Effective Time theretofore payable (but for the provisions of this Section 1.7(d)) with respect to such shares of JTS Common Stock. (e) Transfers of Ownership. If any certificate for shares of JTS Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to JTS or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of JTS Common Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of JTS or any agent designated by it that such tax has been paid or is not payable. (f) No Liability. Notwithstanding anything to the contrary in this Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to any person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.8 No Further Ownership Rights in Atari Stock. All shares of JTS Common Stock issued upon the surrender for exchange of shares of Atari Common Stock in accordance with the terms hereof (including any cash paid in lieu of fractional shares) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Atari Common Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Atari Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of JTS Common Stock (and cash in lieu of fractional shares) as may be required pursuant to Section 1.6; provided, however, that JTS may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against JTS, the Surviving Corporation or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.10 Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368 of the Code. 1.11 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Atari, the officers and directors of Atari are fully authorized in the name of the corporation or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement. -5- 13 1.12 Dissenting JTS Shares. (a) Notwithstanding any provision of this Agreement to the contrary, any shares of JTS Common Stock or JTS Series A Preferred Stock held by a holder who has exercised dissenters' rights for such shares in accordance with Delaware Law or California General Corporation Law to the extent such law is applicable by virtue of Section 2115 thereof ("California Law") and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting Shares"), shall be entitled to such rights as are granted by Delaware Law or California Law. (b) JTS shall give Atari (i) prompt notice of any written demands received by JTS for an appraisal of shares of capital stock of JTS pursuant to Section 262 of Delaware Law or Chapter 13 of California Law, withdrawals of such demands, and any other related instruments served pursuant to Delaware Law or California Law and received by JTS and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. JTS shall not, except with the prior written consent of Atari, voluntarily make any payment with respect to any such demands or offer to settle or settle any such demands. ARTICLE II REPRESENTATIONS AND WARRANTIES OF JTS In this Agreement, any reference to any event, change, condition or effect being "material" with respect to any entity or group of entities means any material event, change, condition or effect related to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of such entity or group of entities. In this Agreement, any reference to a "Material Adverse Effect" with respect to any entity or group of entities means any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects of such entity and its subsidiaries, taken as a whole. In this Agreement, any reference to a party's "knowledge" means such party's actual knowledge after due and diligent inquiry. Except as disclosed in a document of even date herewith and delivered by JTS to Atari prior to the execution and delivery of this Agreement and referring to the representations and warranties in this Agreement (the "JTS Disclosure Schedule"), JTS represents and warrants to Atari as follows: 2.1 Organization, Standing and Power. Each of JTS and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of JTS and its subsidiaries has the corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. JTS has delivered a true and -6- 14 correct copy of the Certificate of Incorporation and Bylaws or other charter documents, as applicable, of JTS and each of its subsidiaries, each as amended to date, to Atari. Neither JTS nor any of its subsidiaries is in violation of any of the provisions of its Certificate of Incorporation or Bylaws or equivalent organizational documents. JTS is the owner of all outstanding shares of capital stock of each of its subsidiaries and all such shares are duly authorized, validly issued, fully paid and nonassessable. All of the outstanding shares of capital stock of each such subsidiary are owned by JTS free and clear of all liens, charges, claims or encumbrances or rights of others. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of any such subsidiary, or otherwise obligating JTS or any such subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire any such securities. Except as disclosed in the JTS Disclosure Schedule, JTS does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. 2.2 Capital Structure. The authorized capital stock of JTS consists of 90,000,000 shares of Common Stock, $.000001 par value, and 70,000,000 shares of Preferred Stock, $.000001 par value, all of which is designated Series A Preferred Stock, of which there were issued and outstanding as of the close of business on April 5, 1996, 9,204,741 shares of Common Stock and 29,696,370 shares of Series A Preferred. The JTS Disclosure Schedule contains a true and complete list of the holders of JTS Common Stock and JTS Series A Preferred Stock and the number of shares held by each such holder on April 5, 1996. There are no other outstanding shares of capital stock or voting securities. Each outstanding share of JTS Series A Preferred Stock is convertible into one (1) share of JTS Common Stock. All outstanding shares of JTS Common Stock and JTS Series A Preferred Stock are duly authorized, validly issued, fully paid and non-assessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to preemptive rights or rights of first refusal created by statute, the Certificate of Incorporation or Bylaws of JTS or any agreement to which JTS is a party or by which it is bound. As of the close of business on April 5, 1996, JTS has reserved (i) 4,300,000 shares of JTS Common Stock for issuance to employees and consultants pursuant to the JTS 1995 Stock Option Plan (the "JTS Stock Option Plan"), of which 37,554 shares have been issued pursuant to option exercises and 3,680,358 shares are subject to outstanding, unexercised options, (ii) 600,000 shares of JTS Common Stock for issuance upon the exercise of outstanding, unexercised JTS Warrants and (iii) 32,500,000 shares of JTS Series A Preferred Stock and JTS Common Stock for issuance upon conversion of the note issued to Atari on February 13, 1996 and upon exercise of the warrants issuable to Atari pursuant to such note. Since April 5, 1996, JTS has not issued or granted additional options under the JTS Stock Option Plan. Other than pursuant to this Agreement, there are no other options, warrants, calls, rights, commitments or agreements of any character to which JTS is a party or by which it is bound obligating JTS to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of capital stock of JTS or obligating JTS to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. The terms of the JTS Stock Option Plan and the JTS Warrants permit the assumption or substitution of options or warrants, as applicable, to purchase Atari Common Stock as provided in this Agreement, without the consent or approval of the holders of such securities, the JTS stockholders, or otherwise. True and -7- 15 complete copies of all agreements and instruments relating to or issued under the JTS Stock Option Plan or JTS Warrants have been made available to Atari and such agreements and instruments have not been amended, modified or supplemented, and there are no agreements to amend, modify or supplement such agreements or instruments in any case from the form made available to Atari. The shares of JTS Common Stock to be issued pursuant to the Merger will be duly authorized, validly issued, fully paid, and non-assessable. 2.3 Authority. JTS has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of JTS, subject only to the approval of the Merger by JTS's stockholders as contemplated by Section 6.1(a). This Agreement has been duly executed and delivered by JTS and constitutes the valid and binding obligation of JTS. The execution and delivery of this Agreement by JTS does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Certificate of Incorporation or Bylaws of JTS or any of its subsidiaries, as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to JTS or any of its subsidiaries or any of their properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to JTS or any of its subsidiaries in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger as provided in Section 1.2, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the securities laws of any foreign country; (iii) such filings as may be required under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"); and (iv) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole, and would not prevent, alter or materially delay any of the transactions contemplated by this Agreement. The JTS Disclosure Schedule sets forth a full and complete list of all necessary consents, waivers and approvals of third parties applicable to the operations of JTS that are required to be obtained by JTS in connection with the execution and delivery of this Agreement or the Merger Agreement by JTS or the consummation by JTS of the transactions contemplated hereby or thereby, except any such consents, waivers and approvals, which, if not obtained, would not have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. Prior to the Closing Date, JTS will obtain all such consents. The Stock Purchase Agreement dated as of April 4, 1996 between JTS and Lunenburg, S.A., a Panama corporation, together with all documents executed in connection therewith (the "Moduler Agreement"), has been duly executed and delivered by JTS, the transactions contemplated thereby have been consummated, and the Moduler Agreement constitutes a valid and binding obligation of JTS. JTS has provided to Atari a true, correct and complete copy of the Moduler Agreement, and has performed all obligations required to be performed by it to date under the Moduler Agreement. To JTS' best -8- 16 knowledge, (a) the other parties to the Moduler Agreement have performed all obligations required to be performed by them to date under such agreement, (b) as to such other parties, the Moduler Agreement is valid, binding and enforceable in accordance with its terms and (c) the Moduler Agreement is in full force and effect with no default or dispute or basis therefor existing with respect thereto. 2.4 Financial Statements. JTS has furnished to Atari its audited consolidated balance sheet, consolidated statements of operations and consolidated statements of stockholders equity and cash flows as of and for the year ended January 28, 1996, and the audited statement of assets and liabilities, statement of revenues and expenses and cash flows of The Hard Disk Drive Division of Moduler as of and for the year ended January 28, 1996 (collectively, the "JTS Financial Statements"). The JTS Financial Statements, including the notes thereto, were complete and correct in all material respects as of their respective dates, complied as to form in all material respects with applicable accounting requirements as of their respective dates, and have been prepared in accordance with generally accepted accounting principles applied on a basis consistent throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto). The JTS Financial Statements are in accordance with the books and records of JTS and fairly present the consolidated financial condition and operating results of JTS and its subsidiaries at the dates and during the periods indicated therein. There has been no change in JTS accounting policies except as described in the notes to the JTS Financial Statements. 2.5 Absence of Certain Changes. Since January 28, 1996, (the "JTS Balance Sheet Date"), JTS has conducted its business in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition (whether or not covered by insurance) that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect to JTS and its subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer of any material asset of JTS or any of its subsidiaries other than in the ordinary course of business and consistent with past practice; (iii) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by JTS or any revaluation by JTS of any of its or any of its subsidiaries' assets; (iv) any issuance or agreement to issue or any commitment to issue any equity security, bond, note or other security of JTS or any of its subsidiaries; (v) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of JTS, or any direct or indirect redemption, purchase or other acquisition by JTS of any of its shares of capital stock; (vi) any material contract entered into by JTS or any of its subsidiaries, other than in the ordinary course of business and as provided to Atari, or any amendment or termination of, or default under, any material contract to which JTS or any of its subsidiaries is a party or by which it is bound; or (vii) any negotiation or agreement by JTS or any of its subsidiaries to do any of the things described in the preceding clauses (i) through (vii) (other than negotiations with Atari regarding the transactions contemplated by this Agreement). 2.6 Absence of Undisclosed Liabilities. JTS has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the JTS balance sheet and the Moduler statement of assets and liabilities, each as included in the JTS Financial Statements, and true, correct and complete copies of which have been provided to Atari, (collectively, the "JTS Balance Sheet"), (ii) those incurred in the ordinary course of business and not required to be set forth in the JTS Balance Sheet under generally accepted accounting principles, and -9- 17 (iii) those incurred in the ordinary course of business since the JTS Balance Sheet Date and consistent with past practice. 2.7 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of JTS or any of its subsidiaries, threatened against JTS or any of its subsidiaries or any of their respective properties or any of their respective officers or directors (in their capacities as such) that, individually or in the aggregate, could have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. There is no judgment, decree or order against JTS or any of its subsidiaries, or, to the knowledge of JTS and its subsidiaries, any of their respective directors or officers (in their capacities as such), that could prevent, enjoin, alter or delay any of the transactions contemplated by this Agreement, or that could have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. 2.8 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon JTS or any of its subsidiaries which has or could have the effect of prohibiting or materially impairing any current or future business practice of JTS or any of its subsidiaries, any acquisition of property by JTS or any of its subsidiaries or the conduct of business by JTS or any of its subsidiaries as currently conducted or as proposed to be conducted by JTS or any of its subsidiaries. 2.9 Governmental Authorization. JTS and each of its subsidiaries have obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which JTS or any of its subsidiaries currently operates or holds any interest in any of its properties or (ii) which is required for the operation of JTS's or any of its subsidiaries' business or the holding of any such interest (herein collectively called "JTS Authorizations"), and all of such JTS Authorizations are in full force and effect, except where the failure to obtain or have any of such JTS Authorizations could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. 2.10 Title to Property. JTS and its subsidiaries have good and marketable title to all of their respective properties, interests in properties and assets, real and personal, reflected in the JTS Balance Sheet or acquired after the JTS Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the JTS Balance Sheet Date thereof in the ordinary course of business), free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties and (iii) liens securing debt which is reflected on the JTS Balance Sheet. The plants, property and equipment of JTS and its subsidiaries that are used in the operations of their businesses are in good operating condition and repair. All properties used in the operations of JTS and its subsidiaries are reflected in the JTS Balance Sheet to the extent generally accepted accounting principles require the same to be reflected. The JTS Disclosure Schedule identifies each parcel of real property owned or leased by JTS or any of its subsidiaries. -10- 18 2.11 Intellectual Property. JTS and its subsidiaries own, or are licensed or otherwise possess legally enforceable rights to use all patents, trademarks, trade names, service marks, copyrights, and any applications therefor, maskworks, net lists, schematics, technology, know-how, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material ("Intellectual Property") that are used or proposed to be used in the business of JTS and its subsidiaries as currently conducted or as proposed to be conducted by JTS and its subsidiaries. To the knowledge of JTS and its subsidiaries, there is no material unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of JTS or any of its subsidiaries, any trade secret material to JTS or any of its subsidiaries, or any Intellectual Property right of any third party to the extent licensed by or through JTS or any of its subsidiaries, by any third party, including any employee or former employee of JTS or any of its subsidiaries. Neither JTS nor any of its subsidiaries has entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions (i) listed on the JTS Disclosure Schedule or (ii) contained in purchase orders arising in the ordinary course of business. 2.12 Environmental Matters. (a) To the knowledge of JTS and its subsidiaries, no substance that is regulated by any foreign, federal, state or local governmental authority or that has been designated by any such authority to be radioactive, toxic, hazardous or otherwise a danger to health or the environment (herein a "Hazardous Material") is present in, on or under any property that JTS or any of its subsidiaries has at any time owned, operated, occupied or leased (herein a "JTS Facility"), except to the extent that such presence has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. (b) To the knowledge of JTS and its subsidiaries, neither JTS nor any of its subsidiaries has transported, stored, used, disposed of, manufactured, released or exposed its employees or any other person to Hazardous Materials ("Hazardous Materials Activity") in material violation of any applicable foreign, federal, state or local statute, rule, regulation, order or law. (c) To the knowledge of JTS and its subsidiaries, each of JTS and its subsidiaries is and at all times has been in compliance with all foreign, federal, state and local laws relating to emissions, discharges, releases or threatened releases of Hazardous Materials, except to the extent noncompliance with such laws has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. (d) No action, proceeding, permit revocation, writ, injunction or claim is pending, or to the knowledge of JTS and its subsidiaries threatened, concerning the Hazardous Materials Activities of JTS or any of its subsidiaries and/or any JTS Facilities. Neither JTS nor any of its subsidiaries is aware of any fact or circumstance which could impose any material environmental liability upon JTS or any of its subsidiaries. 2.13 Taxes. JTS and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which JTS or any of its subsidiaries is or has been a member have -11- 19 timely filed all Tax Returns required to be filed by it, have paid all Taxes shown thereon to be due and has provided adequate accruals in accordance with generally accepted accounting principles in its financial statements for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. Except as disclosed in the JTS Disclosure Schedule, (i) no material claim for Taxes has become a lien against the property of JTS or any of its subsidiaries or is being asserted against JTS or any of its subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit of any Tax Return of JTS or any of its subsidiaries is being conducted by a Tax authority, (iii) no extension of the statute of limitations on the assessment of any Taxes has been granted by JTS or any of its subsidiaries and is currently in effect, and (iv) there is no agreement, contract or arrangement to which JTS or any of its subsidiaries is a party that may result in the payment of any amount that would not be deductible by reason of Sections 280G, 162 or 404 of the Code. Neither JTS nor any of its subsidiaries is a party to any tax sharing or tax allocation agreement nor does JTS or any of its subsidiaries owe any amount under any such agreement. As used herein, "Taxes" shall mean all taxes of any kind, including, without limitation, those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. JTS and each of its subsidiaries are in full compliance with all terms and conditions of any Tax exemptions or other Tax-sharing agreement or order of a foreign government and the consummation of the Merger shall not have any adverse effect on the continued validity and effectiveness of any such Tax exemptions or other Tax-sharing agreement or order. 2.14 Employee Benefit Plans. (a) The JTS Disclosure Schedule lists, with respect to JTS, any trade or business (whether or not incorporated) which is treated as a single employer with JTS (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code or any subsidiary of JTS (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) all loans to employees in excess of $50,000, loans to officers, and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, disability, employee relocation, cafeteria (Code section 125), life insurance or accident insurance plans, programs or arrangements, (iii) all bonus, deferred compensation or incentive plans, programs or arrangements, (iv) other material fringe or employee benefit plans, programs or arrangements that apply to senior management of JTS and that do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which current or contingent obligations of JTS of greater than $50,000 exist for the benefit of, or relating to, any current or former employee, consultant or director of JTS (together, the "JTS Employee Plans"), and a copy of each such JTS Employee Plan and each summary plan description and annual report on the Form 5500 series required to be filed with any government agency for each JTS Employee Plan for the three most recent Plan years has been delivered to Atari. -12- 20 (b) (i) None of the JTS Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any JTS Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Effect on JTS or its subsidiaries; (iii) all JTS Employee Plans have been administered in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code, orders, or governmental rules and regulations currently in effect with respect thereto and including all applicable requirements for notification to participants or to the Department of Labor, Internal Revenue Service or Secretary of the Treasury), except as would not have, in the aggregate, a Material Adverse Effect on JTS or its subsidiaries, and JTS and each of its subsidiaries have performed all obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any material default or violation by any other party to, any of the JTS Employee Plans; (iv) each JTS Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has received a favorable determination letter from the Internal Revenue Service (the "IRS") as to such qualification, and nothing has occurred which could reasonably be expected to cause the loss of such qualification or exemption; (v) all material contributions required to be made by JTS or any of its subsidiaries to any JTS Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each JTS Employee Plan for the current plan years; and (vi) no JTS Employee Plan is covered by, and neither JTS nor any subsidiary has incurred or expects to incur any liability under Title IV of ERISA or Section 412 of the Code. (c) With respect to each JTS Employee Plan that constitutes a group health plan within the meaning of Section 5000(b)(1) of the Code or Section 607(1) of ERISA, JTS and each of its United States subsidiaries have complied with the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and the proposed regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect on JTS and its subsidiaries. 2.15 Certain Agreements Affected by the Merger. Neither the execution and delivery of this Agreement nor the consummation of the transaction contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of JTS or any of its subsidiaries, (ii) increase any benefits otherwise payable by JTS or (iii) result in the acceleration of the time of payment or vesting of any such benefits. 2.16 Employee Matters. Except as to matters which could not, in the aggregate, have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole, JTS and each of its subsidiaries are in compliance in all respects with all currently applicable laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, and is not engaged in any unfair labor practice. There are no pending claims against JTS or any of its subsidiaries under any workers compensation plan or policy or for long term disability. Neither JTS nor any of its subsidiaries has any material obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. There are no -13- 21 controversies pending or, to the knowledge of JTS or any of its subsidiaries, threatened, between JTS or any of its subsidiaries and any of their respective employees, which controversies have or could have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. Neither JTS nor any of its subsidiaries is a party to any collective bargaining agreement or other labor unions contract nor does JTS nor any of its subsidiaries know of any activities or proceedings of any labor union or organize any such employees. 2.17 Interested Party Transactions. Except as disclosed in the JTS Disclosure Schedule, neither JTS nor any of its subsidiaries is indebted to any director, officer, employee or agent of JTS or any of its subsidiaries (except for amounts due as normal salaries and in reimbursement of ordinary expenses), and no such person is indebted to JTS or any of its subsidiaries. Except as disclosed in the JTS Disclosure Schedule, no officer, director or stockholder of JTS or any affiliate of such person has, either directly or indirectly, (i) an interest in any corporation, partnership, firm or other person or entity which furnishes or sells services or products which are similar to those furnished or sold by JTS or (ii) a beneficial interest in a contract or agreement to which JTS is a party or by which JTS may be bound. For purposes of this Section 2.17, there shall be disregarded any interest which arose solely from the ownership of less than a one percent (1%) equity interest in a corporation whose stock is regularly traded on a national securities exchange or over-the-counter market. 2.18 Insurance. JTS and each of its subsidiaries have policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of JTS and its subsidiaries. There is no claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and JTS and its subsidiaries are otherwise in compliance with the terms of such policies and bonds. JTS has no knowledge of any threatened termination of, or premium increase with respect to, any of such policies. 2.19 Compliance With Laws. Each of JTS and its subsidiaries has complied with, are not in violation of, and have not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not be reasonably expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole. 2.20 Minute Books. The minute books of JTS and its subsidiaries made available to Atari contain a complete and accurate summary of all meetings of directors and stockholders or actions by written consent since the time of incorporation of JTS and the respective subsidiaries through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects. 2.21 Complete Copies of Materials. JTS has delivered or made available true and complete copies of each document which has been requested by Atari or its counsel in connection with their legal and accounting review of JTS and its subsidiaries. -14- 22 2.22 Brokers' and Finders' Fees. JTS has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. 2.23 Registration Statement; Proxy Statement/Prospectus. The information supplied by JTS for inclusion in the registration statement on Form S-4 (or such other or successor form as shall be appropriate, the "Registration Statement") pursuant to which the shares of JTS Common Stock to be issued in the Merger will be registered with the Securities and Exchange Commission (the "SEC") shall not at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The information supplied by JTS for inclusion in the proxy statement/prospectus to be sent to the stockholders of JTS and Atari in connection with the meeting of JTS's stockholders to consider the Merger (the "JTS Stockholders Meeting") and in connection with the meeting of Atari's stockholders to consider the Merger (the "Atari Stockholders Meeting") (such proxy statement/prospectus as amended or supplemented is referred to herein as the "Proxy Statement") shall not, on the date the Proxy Statement is first mailed to JTS's stockholders and Atari's stockholders, at the time of the JTS Stockholders Meeting, at the time of the Atari Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the JTS Stockholders Meeting or the Atari Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event or information should be discovered by JTS which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, JTS shall promptly inform Atari. Notwithstanding the fore going, JTS makes no representation, warranty or covenant with respect to any information supplied by Atari which is contained in any of the foregoing documents. 2.24 Vote Required. The affirmative votes of the holders of (i) a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on the record date set for the JTS Stockholders Meeting, voting together, (ii) a majority of the shares of JTS Common Stock outstanding on the record date set for the JTS Stockholders Meeting, voting separately as a class, and (iii) at least two-thirds of the shares of JTS Series A Preferred outstanding on the record date set for the JTS Stockholders Meeting, voting separately as a class, are the only votes of the holders of any of JTS's capital stock necessary to approve this Agreement and the transactions contemplated hereby. 2.25 Board Approval. The Board of Directors of JTS has unanimously (i) approved this Agreement and the Merger, (ii) determined that the Merger is in the best interests of the stockholders of JTS and is on terms that are fair to such stockholders and (iii) recommended that the stockholders of JTS approve this Agreement and the Merger. -15- 23 2.26 Underlying Documents. True and complete copies of all underlying documents set forth on the JTS Disclosure Schedule or described as having been disclosed or delivered to Atari pursuant to this Agreement have been furnished to Atari. 2.27 Representations Complete. None of the representations or warranties made by JTS herein or in any Schedule hereto, including the JTS Disclosure Schedule, or certificate furnished by JTS pursuant to this Agreement, when all such documents are read together in their entirety, contains or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ATARI Except as disclosed in the Atari SEC Documents (as defined in Section 3.4) or in a document of even date herewith and delivered by Atari to JTS prior to the execution and delivery of this Agreement and referring to the representations and warranties in this Agreement (the "Atari Disclosure Schedule"), Atari represents and warrants to JTS as follows: 3.1 Organization, Standing and Power. The Atari Disclosure Schedule identifies each subsidiary of Atari that is a "significant subsidiary" of Atari as defined by Rule 1-02(v) of Regulation S-X (the "Significant Subsidiaries"). Atari and each of its Significant Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of Atari and its Significant Subsidiaries has the corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. Atari has delivered a true and correct copy of the Articles of Incorporation and Bylaws or other charter documents, as applicable, of Atari and each of its Significant Subsidiaries, each as amended to date, to JTS. Neither Atari nor any of its Significant Subsidiaries is in violation of any of the provisions of its Articles of Incorporation or Bylaws or equivalent organizational documents. Atari is the owner of all outstanding shares of capital stock of each of its subsidiaries and all such shares are duly authorized, validly issued, fully paid and nonassessable. All of the outstanding shares of capital stock of each such subsidiary are owned by Atari free and clear of all liens, charges, claims or encumbrances or rights of others. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of any such subsidiary, or otherwise obligating Atari or any such subsidiary to issue, transfer, sell, purchase, redeem or otherwise acquire any such securities. Except as disclosed in the Atari SEC Documents (as defined in Section 3.4), Atari does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. -16- 24 3.2 Capital Structure. The authorized capital stock of Atari consists of 100,000,000 shares of Common Stock, $.01 par value, and 10,000,000 shares of Preferred Stock, $.01 par value, of which there were issued and outstanding as of the close of business on March 29, 1996, 63,727,318 shares of Common Stock and no shares of Preferred Stock. There are no other outstanding shares of capital stock or voting securities of Atari, other than shares of Atari Common Stock issued after March 29, 1996 upon the exercise of options issued under the Atari 1986 Stock Option Plan (the "Atari Stock Option Plan"). All outstanding shares of Atari have been duly authorized, validly issued, fully paid and are nonassessable and free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to preemptive rights or rights of first refusal created by statute, the Articles of Incorporation or Bylaws of Atari or any agreement to which Atari is a party or by which it is bound. As of the close of business on March 29, 1996, Atari has reserved 3,000,000 shares of Common Stock for issuance to employees, directors and consultants pursuant to the Atari Stock Option Plan, of which 599,674 shares have been issued pursuant to option exercises, and 899,125 shares are subject to outstanding, unexercised options. Since March 29, 1996, Atari has not issued or granted additional options under the Atari Stock Option Plan. There are no other options, warrants, calls, rights, commitments or agreements of any character to which Atari is a party or by which it is bound obligating Atari to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Atari or obligating Atari to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. 3.3 Authority. Atari has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Atari, subject only to the approval of the Merger by the Atari stockholders as contemplated by Section 6.1(a). This Agreement has been duly executed and delivered by Atari and constitutes the valid and binding obligations of Atari. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Articles of Incorporation or Bylaws of Atari or any of its Significant Subsidiaries, as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Atari or any of its Significant Subsidiaries or any of their properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by or with respect to Atari or any of its Significant Subsidiaries in connection with the execution and delivery of this Agreement by Atari or the consummation by Atari of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger as provided in Section 1.2, (ii) the filing with the SEC and the American Stock Exchange of the Proxy Statement relating to the Atari Stockholders Meeting, (iii) the filing of a Form 8-K and Form 10-C with the SEC and the American Stock Exchange within 15 days and 10 days, respectively, after the Closing Date, (iv) any filings as may be required under applicable state securities laws and the securities laws of any foreign country, (v) such filings as may be required under HSR, (vi) such filings as may be required under the rules and regulations of the American Stock Exchange, and (vii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse -17- 25 Effect on Atari and its subsidiaries, taken as a whole, and would not prevent, alter or materially delay any of the transactions contemplated by this Agreement. The Atari Disclosure Schedule sets forth a full and complete list of all necessary consents, waivers and approvals of third parties applicable to the operations of Atari that are required to be obtained by Atari in connection with the execution and delivery of this Agreement or the Merger Agreement by Atari or the consummation by Atari of the transactions contemplated hereby or thereby, except any such consents, waivers and approvals, which, if not obtained, would not have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. Prior to the Closing Date, Atari will obtain all such consents. 3.4 SEC Documents; Financial Statements. Atari has furnished to JTS a true and complete copy of each report, registration statement, definitive proxy statement, and other filings filed with the SEC by Atari since January 1, 1993 (other than filings pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any registration statement on Form S-8), and prior to the Effective Time, Atari will have furnished JTS with true and complete copies of any additional documents (other than filings pursuant to Section 16 of the Exchange Act, and any registration statement on Form S-8) filed with the SEC by Atari prior to the Effective Time (collectively, the "Atari SEC Documents"). As of their respective filing dates, the Atari SEC Documents complied in all material respects with the requirements of the Exchange Act and the Securities Act, and none of the Atari SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Atari SEC Document. The financial statements of Atari, including the notes thereto, included in the Atari SEC Documents (the "Atari Financial Statements") were complete and correct in all material respects as of their respective dates, complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as of their respective dates, and have been prepared in accordance with generally accepted accounting principles applied on a basis consistent throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto or, in the case of unaudited statements included in Quarterly Reports on Form 10-Qs, as permitted by Form 10-Q of the SEC). The Atari Financial Statements are in accordance with the books and records of Atari and fairly present the consolidated financial condition and operating results of Atari and its subsidiaries at the dates and during the periods indicated therein (subject, in the case of unaudited statements, to normal, recurring year-end adjustments). There has been no change in Atari accounting policies except as described in the notes to the Atari Financial Statements. 3.5 Absence of Certain Changes. Since December 31, 1995 (the "Atari Balance Sheet Date"), Atari has conducted its business in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition (whether or not covered by insurance) that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect to Atari and its subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer of any material asset of Atari or any of its subsidiaries other than in the ordinary course of business and consistent with past practice; (iii) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by Atari or any revaluation by Atari of any of its assets; (iv) any issuance or agreement to issue or any commitment to issue any equity security, bond, note or other security of Atari or any of its subsidiaries; (v) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares -18- 26 of Atari, or any direct or indirect redemption, purchase or other acquisition by Atari of any of its shares of capital stock; (vi) any material contract entered into by Atari, other than in the ordinary course of business and as provided to JTS, or any amendment or termination of, or default under, any material contract to which Atari is a party or by which it is bound; or (vii) any negotiation or agreement by Atari or any of its subsidiaries to do any of the things described in the preceding clauses (i) through (vii) (other than negotiations with JTS regarding the transactions contemplated by this Agreement). 3.6 Absence of Undisclosed Liabilities. Atari has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet included in Atari's Annual Report on Form 10-K for the period ended December 31, 1995 (the "Atari Balance Sheet"), (ii) those incurred in the ordinary course of business and not required to be set forth in the Atari Balance Sheet under generally accepted accounting principles, and (iii) those incurred in the ordinary course of business since the Atari Balance Sheet Date and consistent with past practice. 3.7 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Atari or any of its subsidiaries, threatened against Atari or any of its subsidiaries or any of their respective properties or any of their respective officers or directors (in their capacities as such) that, individually or in the aggregate, could have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. There is no judgment, decree or order against Atari or any of its subsidiaries or, to the knowledge of Atari or any of its subsidiaries, any of their respective directors or officers (in their capacities as such) that could prevent, enjoin, alter or delay any of the transactions contemplated by this Agreement, or that could have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. The outcome of the matter In re The Federated Group, Inc. Alleged Debtor U.S.B.C. (N.D.Cal. Div. 5) No. 92-50412-JRG Chapter 7, is not reasonably likely to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. 3.8 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon Atari or any of its subsidiaries which has or could have the effect of prohibiting or materially impairing any current or future business practice of Atari or any of its subsidiaries, any acquisition of property by Atari or any of its subsidiaries or the conduct of business by Atari or any of its subsidiaries as currently conducted or as proposed to be conducted by Atari or any of its subsidiaries. 3.9 Governmental Authorization. Atari and each of its subsidiaries have obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which Atari or any of its subsidiaries currently operates or holds any interest in any of its properties or (ii) which is required for the operation of Atari's or any of its subsidiaries' business or the holding of any such interest (herein collectively called "Atari Authorizations"), and all of such Atari Authorizations are in full force and effect, except where the failure to obtain or have any of such Atari Authorizations could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. -19- 27 3.10 Title to Property. Atari and its Significant Subsidiaries have good and marketable title to all of their respective properties, interests in properties and assets, real and personal, reflected in the Atari Balance Sheet or acquired after the Atari Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the Atari Balance Sheet Date thereof in the ordinary course of business), free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties and (iii) liens securing debt which is reflected on the Atari Balance Sheet. The plants, property and equipment of Atari and its Significant Subsidiaries that are used in the operations of their businesses are in good operating condition and repair. All properties used in the operations of Atari and its Significant Subsidiaries are reflected in the Atari Balance Sheet to the extent generally accepted accounting principles require the same to be reflected. The Atari Disclosure Schedule identifies each parcel of real property owned or leased by Atari or any of its Significant Subsidiaries 3.11 Intellectual Property. Atari and its Significant Subsidiaries own, or are licensed or otherwise possess legally enforceable rights to use all Intellectual Property that are used or proposed to be used in the business of Atari and its Significant Subsidiaries as currently conducted or as proposed to be conducted by Atari and its subsidiaries, except to the extent that the failure to have such rights have not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. To the knowledge of Atari and its Significant Subsidiaries, there is no material unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of Atari or any of its subsidiaries, any trade secret material to Atari or any of its subsidiaries, or any Intellectual Property right of any third party to the extent licensed by or through Atari or any of its subsidiaries, by any third party, including any employee or former employee of Atari or any of its subsidiaries. Neither Atari nor any of its subsidiaries has entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions (i) listed on the Atari Disclosure Schedule or (ii) contained in purchase orders arising in the ordinary course of business. 3.12 Environmental Matters. (a) To the knowledge of Atari and its Significant Subsidiaries, no Hazardous Material is present in, on or under any property that Atari or any of its subsidiaries has at any time owned, operated, occupied or leased (herein an "Atari Facility"), except to the extent that such presence has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. (b) To the knowledge of Atari and its Significant Subsidiaries, neither Atari nor any of its subsidiaries has engaged in a Hazardous Materials Activity in material violation of any applicable foreign, federal, state or local statute, rule, regulation, order or law. (c) To the knowledge of Atari and its Significant Subsidiaries, each of Atari and its subsidiaries is and at all times has been in compliance with all foreign, federal, state and local laws relating -20- 28 to emissions, discharges, releases or threatened releases of Hazardous Materials, except to the extent noncompliance with such laws has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. (d) No action, proceeding, permit revocation, writ, injunction or claim is pending, or to the knowledge of Atari and its subsidiaries threatened, concerning the Hazardous Materials Activities of Atari or any of its subsidiaries and/or any Atari Facilities. Neither Atari nor any of its Significant Subsidiaries is aware of any fact or circumstance which could impose any material environmental liability upon Atari or any of its subsidiaries. 3.13 Taxes. Atari and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which Atari or any of its subsidiaries is or has been a member have timely filed all Tax Returns required to be filed by it, have paid all Taxes shown thereon to be due and has provided adequate accruals in accordance with generally accepted accounting principles in its financial statements for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. Except as disclosed in the Atari SEC Documents, (i) no material claim for Taxes has become a lien against the property of Atari or any of its subsidiaries or is being asserted against Atari or any of its subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit of any Tax Return of Atari or any of its subsidiaries is being conducted by a Tax authority, (iii) no extension of the statute of limitations on the assessment of any Taxes has been granted by Atari or any of its subsidiaries and is currently in effect, and (iv) there is no agreement, contract or arrangement to which Atari or any of its subsidiaries is a party that may result in the payment of any amount that would not be deductible by reason of Sections 280G, 162 or 404 of the Code. Neither Atari nor any of its subsidiaries is a party to any tax sharing or tax allocation agreement nor does Atari or any of its subsidiaries owe any amount under any such agreement. As used herein, "Taxes" shall mean all taxes of any kind, including, without limitation, those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. Atari and each of its subsidiaries are in full compliance with all terms and conditions of any Tax exemptions or other Tax-sharing agreement or order of a foreign government and the consummation of the Merger shall not have any adverse effect on the continued validity and effectiveness of any such Tax exemption or other Tax-sharing agreement or order. 3.14 Employee Benefit Plans. (a) The Atari Disclosure Schedule lists, with respect to Atari, any ERISA affiliate of Atari or any subsidiary of Atari (i) all employee benefit plans (as defined in Section 3(3) of ERISA), (ii) all loans to employees in excess of $50,000, loans to officers, and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, disability, employee relocation, cafeteria (Code section 125), life insurance or accident insurance plans, programs or arrangements, (iii) all bonus, deferred compensation or incentive plans, programs or arrangements, -21- 29 (iv) other material fringe or employee benefit plans, programs or arrangements that apply to senior management of Atari and that do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which current or contingent obligations of Atari of greater than $50,000 exist for the benefit of, or relating to, any current or former employee, consultant or director of Atari (together, the "Atari Employee Plans"), and a copy of each such Atari Employee Plan and each summary plan description and annual report on the Form 5500 series required to be filed with any government agency for each Atari Employee Plan for the three most recent Plan years has been delivered to JTS. (b) (i) None of the Atari Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Atari Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Effect on Atari or its subsidiaries; (iii) all Atari Employee Plans have been administered in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code, orders, or governmental rules and regulations currently in effect with respect thereto and including all applicable requirements for notification to participants or to the Department of Labor, Internal Revenue Service or Secretary of the Treasury), except as would not have, in the aggregate, a Material Adverse Effect on Atari or its subsidiaries, and Atari and each of its subsidiaries have performed all obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any material default or violation by any other party to, any of the Atari Employee Plans; (iv) each Atari Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has received a favorable determination letter from the IRS as to such qualification, and nothing has occurred which could reasonably be expected to cause the loss of such qualification or exemption; (v) all material contributions required to be made by Atari or any of its subsidiaries to any Atari Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Atari Employee Plan for the current plan years; and (vi) no Atari Employee Plan is covered by, and neither Atari nor any subsidiary has incurred or expects to incur any liability under Title IV of ERISA or Section 412 of the Code. (c) With respect to each Atari Employee Plan that constitutes a group health plan within the meaning of Section 5000(b)(1) of the Code or Section 607(1) of ERISA, Atari and each of its United States subsidiaries have complied with the applicable health care continuation and notice provisions of COBRA and the proposed regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect on Atari and its subsidiaries. 3.15 Certain Agreements Affected by the Merger. Neither the execution and delivery of this Agreement nor the consummation of the transaction contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of Atari or any of its subsidiaries, (ii) increase any benefits otherwise payable by Atari or (iii) result in the acceleration of the time of payment or vesting of any such benefits. -22- 30 3.16 Employee Matters. Except as to matters which could not, in the aggregate, have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole, Atari and each of its Significant Subsidiaries are in compliance in all respects with all currently applicable laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, and is not engaged in any unfair labor practice. There are no pending claims against Atari or any of its subsidiaries under any workers compensation plan or policy or for long term disability. Neither Atari nor any of its subsidiaries has any material obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. There are no controversies pending or, to the knowledge of Atari or any of its subsidiaries, threatened, between Atari or any of its subsidiaries and any of their respective employees, which controversies have or could have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. Neither Atari nor any of its subsidiaries is a party to any collective bargaining agreement or other labor unions contract nor does Atari nor any of its subsidiaries know of any activities or proceedings of any labor union or organize any such employees. 3.17 Interested Party Transactions. Except as disclosed in the Atari Disclosure Schedule or the Atari SEC Documents, neither Atari nor any of its subsidiaries is indebted to any director, officer, employee or agent of Atari or any of its subsidiaries (except for amounts due as normal salaries and in reimbursement of ordinary expenses), and no such person is indebted to Atari or any of its subsidiaries. Except as disclosed in the Atari Disclosure Schedule or the Atari SEC Documents, no officer, director or shareholder of Atari or any affiliate of such person has, either directly or indirectly, (i) an interest in any corporation, partnership, firm or other person or entity which furnishes or sells services or products which are similar to those furnished or sold by Atari or (ii) a beneficial interest in a contract or agreement to which Atari is a party or by which Atari may be bound. For purposes of this Section 3.17, there shall be disregarded any interest which arose solely from the ownership of less than a one percent (1%) equity interest in a corporation whose stock is regularly traded on a national securities exchange or over-the-counter market. 3.18 Insurance. Atari and each of its Significant Subsidiaries have policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Atari and its subsidiaries. There is no claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Atari and its Significant Subsidiaries are otherwise in compliance with the terms of such policies and bonds. Atari has no knowledge of any threatened termination of, or premium increase with respect to, any of such policies. 3.19 Compliance With Laws. Each of Atari and its Significant Subsidiaries has complied with, are not in violation of, and have not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not be reasonably expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole. -23- 31 3.20 Minute Books. The minute books of Atari and its subsidiaries made available to JTS contain a complete and accurate summary of all meetings of directors and stockholders or actions by written consent since the time of incorporation of Atari and the respective subsidiaries through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects. 3.21 Complete Copies of Materials. Atari has delivered or made available true and complete copies of each document which has been requested by JTS or its counsel in connection with their legal and accounting review of Atari and its subsidiaries. 3.22 Broker's and Finders' Fees. Atari has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.23 Registration Statement; Proxy Statement/Prospectus. The information supplied by Atari for inclusion in the Registration Statement shall not, at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The information supplied by Atari for inclusion in the Proxy Statement shall not, on the date the Proxy Statement is first mailed to JTS's stockholders and Atari's stockholders, at the time of the JTS Stockholders Meeting, at the time of the Atari Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not false or misleading; or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the JTS Stockholders Meeting or the Atari Stockholders Meeting which has become false or misleading. If at any time prior to the Effective Time any event or information should be discovered by Atari which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, Atari will promptly inform JTS. Notwithstanding the foregoing, Atari makes no representation, warranty or covenant with respect to any information supplied by JTS which is contained in any of the foregoing documents. 3.24 Opinion of Financial Advisor. Atari has been advised in writing by its financial advisor, Montgomery Securities, that in such advisor's opinion, as of the date hereof, the consideration to be paid by Atari hereunder is fair, from a financial point of view, to Atari. 3.25 Board Approval. The Board of Directors of Atari has unanimously (i) approved this Agreement and the Merger, (ii) determined that the Merger is in the best interests of its stockholders and is on terms that are fair to such stockholders and (iii) recommended that its stockholders approve this Agreement and the Merger. 3.26 Vote Required. The affirmative vote of the holders of a majority of the shares of Atari Common Stock outstanding on the record date set for the Atari Stockholders Meeting is the only vote of the holders of any of Atari's capital stock necessary to approve this Agreement and the transactions -24- 32 contemplated hereby. No shareholder of Atari will be entitled to statutory dissenters rights under Nevada Law as a result of the Merger. 3.27 Underlying Documents. True and complete copies of all underlying documents set forth on the Atari Disclosure Schedule or described as having been disclosed or delivered to JTS pursuant to this Agreement have been furnished to JTS. 3.28 Representations Complete. None of the representations or warranties made by Atari herein or in any Schedule hereto, including the Atari Disclosure Schedule, or certificate furnished by Atari pursuant to this Agreement, or the Atari SEC Documents, when all such documents are read together in their entirety, contains or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1 Conduct of Business of JTS and Atari. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, each of JTS and Atari agrees (except to the extent expressly contemplated by this Agreement or as consented to in writing by the other), to carry on its and its subsidiaries' business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay and to cause its subsidiaries to pay debts and taxes when due (subject to good faith disputes over such debts or taxes) and to pay or perform other obligations when due. Each of JTS and Atari agrees to promptly notify the other of any event or occurrence not in the ordinary course of its or its subsidiaries' business, and of any event which could have a Material Adverse Effect on it and its subsidiaries, taken as a whole. Without limiting the foregoing, except as expressly contemplated by this Agreement, neither JTS nor Atari shall do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of the other: (a) Charter Documents. Cause or permit any amendments to its Certificate of Incorporation or Bylaws (except as contemplated by Section 1.4 hereof); (b) Issuance of Securities. Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than the issuance of shares of its Common Stock pursuant to the exercise of stock options, warrants or other rights therefor outstanding as of the date of this Agreement; provided, however, that in addition to any grants specifically described on the JTS Disclosure Schedule, JTS may, in the ordinary course of business consistent with past practice, grant options for the purchase of up to 250,000 shares of JTS Common Stock under the JTS Stock Option Plan and issue shares of JTS Common Stock upon the -25- 33 exercise of such options; and provided, further, that Atari may issue securities under the Atari Option Plan. (c) Dividends; Changes in Capital Stock. Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service to it or its subsidiaries; (d) Acquisitions. Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its and its parent's/subsidiaries' business, taken as a whole; (e) Taxes. Other than in the ordinary course of business, make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, file any material Return or any amendment to a material Return, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; (f) Stock Option Plans, Etc. Accelerate, amend or change the period of exercisability of options, warrants or other rights granted under its employee stock plans or authorize cash payments in exchange for any options, warrants or other rights granted under any of such plans; (g) Other. Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(a) through (f) above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.2 Conduct of Business of JTS. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, except as expressly contemplated by this Agreement, JTS shall not do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of Atari: (a) Material Contracts. Enter into any material contract or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its material contracts, other than in the ordinary course of business consistent with past practice; (b) Intellectual Property. Transfer to any person or entity any rights to its Intellectual Property other than in the ordinary course of business consistent with past practice; -26- 34 (c) Dispositions. Sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material, individually or in the aggregate, to its and its subsidiaries' business, taken as a whole, except in the ordinary course of business consistent with past practice; (d) Indebtedness. Incur any indebtedness for borrowed money (except amounts borrowed under JTS's existing revolving credit line or drawdowns of existing credit facilities for working capital or construction purposes only) or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others; (e) Revaluation. Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and other than as disclosed in the JTS Disclosure Schedule; (f) Payment of Obligations. Pay, discharge or satisfy in an amount in excess of $50,000 in any one case or $250,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the JTS Financial Statements; (g) Termination or Waiver. Terminate or waive any right of substantial value, other than in the ordinary course of business; (h) Employee Benefit Plans. Adopt or amend any employee benefit or stock purchase or option plan; (i) Lawsuits. Commence a lawsuit other than (i) for the routine collection of bills, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with Atari prior to the filing of such a suit, (iii) in such cases in which the damages or legal fees are not reasonably expected to material, or (iv) for a breach of this Agreement; or (j) Other. Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.2(a) through (i) above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.3 Conduct of Business of Atari. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, except as expressly contemplated by this Agreement, Atari shall not do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of JTS: -27- 35 (a) Material Contracts. Enter into any material contract or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its material contracts, other than in the ordinary course of business consistent with past practice; (b) Intellectual Property. Transfer to any person or entity any rights to its Intellectual Property other than in the ordinary course of business consistent with past practice; (c) Dispositions. Sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material, individually or in the aggregate, to its and its subsidiaries' business, taken as a whole, except in the ordinary course of business consistent with past practice; (d) Indebtedness. Incur any indebtedness for borrowed money (except amounts borrowed under JTS's existing revolving credit line or drawdowns of existing credit facilities for working capital or construction purposes only) or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others; (e) Revaluation. Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and other than as disclosed in the Atari Disclosure Schedule; (f) Payment of Obligations. Pay, discharge or satisfy in an amount in excess of $50,000 in any one case or $250,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the Atari Financial Statements; (g) Capital Expenditures. Make any capital expenditures, capital additions or capital improvements except in the ordinary course of business and consistent with past practice, and in any event not to exceed $25,000 per quarter; (h) Termination or Waiver. Terminate or waive any right of substantial value, other than in the ordinary course of business; (i) Employee Benefit Plans. Adopt or amend any employee benefit or stock purchase or option plan; (j) Lawsuits. Commence a lawsuit other than (i) for the routine collection of bills, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with JTS prior to the filing of such a suit, (iii) in such cases in which the damages or legal fees are not reasonably expected to material, or (iv) for a breach of this Agreement; or (k) Other. Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.3(a) through (j) above, or any action which would make any of its representations or -28- 36 warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.4 No Other JTS Negotiations. From and after the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, JTS shall not, directly or indirectly (i) solicit, initiate discussion or engage in negotiations with any person (whether such negotiations are initiated by JTS or otherwise) or take any other action intended or designed to facilitate the efforts of any person, other than Atari, relating to the possible acquisition of JTS or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets of otherwise) or any of its or their capital stock or any material portion of its or their assets (with any such efforts by any such person, including a firm proposal to make such an acquisition, to be referred to as a "JTS Acquisition Proposal") (ii) provide non-public information with respect to JTS or any of its subsidiaries to any person, other than Atari, relating to a possible JTS Acquisition Proposal by any person, other than Atari, (iii) enter into an agreement with any person, other than Atari, providing for a possible JTS Acquisition Proposal, or (iv) make or authorize any statement, recommendation or solicitation in support of any possible JTS Acquisition Proposal by any person other than Atari. If JTS or any of its subsidiaries receives any unsolicited offer or proposal to enter negotiations relating to a JTS Acquisition Proposal, JTS shall immediately notify Atari thereof, including information as to the identity of the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be. JTS recognizes and acknowledges that a breach of this Section 4.4 may cause irreparable and material loss and damage to Atari as to which Atari may not have an adequate remedy at law or in damages and that, accordingly, JTS agrees that the issuance of an injunction or other equitable remedy is the appropriate remedy for any such breach. 4.5 No Other Atari Negotiations. From and after the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, Atari shall not, directly or indirectly (i) solicit, initiate discussion or engage in negotiations with any person (whether such negotiations are initiated by Atari or otherwise) or take any other action intended or designed to facilitate the efforts of any person, other than JTS, relating to the possible acquisition of Atari (whether by way of merger, purchase of capital stock, purchase of assets of otherwise) or any of its capital stock or any material portion of its assets (with any such efforts by any such person, including a firm proposal to make such an acquisition, to be referred to as an "Atari Acquisition Proposal") (ii) provide non-public information with respect to Atari to any person, other than JTS, relating to a possible Atari Acquisition Proposal by any person, other than JTS, (iii) enter into an agreement with any person, other than JTS, providing for a possible Atari Acquisition Proposal, or (iv) make or authorize any statement, recommendation or solicitation in support of any possible Atari Acquisition Proposal by any person other than JTS. If Atari receives any unsolicited offer or proposal to enter negotiations relating to an Atari Acquisition Proposal, Atari shall immediately notify JTS thereof, including information as to the identity of the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be. Atari recognizes and acknowledges that a breach of this Section 4.5 may cause irreparable and material loss and damage to JTS as to which JTS may not have an adequate remedy at law or in damages and that, accordingly, JTS agrees that the issuance of an injunction or other equitable remedy is the appropriate remedy for any such breach. Notwithstanding the foregoing, nothing contained in this Agreement (i) shall prevent the Board of Directors of Atari from referring any third party to this -29- 37 Section 4.5 or providing a copy of this Agreement (other than the JTS Disclosure Schedule) to any third party, (ii) shall prevent the Board of Directors of Atari from considering, negotiating, approving and recommending to the shareholders of Atari an unsolicited bona fide written Atari Acquisition Proposal which the Board of Directors of Atari determines in good faith (after consultation with its financial advisors and after consultation with outside counsel as to whether the Board of Directors is required to do so in order to discharge properly its fiduciary duties to shareholders under applicable law) would result in a transaction more favorable to the Company's shareholders from a financial point of view than the transaction contemplated by this Agreement (any such Atari Acquisition Proposal being referred to herein as a "Superior Atari Proposal"). ARTICLE V ADDITIONAL AGREEMENTS 5.1 Proxy Statement/Prospectus; Registration Statement. As promptly as practicable after the execution of this Agreement, JTS and Atari shall prepare, and Atari shall file with the SEC, preliminary proxy materials relating to the approval of the Merger and the transactions contemplated hereby by the stockholders of each of JTS and Atari and, as promptly as practicable following receipt of SEC comments thereon, JTS and Atari shall file with the SEC a Registration Statement on Form S-4 (or such other or successor form as shall be appropriate), which complies in form with applicable SEC requirements and shall use all reasonable efforts to cause the Registration Statement to become effective as soon thereafter as practicable. The Proxy Statement shall include the recommendation of the Board of Directors of JTS in favor of the Merger; provided that such recommendation may not be included or may be withdrawn if previously included if JTS's Board of Directors, upon written advice of its outside legal counsel, shall determine that to include such recommendation or not withdraw such recommendation if previously included would constitute a breach of the Board's fiduciary duty under applicable law. The Proxy Statement shall include the recommendation of the Board of Directors of Atari in favor of the Merger; provided that such recommendation may not be included or may be withdrawn if previously included if Atari's Board of Directors, upon written advice of its outside legal counsel, shall determine that to include such recommendation or not withdraw such recommendation if previously included would constitute a breach of the Board's fiduciary duty under applicable law. 5.2 Meetings of Stockholders. (a) JTS shall promptly after the date hereof take all action necessary in accordance with Delaware Law and its Certificate of Incorporation and Bylaws to convene the JTS Stockholders Meeting on or prior to June 30, 1996 or as soon thereafter as is practicable. JTS shall consult with Atari and use all reasonable efforts to hold the JTS Stockholders Meeting on the same day as the Atari Stockholders Meeting and shall not postpone or adjourn (other than for the absence of a quorum) the JTS Stockholders Meeting without the consent of Atari. JTS shall use its best efforts to solicit from stockholders of JTS proxies in favor of the Merger and shall take all other action necessary or advisable to secure the vote or consent of stockholders required to effect the Merger. -30- 38 (b) Atari shall promptly after the date hereof take all action necessary in accordance with Nevada Law and its Articles of Incorporation and Bylaws to convene the Atari Stockholders Meeting on or prior to June 30, 1996 or as soon thereafter as is practicable. Atari shall consult with JTS and shall use all reasonable efforts to hold the Atari Stockholders Meeting on the same day as the JTS Stockholders Meeting and shall not postpone or adjourn (other than for the absence of a quorum) the Atari Stockholders Meeting without the consent of JTS. Atari shall use its best efforts to solicit from stockholders of Atari proxies in favor of the Merger and shall take all other action necessary or advisable to secure the vote or consent of stockholders required to effect the Merger. 5.3 Access to Information. JTS shall afford Atari and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (i) all of JTS's and its subsidiaries' properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of JTS and its subsidiaries as Atari may reasonably request. JTS agrees to provide to Atari and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. Atari shall afford JTS and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (i) all of Atari's and its subsidiaries' properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of Atari and its subsidiaries as JTS may reasonably request. Atari agrees to provide to JTS and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 5.3 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger. 5.4 Public Disclosure. Atari and JTS shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except as may be required by law. 5.5 Consents; Cooperation. Each of Atari and JTS shall promptly apply for or otherwise seek, and use its best efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the Merger, including those required under HSR, and shall use its best efforts to obtain all necessary consents, waivers and approvals under any of its material contracts in connection with the Merger for the assignment thereof or otherwise. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to HSR or any other federal or state antitrust or fair trade law. 5.6 Continuity of Interest Certificates. (a) Schedule 5.6(a) sets forth those persons who hold one percent (1%) or more of the outstanding shares of JTS capital stock (the "JTS Significant Stockholders"). JTS shall provide Atari -31- 39 such information and documents as Atari shall reasonably request for purposes of reviewing such list. JTS shall use its best efforts to deliver or cause to be delivered to Atari, concurrently with the execution of this Agreement (and in each case prior to the Effective Time) from each of the JTS Significant Stockholders, an executed Continuity of Interest Certificate in a form reasonably satisfactory to counsel to Atari. The Surviving Company shall be entitled to place appropriate legends on the certificates evidencing any JTS Common Stock held by such JTS Significant Stockholders, and to issue appropriate stop transfer instructions to the transfer agent for JTS Common Stock, consistent with the terms of such Continuity of Interest Certificates. (b) Schedule 5.6(b) sets forth those persons who hold five percent (5%) or more of the outstanding shares of Atari capital stock (the "Atari Significant Stockholders"). Atari shall provide JTS such information and documents as JTS shall reasonably request for purposes of reviewing such list. Atari shall use its best efforts to deliver or cause to be delivered to JTS, concurrently with the execution of this Agreement (and in each case prior to the Effective Time) from each of the Atari Significant Stockholders, an executed Continuity of Interest Certificate in a form reasonably satisfactory to counsel to JTS. The Surviving Company shall be entitled to place appropriate legends on the certificates evidencing any JTS Common Stock to be received by such Atari Significant Stockholders pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for JTS Common Stock, consistent with the terms of such Continuity of Interest Certificates. 5.7 Voting Agreements. (a) Prior to or concurrently with the execution of this Agreement, each JTS stockholder named in Schedule 5.7(a) shall have executed and delivered to Atari a Voting Agreement substantially in the form of Exhibit C-1 attached hereto. (b) Prior to or concurrently with the execution of this Agreement, each Atari stockholder named in Schedule 5.7(b) shall have executed and delivered to JTS a Voting Agreement substantially in the form of Exhibit C-2 attached hereto. 5.8 FIRPTA. Promptly following the Closing, JTS and Atari shall deliver to the IRS appropriate notices that their capital stock is not a "U.S. Real Property Interest" as defined in and in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2). 5.9 Legal Requirements. Each of Atari and JTS will, and will cause their respective subsidiaries to, take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party hereto necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement and will take all reasonable actions necessary to obtain (and will cooperate with the other parties hereto in obtaining) any consent, approval, order or authorization of, or any registration, declaration or filing with, any Governmental Entity or other person, required to be obtained or made in connection with the taking of any action contemplated by this Agreement. -32- 40 5.10 Blue Sky Laws. JTS shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the JTS Common Stock in connection with the Merger. Atari shall use its best efforts to assist JTS as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of JTS Common Stock in connection with the Merger. 5.11 Atari Employee Benefit Plans. At the Effective Time, each outstanding option to purchase shares of Atari Common Stock under the Atari Stock Option Plan whether vested or unvested, will be assumed by JTS. Each such option so assumed by JTS under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Atari Stock Option Plan immediately prior to the Effective Time, except that (i) such option will be exercisable for that number of whole shares of JTS Common Stock equal to the product of the number of shares of Atari Common Stock that were issuable upon exercise of such option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of JTS Common Stock, and (ii) the per share exercise price for the shares of JTS Common Stock issuable upon exercise of such assumed option will be equal to the quotient determined by dividing the exercise price per share of Atari Common Stock at which such option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. It is the intention of the parties that the options so assumed by JTS qualify following the Effective Time as incentive stock options as defined in Section 422 of the Code to the extent such options qualified as incentive stock options prior to the Effective Time. 5.12 Atari Debentures. Each Atari Debenture, upon its surrender to JTS at any time at or following the Closing, shall be exchanged for a debenture in substantially identical form (i) representing the right to convert into that number of shares of JTS Common Stock equal to the number of shares of Atari Common Stock for which such debenture was previously convertible multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of JTS Common Stock, and (ii) with a per share conversion price for the shares of JTS Common Stock issuable upon exercise of such assumed debenture equal to the quotient determined by dividing the conversion price per share of JTS Common Stock at which such debenture was convertible immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. 5.13 Form S-8. JTS agrees to file, no later than five (5) days after the Closing, a registration statement on Form S-8 covering the shares of JTS Common Stock issuable pursuant to outstanding options under the Atari Stock Option Plan assumed by JTS. 5.14 Tax-Free Reorganization; Tax Returns. Atari and JTS shall each use its best efforts to cause the Merger to be treated as a "reorganization" within the meaning of Section 368(a)(1)(A) of the Code and shall report the Merger as such in all federal and, to the extent permitted, all state and local tax returns filed after the Effective Time of the Merger. 5.15 Registration Rights. At or prior to the Closing, JTS shall provide to the holders of Atari Common Stock listed on Schedule 5.15 hereto, the registration rights set forth in that certain Registration Rights Agreement dated as of February 3, 1995 by and among JTS and the entities listed on Exhibit A thereto, by amending such agreement in a form reasonably acceptable to counsel to Atari. -33- 41 5.16 Indemnification of Officers and Directors. After the Effective Time, the Surviving Corporation shall (to the extent not prohibited by law) indemnify and hold harmless, and pay in advance expenses, costs, damages, settlements and fees to each director or officer of Atari serving as such as of the date hereof as provided in the Nevada law or the Articles of Incorporation or bylaws of Atari or any indemnification agreement to which Atari and such officer or director is a party, in each case as in effect at the date hereof, which provisions shall survive the Merger and shall continue in full force and effect after the Effective Time. 5.17 Listing of JTS Common Stock. Atari and JTS shall each use its best efforts to cause the JTS Common Stock to be approved for listing on the Nasdaq National Market or the American Stock Exchange, such that trading in JTS Common Stock shall commence on the first trading day following the Closing. 5.18 Atari Consent to JTS Transaction with Moduler. JTS covenants and agrees with Atari that JTS will not amend or modify the Moduler Agreement without the prior written consent of Atari. 5.19 Atari SEC Documents. Atari covenants and agrees with JTS that from and after the date hereof, Atari will timely file all reports which it is required to file with the SEC pursuant to the Exchange Act. 5.20 Best Efforts and Further Assurances. Each of the parties to this Agreement shall use its best efforts to effectuate the transactions contemplated hereby and to fulfill or cause to be fulfilled the conditions to closing under this Agreement. Each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. ARTICLE VI CONDITIONS TO THE MERGER 6.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by agreement of all the parties hereto: (a) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by (i) the holders of a majority of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding as of the record date set for the JTS Stockholders Meeting, voting together, (ii) a majority of the shares of JTS Common Stock outstanding on the record date set for the JTS Stockholders Meeting, voting separtely as a class, (iii) the holders of at least two-thirds of the shares of JTS Series A Preferred outstanding as of the record date set for the JTS Stockholders Meeting, voting -34- 42 separately as a class, and (iv) the holders of a majority of the shares of Atari Common Stock outstanding as of the record date set for the Atari Stockholders Meeting. (b) Registration Statement Effective. The SEC shall have declared the Registration Statement effective. No stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose, and no similar proceeding in respect of the Proxy Statement, shall have been initiated or threatened by the SEC; and all requests for additional information on the part of the SEC shall have been complied with to the reasonable satisfaction of the parties hereto. (c) Exchange Act Registration Statement Effective. JTS shall have filed a Registration Statement on Form 8-A with the SEC pursuant to the Exchange Act (the "Form 8-A"). The SEC shall have declared the Form 8-A effective. No stop orders suspending the effectiveness of the Form 8-A or any part thereof shall have been issued and no proceeding for that purpose, shall have been initiated or threatened by the SEC. (d) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. In the event an injunction or other order shall have been issued, each party agrees to use its reasonable diligent efforts to have such injunction or other order lifted. (e) Governmental Approval. Atari and JTS and their respective subsidiaries shall have timely obtained from each Governmental Entity all approvals, waivers and consents, if any, necessary for consummation of or in connection with the Merger and the several transactions contemplated hereby, including such approvals, waivers and consents as may be required under the Securities Act, under state Blue Sky laws, and under HSR. (f) Tax Opinion. Atari and JTS shall have received substantially identical written opinions of Wilson Sonsini Goodrich & Rosati, P.C., and Cooley Godward Castro Huddleson & Tatum, in form and substance reasonably satisfactory to them, to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and such opinions shall not have been withdrawn. In rendering such opinions, counsel shall be entitled to rely upon representations of Atari and JTS and certain stockholders of Atari and JTS. (g) Listing of JTS Common Stock. The JTS Common Stock shall have been approved for quotation on the Nasdaq National Market or the American Stock Exchange. -35- 43 (h) Limit on JTS Dissenting Shares. No more than 5.0% of the shares of JTS Common Stock and JTS Series A Preferred Stock shall be Dissenting Shares or entitled to exercise any dissenters or appraisal rights with respect to the Merger. (i) Continuity of Interest Certificates. Atari shall have received from each of the JTS Significant Stockholders an executed Continuity of Interest Certificate as contemplated by Section 5.6 hereof. JTS shall have received from each of the Atari Significant Shareholders an executed Continuity of Interest Certificate as contemplated by Section 5.6 hereof. (j) Supplemental Indentures. To the extent required by the indenture related to the Atari Debentures or the indenture related to the Federated Debentures, Atari and JTS shall have entered into supplemental indentures with the trustees for such debentures, such supplemental indentures to be in a form reasonably satisfactory to counsel to Atari and counsel to JTS. 6.2 Additional Conditions to Obligations of JTS. The obligations of JTS to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by JTS: (a) Representations, Warranties and Covenants. (i) The representations and warranties of Atari in this Agreement shall be true and correct in all respects on and as of the Effective Time as though such representations and warranties were made on and as of such time, except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries and (ii) Atari shall have performed and complied in all respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Effective Time, except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries. (b) Certificate of Atari. JTS shall have been provided with a certificate executed on behalf of Atari by its President and its Chief Financial Officer to the effect that, as of the Effective Time: (i) all representations and warranties made by Atari under this Agreement are true and complete in all respects except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries; and (ii) all covenants, obligations and conditions of this Agreement to be performed by Atari on or before such date have been so performed in all respects except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries. (c) Third Party Consents. JTS shall have been furnished with evidence satisfactory to it of the consent or approval of those persons whose consent or approval shall be required in -36- 44 connection with the Merger under any material contract of Atari or any of its Significant Subsidiaries or otherwise. (d) Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting JTS' conduct or operation of the business of Atari and its subsidiaries, following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (e) Legal Opinions. JTS shall have received legal opinions from Wilson Sonsini Goodrich & Rosati, P.C. and Atari's Nevada counsel, which opinions shall be reasonably satisfactory to counsel to JTS. (f) No Material Adverse Changes. There shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of Atari and its subsidiaries, taken as a whole. 6.3 Additional Conditions to the Obligations of Atari. The obligations of Atari to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by Atari: (a) Representations, Warranties and Covenants. (i) The representations and warranties of JTS in this Agreement shall be true and correct in all respects on and as of the Effective Time as though such representations and warranties were made on and as of such time, except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries and (ii) JTS shall have performed and complied in all respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Effective Time, except to the extent that the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries. (b) Certificate of JTS. Atari shall have been provided with a certificate executed on behalf of JTS by its Chief Executive Officer and Chief Financial Officer to the effect that, as of the Effective Time: (i) all representations and warranties made by JTS under this Agreement are true and complete in all respects; except to the extent that the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries; and (ii) all covenants, obligations and conditions of this Agreement to be performed by JTS on or before such date have been so performed in all respects except to the extent that -37- 45 the failure to so perform or comply has not had and could not reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries. (c) Third Party Consents. Atari shall have been furnished with evidence satisfactory to it of the consent or approval of those persons whose consent or approval shall be required in connection with the Merger under any material contract of JTS or any of its subsidiaries or otherwise. (d) Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting JTS' conduct or operation of the business of JTS and its subsidiaries, following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (e) Legal Opinion. Atari shall have received a legal opinion from Cooley Godward Castro Huddleson & Tatum, which opinion shall be reasonably satisfactory to counsel to Atari. (f) No Material Adverse Changes. There shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations, results of operations or prospects of JTS and its subsidiaries, taken as a whole. (g) Conversion of JTS Series A Preferred Stock. Each outstanding share of JTS Series A Preferred Stock shall be converted into one (1) share of JTS Common Stock. (h) Right of First Refusal and Co-Sale Agreement. The provisions of the Right of First Refusal and Co-Sale Agreement dated as of February 3, 1995 by and among JTS and certain other parties, as amended, shall have terminated. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. Notwithstanding approval of this Agreement by the stockholders of JTS or Atari, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time: (a) by mutual written consent of JTS and Atari; (b) by Atari if (i) it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of JTS, which has or can reasonably be expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole, and such breach has not been cured within five (5) days after written notice to JTS (provided that, no cure period shall be required for a breach which by -38- 46 its nature cannot be cured) or (ii) there shall be any final action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would prohibit JTS's ownership or operation of all or a material portion of the business of Atari or any of its subsidiaries, or compel Atari or any of Atari's subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold separate or otherwise relinquish all or a material portion of the business or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's subsidiaries as a result of the Merger. (c) by JTS if (i) it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Atari, which has or can reasonably be expected to have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole, and such breach has not been cured within five (5) days after written notice to Atari (provided that, no cure period shall be required for a breach which by its nature cannot be cured) or (ii) there shall be any final action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would prohibit JTS's ownership or operation of all or a material portion of the business of JTS or any of its subsidiaries, or compel Atari or any of Atari's subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold separate or otherwise relinquish all or a material portion of the business or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's subsidiaries as a result of the Merger. (d) by any party hereto if: (i) the Closing has not occurred by July 31, 1996, (ii) there shall be a final, non-appealable order of a federal or state court in effect preventing consummation of the Merger; (iii) there shall be any final action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity which would make consummation of the Merger illegal; (iv) if JTS's stockholders do not approve the Merger and this Agreement by the requisite vote at JTS Stockholders Meeting; (v) if Atari's stockholders do not approve the Merger and this Agreement by the requisite vote at the Atari Stockholders Meeting; or (vi) if the Atari Board of Directors shall have accepted, approved or recommended to the shareholders of Atari a Superior Atari Proposal. Where action is taken to terminate this Agreement pursuant to this Section 7.1, it shall be sufficient for such action to be authorized by the Board of Directors of the party taking such action and for such party to then notify the other parties in writing of such action. 7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Atari and JTS or their respective officers, directors, stockholders or affiliates, except to the extent that such termination results from the breach by a party hereto of any of its representations, warranties or covenants set forth this Agreement; provided that, the provisions of Section 7.3 (Expenses) and this Section 7.2 shall remain in full force and effect and survive any termination of this Agreement. 7.3 Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense, except that expenses incurred in connection with printing the Proxy Materials -39- 47 and the S-4 Registration Statement, registration and filing fees incurred in connection with the S-4 Registration Statement and the Proxy Materials and fees, costs and expenses associated with compliance with applicable state securities laws, listing of the JTS Common Stock on the Nasdaq National Market or the American Stock Exchange, and with HSR in connection with the Merger shall be shared equally by JTS and Atari. 7.4 Amendment. The boards of directors of the parties hereto may cause this Agreement to be amended at any time by execution of an instrument in writing signed on behalf of each of the parties hereto; provided that an amendment made subsequent to adoption of the Agreement by the stockholders of JTS or Atari shall not (i) alter or change the amount or kind of consideration to be received on conversion of the Atari Common Stock, (ii) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger, or (iii) alter or change any of the terms and conditions of the Agreement if such alteration or change would adversely affect the holders of Atari Common Stock. 7.5 Extension; Waiver. At any time prior to the Effective Time any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE VIII GENERAL PROVISIONS 8.1 Non-Survival at Effective Time. The representations, warranties and agreements set forth in this Agreement shall terminate at the Effective Time, except that the agreements set forth in Article I, Section 5.8 (FIRPTA), Section 5.11 (Employee Benefit Plans), Section 5.12 (Atari Debentures), Section 5.13 (Form S-8), Section 5.14 (Tax Free Reorganization; Tax Returns), Section 5.16 (Indemnification), Section 5.20 (Best Efforts and Further Assurances), 7.3 (Expenses), and this Article VIII shall survive the Effective Time. 8.2 Absence of Third Party Beneficiary Rights. No provisions of this Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, stockholder, partner or employee of any party hereto or any other person or entity unless specifically provided otherwise herein, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. 8.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or -40- 48 certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Atari, to: Atari Corporation 455 South Mathilda Avenue Sunnyvale, California 94086 Attention: Jack Tramiel Facsimile No.: (408) 328-0909 Telephone No.: (408) 328-0900 with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Jeffrey D. Saper, Esq. Facsimile No.: (415) 493-6811 Telephone No.: (415) 493-9300 (b) if to JTS, to: JTS Corporation 166 Baypointe Parkway San Jose, California 95134 Attention: David T. Mitchell Facsimile No.: (408) 468-1619 Telephone No.: (408) 468-1800 with a copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square Palo Alto, California 94306 Attention: Andrei M. Manoliu, Esq. Facsimile No.: (415) 857-0663 Telephone No.: (415) 843-5000 8.4 Interpretation. When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. -41- 49 8.5 Counterparts. This Agreement may be executed in counterparts, both of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 8.6 Entire Agreement; Nonassignability; Parties in Interest. This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto, including the Exhibits, the Schedules, including the JTS Disclosure Schedule and the Atari Disclosure Schedule (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise. 8.7 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 8.8 Remedies Cumulative. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 8.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. Each of the parties hereto irrevocably consents to the exclusive jurisdiction of any court located in the County of Santa Clara, California, in connection with any matter based upon or arising out of this Agreement or the matters contemplated herein, agrees that process may be served upon them in any manner authorized by the laws of the State of California for such persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. 8.10 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 8.11 Amendment and Restatement. The parties hereto hereby consent and agree that this Agreement shall constitute an amendment and restatement of that certain Agreement and Plan of Reorganization by and among Atari, JTS and JTS Acquisition Corporation dated as of February 12, 1996. -42- 50 IN WITNESS WHEREOF, JTS and Atari have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized, all as of the date first written above. JT STORAGE, INC. By: /s/David T. Mitchell ---------------------- President ATARI CORPORATION By: /s/Sam Tramiel ---------------------- President EX-2.2 3 FORM OF AGREE. OF MERGER OF JTS CORP.& ATARI CORP. 1 Exhibit 2.2 AGREEMENT OF MERGER OF JT STORAGE, INC. AND ATARI CORPORATION This Agreement of Merger (the "AGREEMENT") is entered into as of ______________, 1996, by and between JT STORAGE, INC., a Delaware corporation ("JTS"), and ATARI CORPORATION, a Nevada corporation ("ATARI"). RECITALS A. JTS and Atari have entered into an Amended and Restated Agreement and Plan of Reorganization, dated as of April 8, 1996 (the "PLAN"), providing for certain representations, warranties and agreements in connection with the transactions contemplated hereby, in accordance with the General Corporation Law of the State of Delaware (the "DELAWARE LAW"). B. The Boards of Directors of JTS and Atari deem it advisable and in the respective best interests of JTS and Atari and their stockholders that Atari be merged with and into JTS through a statutory merger of Atari into JTS (the "MERGER") with JTS as the surviving corporation (the "SURVIVING CORPORATION"). NOW THEREFORE, JTS and Atari agree as follows: 1. THE MERGER 1.1. EFFECTIVE TIME OF MERGER. The Merger will become effective at 5:00 p.m., Eastern Standard Time, on ___________, 1996 (the "EFFECTIVE TIME"). 1.2. EFFECTS OF MERGER. At the Effective Time: (A) Atari will be merged with and into JTS and the separate corporate existence of Atari shall thereupon cease. JTS will be the surviving corporation in the Merger, and the corporate existence of JTS, with all its purposes, objects, rights, privileges, powers, immunities and franchises, will continue unaffected and unimpaired by the Merger. (B) The Certificate of Incorporation of JTS will be amended to read as set forth on Exhibit A hereto (the "JTS Certificate of Incorporation") and will be the Certificate of Incorporation of the Surviving Corporation. (C) The Bylaws of JTS will be the Bylaws of the Surviving Corporation. 1. 2 (D) Each share of JTS Common Stock, 0.000001 par value ("JTS COMMON STOCK"), outstanding immediately prior to the Effective Time will continue to be an identical outstanding share of Common Stock of JTS as the surviving corporation (with the changes set forth in the JTS Certificate of Incorporation). (E) The shares of Atari Common Stock, $0.01 par value ("ATARI COMMON STOCK"), outstanding immediately prior to the Effective Time will be converted into shares of JTS Common Stock as provided in Section 2 of this Agreement; outstanding options to purchase shares of Atari Common Stock will be converted into outstanding options to purchase shares of JTS Common Stock as provided in Section 2 of this Agreement; and each share of Atari capital stock held in treasury will be canceled. (F) Without further transfer, act or deed, JTS, as the surviving corporation, will succeed to all the properties, assets, rights, privileges, powers, immunities and franchises of Atari, and will be subject to, and responsible for, all of the debts, liabilities and obligations of Atari, with the effect set forth in the Delaware Law. (G) All rights of creditors and all liens upon the property of Atari will be preserved unimpaired following the Merger, provided that such liens upon the property of Atari will be limited to the property affected thereby immediately prior to the Effective Time. 2. CONVERSION OF ATARI COMMON STOCK; TREATMENT OF ATARI OPTIONS; EXCHANGE OF CERTIFICATES 2.1. CONVERSION OF ATARI COMMON STOCK. Each share of Atari Common Stock outstanding immediately prior to the Effective Time will be converted into and represent a right to receive one (1) fully paid and nonassessable share of issued and outstanding JTS Common Stock. 2.2. ASSUMPTION OF OUTSTANDING OPTIONS TO PURCHASE ATARI COMMON STOCK. At the Effective Time, each then outstanding option (an "ATARI OPTION") to purchase Atari Common Stock granted under the Atari 1986 Incentive Stock Option Plan (the "ATARI PLAN") shall be assumed by JTS and the holder thereof shall be entitled, in accordance with the terms of such Atari Option, to purchase after the Effective Time that number of shares of JTS Common Stock equal to the number of shares of Atari Common Stock subject to such Atari Option at the Effective Time and the per share exercise price per full share of JTS Common Stock for each such assumed option will equal the exercise price of the Atari Option (per share of Atari Common Stock). Except as otherwise expressly provided in the Atari Plan, the term, excercisability, vesting schedule, status as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE"), if applicable, and all other terms of the Atari Options will otherwise be unchanged. Continuous employment with Atari prior to the Effective Time will be credited to each holder of an Atari Option for purposes of determining the number of shares subject to exercise after the Effective Time and for other purposes under the Atari Plan. 2. 3 2.3. EXCHANGE OF CERTIFICATES. 2.3.1. EXCHANGE AGENT. Prior to the Closing Date, JTS shall appoint Registrar and Transfer Company, or such other bank or trust company selected by JTS, to act as exchange agent (the "EXCHANGE AGENT") in the Merger. 2.3.2. JTS TO PROVIDE SHARES. Promptly after the Effective Time, but in no event later than five business days thereafter, JTS shall make available for exchange in accordance with this Section 2.3, the shares of JTS Common Stock issuable pursuant to Section 2.1 in exchange for outstanding shares of Atari Common Stock. 2.3.3. EXCHANGE PROCEDURES. As soon as practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate that, immediately prior to the Effective Time, represented outstanding shares of Atari Common Stock (a "CERTIFICATE") whose shares are being converted into JTS Common Stock pursuant to Section 2.1, the following: (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates duly endorsed as instructed to the Exchange Agent and shall be in such form and have such other provisions as JTS may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for JTS Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent duly endorsed as instructed, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the number of shares of JTS Common Stock to which the holder of Atari Common Stock is entitled pursuant to Section 2.1 hereof and is represented by the Certificate so surrendered. The Certificate so surrendered shall forthwith be cancelled. Until surrendered as contemplated by this Section 2.3, each Certificate shall be deemed at any time after the Effective Time to represent the right to receive upon such surrender the number of shares of JTS Common Stock as provided by this Section 2.3 and the provisions of the Delaware Law. 2.3.4. PAYMENT OF DIVIDENDS AND DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or distributions payable to holders of record of JTS Common Stock after the Effective Time shall be paid to the holder of any unsurrendered Certificate until the holder of such Certificate shall surrender such Certificate. Subject to the effect, if any, of applicable escheat and other laws, following surrender of any Certificate, there shall be delivered to the person entitled thereto, without interest, the amount of dividends theretofore paid with respect to JTS Common Stock so withheld as of any date subsequent to the Effective Time and prior to such date of delivery. 2.3.5. NO FURTHER OWNERSHIP RIGHTS IN ATARI STOCK. All JTS Common Stock delivered upon the surrender for exchange of shares of Atari Common Stock in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such shares of Atari Common Stock. There shall be no further registration of transfers on the stock transfer books of Atari or its transfer agent of the shares of Atari Common Stock that were outstanding immediately prior to the Effective Time. If, after the Closing Date, 3. 4 Certificates are presented for any reason, they shall be cancelled and exchanged as provided in this Section 2.3. 3. TERMINATION AND AMENDMENT. 3.1. AGREEMENT SUBJECT TO TERMINATION BY MUTUAL CONSENT. Notwithstanding the approval of this Agreement by the stockholders of JTS and Atari, this Agreement may be terminated at any time prior to the Effective Time by mutual agreement of JTS and Atari. 3.2. AGREEMENT SUBJECT TO TERMINATION ON TERMINATION OF PLAN. Notwithstanding the approval of this Agreement by the stockholders of JTS and Atari, this Agreement shall terminate forthwith in the event that the Plan shall be terminated as therein provided. 3.3. EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided above, this Agreement shall forthwith become void and there shall be no liability on the part of either JTS or Atari or their respective officers and directors, except as otherwise provided in the Plan. 3.4. AMENDMENT. This Agreement may be amended by the parties hereto at any time before or after approval by the stockholders of either JTS or Atari, but, after such approval, no amendment shall be made which by applicable law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 4. MISCELLANEOUS. 4.1. PLAN. The Plan and this Agreement are intended to be construed together in order to effectuate their purposes. 4.2. ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. Neither party hereto may assign any of its rights or obligations hereunder without the prior written consent of the other party hereto. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 4.3. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 4.4. COUNTERPARTS. This Agreement may be executed in counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. 4.5. TAX-FREE REORGANIZATION. The Merger contemplated hereby is intended to be treated as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code. 4. 5 5. 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date and year first above written. JT STORAGE, INC. Attest: ____________________ By: ____________________________________ W. Virginia Walker, David T. Mitchell, Secretary President and Chief Executive Officer ATARI CORPORATION Attest: ___________________ By: ____________________________________ ___________________, Sam Tramiel, Secretary President and Chief Executive Officer 6. 7 CERTIFICATE OF THE SECRETARY OF JT STORAGE, INC. I, W. Virginia Walker, the Secretary of JT Storage, Inc., a Delaware corporation (the "Corporation"), hereby certify as such Secretary, in accordance with the General Corporation Law of the State of Delaware, that the Agreement of Merger between Atari Corporation and the Corporation to which this certificate is attached, after having first been duly adopted by the Corporation and executed on its behalf by the President and Chief Executive Officer and the Secretary of the Corporation, was then submitted to the stockholders of the Corporation at a meeting duly called and held on June __, 1996, and at such meeting a majority of the outstanding Common Stock and Series A Preferred Stock (voting together as a class), a majority of the outstanding Common Stock (voting separately as a class) and at least two-thirds of the outstanding Series A preferred Stock (voting separately as a class) of the Corporation entitled to vote on the Agreement of Merger were voted for the adoption of the Agreement of Merger, thereby duly approving and adopting the Agreement of Merger. IN WITNESS WHEREOF, the undersigned has executed this certificate this __th day of June, 1996. _________________________ W. Virginia Walker Secretary JT Storage, Inc. 8 CERTIFICATE OF THE SECRETARY OF ATARI CORPORATION I, ____________________________, the Secretary of Atari Corporation, a Nevada corporation (the "Corporation"), hereby certify as such Secretary, in accordance with the General Corporation Law of the State of Delaware, that the Agreement of Merger between JT Storage, Inc. and the Corporation to which this certificate is attached, after having first been duly adopted by the Corporation and executed on its behalf by the President and Chief Executive Officer and the Secretary of the Corporation, was then submitted to the stockholders of the Corporation at a meeting duly called and held on June __, 1996, and at such meeting a majority of the outstanding Common Stock of the Corporation entitled to vote on the Agreement of Merger were voted for the adoption of the Agreement of Merger, thereby duly approving and adopting the Agreement of Merger. IN WITNESS WHEREOF, the undersigned has executed this certificate this __th day of June, 1996. _________________________ Secretary Atari Corporation EX-3.1 4 RESTATED CERTIFICATE OF INCORP - JT STORAGE 1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF JT STORAGE, INC. (Originally incorporated on February 3, 1994) JT Storage, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is JT Storage, Inc. JT Storage, Inc. was originally incorporated under the same name, and the original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on February 3, 1994. 2. Pursuant to Section 241 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of this corporation. 3. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: ARTICLE I The name of the corporation (which is hereinafter referred to as the "CORPORATION") is: JT Storage, Inc. ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 2 ARTICLE IV (A) Classes of Stock. The total number of shares of stock which the Corporation shall have authority to issue is 40,000,000 shares, consisting of 24,000,000 shares of Common Stock having a par value of $0.000001 per share ("COMMON STOCK") and 16,000,000 shares of Preferred Stock, all of which shall be designated Series A Preferred Stock, par value $0.000001 per share ("SERIES A PREFERRED"). Upon the filing of this Restated Certificate of Incorporation, each one (1) outstanding share of Common stock shall be split into four thousand five hundred (4,500) shares of Common Stock. (B) Rights, Preferences, Privileges and Restrictions of Preferred Stock. The rights, preferences, privileges, restrictions and other matters relating to the Series A Preferred are as follows: 1. Dividends. (a) Dividends on Series A Preferred. The holders of Series A Preferred shall be entitled to receive, when and as declared by the Board of Directors (the "BOARD") out of funds legally available therefor, dividends at the rate of $0.09 per share, per annum, payable in preference and priority to any payment of any distribution on Common Stock of the Corporation, appropriately adjusted for any stock split, stock dividend, stock combination or other recapitalization (a "RECAPITALIZATION") of the Series A Preferred (as so adjusted, the "DIVIDEND RATE"). Such dividends shall accrue on each share of Series A Preferred from day to day, whether or not declared, and shall be cumulative. Such cumulative dividends on the Series A Preferred may be paid, at the option of the Corporation, in cash or shares of capital stock of the Corporation, with any shares of capital stock to be valued at the per share fair market of such capital stock, as determined in good faith by the Corporation's Board of Directors at the time such dividends are declared. (b) Dividends on Common Stock. No dividends or other distributions shall be made with respect to the Common Stock until all accrued and unpaid dividends on the Series A Preferred shall have been declared and paid in full. In the event the Corporation shall at any time declare or pay a dividend on the Common Stock, it shall, simultaneously therewith and as part of such declaration or payment, declare and pay to each holder of Series A Preferred a dividend equal to the dividend which would be payable to such holder if the shares of Series A Preferred held by such holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive such dividend. (c) Definition of Distribution. For purposes of this Restated Certificate of Incorporation, unless the context otherwise requires, a "DISTRIBUTION" shall mean the transfer of cash or other property without consideration, whether by way of dividend or otherwise, payable -2- 3 other than in Common Stock, or the purchase or redemption of shares of Corporation (other than repurchases of Common Stock issued to or held by employees, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of said repurchase) for cash or property. 2. Liquidation Preference. (a) Series A Preferred. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (or the deemed occurrence of such event pursuant to subsection (c)(i) of this Section 2) (collectively, a "LIQUIDATION"), the holders of shares of the Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, an amount equal to $1.00 per share of Series A Preferred then held by them (as adjusted for any Recapitalization), plus the greater of (i) $0.09 per share of Series A Preferred then held by them (as adjusted for any Recapitalization with respect to such shares and for partial years) per annum calculated from the original issue date of the shares of Series A Preferred through the date of distribution, minus all dividends and other distributions previously made in respect of any shares of Series A Preferred held by them or (ii) any declared but unpaid dividends for Series A Preferred then held by them. All of the preferential amount to be paid to the holders of the Series A Preferred under this Section 2(a) shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Corporation to, the holders of Common Stock in connection with any actual or deemed Liquidation. After the payment or the setting apart for payment to the holders of the Series A Preferred of the preferential amounts so payable to them, the remaining assets of the Corporation available for distribution shall be distributed in accordance with the provisions of Section 2(b), as applicable. If the assets or surplus funds to be distributed are insufficient to permit the payment to holders of the Series A Preferred of their full preferential amount, then the entire assets of the Corporation legally available for distribution shall be distributed ratably among the holders of Series A Preferred in such a manner that the preferential amount to be distributed to each such holder shall equal the amount obtained by multiplying the entire assets and funds of the Corporation legally available for distribution hereunder by a fraction, the numerator of which shall be the number of shares of Series A Preferred then held by such holder, and the denominator of which shall be the total number of shares of Series A Preferred then outstanding. (b) Series A Preferred and Common Stock. After payment has been made to the holders of the Series A Preferred of the full amounts to which they shall be entitled as set forth in Section 2(a) above, the entire remaining assets and funds of the Corporation legally available for distribution, if any, shall be distributed ratably among the holders of Series A Preferred and the holders of Common Stock in a manner such that the amount so distributed to each holder of Common Stock and/or Series A Preferred shall equal the amount obtained by multiplying the -3- 4 entire assets and funds of the Corporation legally available for distribution pursuant to this Section 2(b) by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock then held by the holder and the number of shares of Common Stock issuable upon conversion of the shares of Series A Preferred then held by the holder, and the denominator of which shall be the sum of the total number of shares of Common Stock then outstanding and the total number of shares of Common Stock issuable upon conversion of the total number of shares of Series A Preferred then outstanding; provided, however, that if each holder of Series A Preferred would receive a distribution of at least an aggregate of $5.00 per share of Series A Preferred solely pursuant to this Section 2(a) and without any distribution pursuant to Section 2(a), then Section 2(a) shall be of no force and effect and the Corporation's assets available for distribution to its stockholders shall be distributed among all holders of Series A Preferred and all holders of Common Stock solely pursuant to this Section 2(b) in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Series A Preferred were converted into Common Stock at the then effective Conversion Price (as defined in Section 4(a) below). (c) Special Provisions. (i) For purposes of this Section 2, upon the election of the holders of at least a majority of the then outstanding shares of Series A Preferred, a Liquidation shall be deemed to occur upon the sale or transfer of all or substantially all of the Corporation's assets or the acquisition of the Corporation by another entity, including any merger consolidation with or into any other corporation and any other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Corporation for securities or consideration issued or caused to be issued by the acquiring entity as a result of which stockholders of the Corporation immediately prior to the transaction or series of transactions own less than fifty percent (50%) of the equity securities of the surviving corporation immediately following the merger, consolidation, sale or transfer of assets or other transaction or series of transactions. (ii) If any assets distributed pursuant to this Section 2 are other than cash, then the value of such noncash assets shall be determined by the Board of Directors of the Corporation, acting in good faith. (iii) Each holder of an outstanding share of Series A Preferred shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the General Corporation Law of California, to distributions made by the Corporation in connection with the repurchase of shares of Common Stock issued to or held by employees or consultants upon termination of their employment or services pursuant to agreements between the Corporation and such persons providing for the corporation's right of said repurchase. 3. Redemptions. Redemption of Series A Preferred. The Series A Preferred shall not be redeemable by the Corporation prior to January 10, 2000. On January 10, 2000, January 10, -4- 5 2001 and January 10, 2002, (each a "REDEMPTION DATE" and, collectively the "REDEMPTION DATES"), the Corporation shall redeem, upon the election of a majority of the holders of Series A Preferred, in cash out of any funds legally available therefor, one-third (on a pro rata basis as to each stockholder), one-half (on a pro rata basis as to each stockholder) and all of the outstanding shares of Series A Preferred, respectively. Redemptions pursuant to this Section 3 for the Series A Preferred shall be made at a price of $1.00 per share (appropriately adjusted for any Recapitalization) plus all accrued but unpaid dividends on such shares as of each such Redemption Date (in each case, the "REDEMPTION PRICE"). The Corporation need not establish any sinking fund for the redemption of the Series A Preferred. At least thirty days prior to each Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A Preferred at the address last known on the records of the Corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "REDEMPTION NOTICE"). On or after each Redemption Date, each holder of Series A Preferred shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. Nothing herein shall be deemed to prevent a holder of Series A Preferred from converting all or part of such holder's Series A Preferred into Common Stock in accordance with the terms of Section 4(a) hereof at any time prior to the date five (5) days before each Redemption Date, in which case the provisions of this Section 3 shall not apply to any shares so converted; provided, however that shares so converted shall be deemed to have been redeemed in the year of conversion, solely for purposes of determining the Corporation's compliance with the preceding paragraph. From and after each Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series A Preferred so redeemed shall cease with respect to such shares (except the right to receive the Redemption Price without interest upon surrender of the shareholder's certificate or certificates), and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A Preferred on any Redemption Date are insufficient to redeem the total number of shares of Series A Preferred required to be redeemed on such Redemption Date, those funds which are legally available for redemption shall be used to redeem, on a pro rata basis, the maximum possible number of the shares of Series A Preferred required to be redeemed on such Redemption Date. The shares of Series A Preferred not redeemed on a Redemption Date shall remain outstanding and remain entitled to all the rights and preferences provided herein, including the rights of conversion set forth in Section 4 hereof. At any time thereafter when additional funds -5- 6 of the Corporation are legally available for the redemption of shares of Series A Preferred, such funds will immediately be used to redeem, on a pro rata basis, the balance of the shares which the Corporation was obliged to redeem on such Redemption Date, but which were not redeemed. 4. Conversion. The holders of Series A Preferred shall have conversion rights as follows (the "CONVERSION RIGHTS"): (a) Optional Conversion. Each share of Series A Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series A Preferred, into that number of fully-paid and non-assessable shares of Common Stock that is equal to $1.00 divided by the Conversion Price determined as hereinafter provided, in effect at the time of conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series A Preferred, without the payment of any additional consideration by the holders thereof, (the "CONVERSION PRICE") shall initially be $1.00 per share of Common Stock, and shall be subject to adjustment as provided herein. (b) Automatic Conversion. Each share of Series A Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Price as follows: (i) Initial Public Offering. Upon the closing ("CLOSING") of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "SECURITIES ACT"), covering the offer and sale of Common Stock of the Corporation to the public at an offering price to the public of at least Five Dollars ($5.00) per share (as adjusted for any Recapitalization) and in which the aggregate gross proceeds received by the Corporation (net of underwriting discounts) equal or exceed ten million dollars ($10,000,000) (an "IPO"). In the event of the Closing of an IPO, the person(s) entitled to receive the Common Stock issuable upon such conversion of the Series A Preferred shall not be deemed to have converted that Preferred Stock until immediately prior to the Closing. (ii) Two-Thirds Percent Vote. Upon the affirmative election of the holders of not less than two-thirds of the then outstanding shares of Series A Preferred. In the event of such an election, the person(s) entitled to receive shares of Common Stock issuable upon such conversion of the Series A Preferred shall not be deemed to have converted that Series A Preferred until the election (duly approved by not less than two-thirds of the Series A Preferred then outstanding) is received by the Corporation. (c) Mechanics of Conversion. (i) No fractional shares of Common Stock shall be issued upon conversion of Series A Preferred. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation at its election shall either pay cash equal to such fraction -6- 7 multiplied by the then fair market value of a share of Common Stock, as determined by the Board, or issue one whole share of Common Stock for each fraction of a share outstanding, after aggregating all fractional shares held by each stockholder. (ii) Before any holder of Series A Preferred shall be entitled to convert the same into full shares of Common Stock pursuant to Section 4(a) above, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred, and shall give written notice to the Corporation at such office that such holder elects to convert the same. In the event of an automatic conversion pursuant to paragraph 4(b) above, the outstanding shares of Series A Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless either the certificates evidencing such shares of Series A Preferred are delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and delivers to the Corporation a fully executed agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery issue and deliver at such office to such holder of Series A Preferred, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock, if applicable. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (iii) In the event of the automatic conversion of shares of Series A Preferred in accordance with Section 4(b) or any voluntary conversion pursuant to Section 4(a) that occurs within ninety (90) days immediately prior to the effective date of any automatic conversion, any and all rights held by the holders of such converted shares of Series A Preferred to receive any accrued but unpaid dividends in respect of such shares shall terminate and be of no effect as of the date of such conversion. (d) Adjustments to Conversion Price for Certain Issues. (i) Adjustments for Subdivisions, Stock Dividends, or Combinations of Common. In the event the outstanding shares of Common Stock shall be subdivided (by stock split, stock dividend or otherwise) into a greater number of shares of Common Stock and the outstanding shares of Series A Preferred are not identically subdivided, the Conversion Price in effect immediately prior to such subdivision shall, concurrently with the effectiveness of such -7- 8 subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined (by reclassification, reverse stock split or otherwise) into a lesser number of shares of Common Stock and the outstanding shares of Series A Preferred are not identically combined, the Conversion Price in effect immediately prior to such combination shall, concurrently with the effectiveness of such combination, be proportionately increased. (ii) Adjustments for Other Distributions. In the event the Corporation at any time or from time to time makes or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of the Corporation other than shares of Common Stock and other than as otherwise adjusted in this Section 4, then and in each such event provision shall be made so that the holders of Series A Preferred shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their Series A Preferred been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Series A Preferred. (iii) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series A Preferred shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Series A Preferred shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock that would have been subject to receipt by the holders of the number of shares of Common Stock issuable upon conversion of the Series A Preferred immediately before that change. (iv) Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification, or exchange of shares provided for elsewhere in this Section 4) or a merger or consolidation of this Corporation with or into another corporation, or the sale of all or substantially all of this Corporation's properties and assets to any other person (other than a merger, consolidation or sale deemed to be a Liquidation as provided for in Section 2(c)(i)), then, as a part of such reorganization, merger, consolidation, or sale, provision shall be made so that the holders of the Series A Preferred shall thereafter be entitled to receive upon conversion of the Series A Preferred, the number of shares of stock or other securities or property of this Corporation, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion of the Series A Preferred would have been entitled to upon such capital reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application -8- 9 of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred after such reorganization, merger, consolidation, or sale to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred) shall be applicable after that event as nearly equivalent as may be practicable. (e) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section (4) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred against impairment. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series A Preferred. (g) Notices of Record Date. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or -9- 10 (iv) to merge with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, the Corporation shall send to the holders of the Series A Preferred at least twenty (20) business days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) of this clause (g). Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of Series A Preferred at the address for each such holder as shown on the books of the Corporation. (h) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. 5. Voting Rights of Series A Preferred. The holder of each share of Series A Preferred shall have the right to one vote for each full share of Common Stock into which each such share of Series A Preferred could then be converted pursuant to Section 4(a). With respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. 6. Special Voting Rights of Series A Preferred. (a) The Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least two-thirds of the then outstanding shares of Series A Preferred (voting in accordance with Section 5): (i) create any new class or series of stock having a preference over, or being on parity with, the Series A Preferred with respect to dividends, redemption or upon liquidation or otherwise; or (ii) sell, lease, convey or otherwise dispose of all or substantially all of its property or business; or -10- 11 (iii) amend or repeal any provision of, or add any provision to, the Certificate of Incorporation if such action would adversely alter or change the rights, preferences, privileges or powers of the Series A Preferred; or (iv) increase the authorized number of shares of its Preferred Stock or Common Stock; or (v) undertake any transaction or series of transactions involving a reorganization, consolidation or merger as a result of which the holders of the voting stock of the Corporation prior thereto hold less than 50% of the voting stock of the surviving or successor corporation or entity; or (vi) pay or declare any dividend other than in Common Stock to the holders of Common Stock; or (vii) repurchase or otherwise acquire, directly or indirectly, through subsidiaries or otherwise, its securities, other than repurchases from employees of, or consultants to, the Company upon termination of employment or consultancy. 7. Status of Converted or Redeemed Stock. In the event any shares of Series A Preferred shall be redeemed or converted pursuant to Sections 3 or 4 hereof, respectively, the shares so redeemed or converted shall be canceled and shall not be reissuable by the Corporation, and the Certificate of Incorporation shall be appropriately amended to effect the corresponding reduction in this Corporation's authorized capital stock. (C) Rights of Common Stock. The rights and other matters relating to the Common Stock are, unless otherwise expressly provided in this Certificate of Incorporation, as set forth in this Article IV(C). 1. Voting Rights. Except as otherwise expressly provided in this Certificate of Incorporation or as required by applicable law which cannot be superseded by the provisions of this Certificate of Incorporation, the holders of the outstanding shares of Common Stock shall possess voting power for the election of directors and for all other purposes, each holder of record of shares of Common Stock being entitled to one vote for each share of Common Stock standing in such holder's name on the books of the Corporation. 2. Residual Rights. All rights accruing to the outstanding shares of the Corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. ARTICLE V The Board is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation. In addition to the powers and authority hereinbefore or by statute expressly conferred -11- 12 upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation (including the power to increase or decrease the size of the Board) subject, nevertheless, to the provisions of the General Corporation Law of the State of Delaware, this Certificate of Incorporation, and any Bylaws adopted by the stockholders; provided, that no Bylaw hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such Bylaws had not been adopted. ARTICLE VI Elections of directors need not be done by written ballot unless the Bylaws of the Corporation shall otherwise provide. The books of the Corporation may be kept (subject to any provision contained in the General Corporation Law of the State of Delaware) outside the State of Delaware at such place or places as may be designated from time to time by the Board or in the Bylaws of the Corporation. ARTICLE VII Until the closing of an IPO, at the election of directors of the Corporation, each holder of stock of any class of series shall be entitled to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he or she would be entitled to cast for the election of directors with respect to his or her shares of stock multiplied by the number of directors to be elected by him or her, and he or she may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them as he or she may see fit, so long as the name of the nominee for director shall have been placed in nomination prior to the voting and the stockholder, or any other holder of the same class or series of stock, has given notice at the meeting prior to the voting of the intention to cumulate votes. This Article VII shall terminate and be of no legal effect upon the Closing of an IPO. ARTICLE VIII To the fullest extent permitted by the Delaware General Corporation Law, as the same now exists or may hereafter be amended in a manner more favorable to directors, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of any duty as a director. ARTICLE IX The Corporation shall indemnify to the fullest extent permitted by the Delaware General Corporation Law, as the same now exists or may hereafter be amended in a manner more favorable to directors, any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he or she is or was a director and/or officer of the Corporation. -12- 13 ARTICLE X The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and by this Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XI No holder of any shares of any class or series of capital stock of the Corporation shall be entitled to any preemptive right to subscribe for or otherwise acquire any additional shares of any class or series of capital stock of the Corporation or any securities convertible into, or exercisable or exchangeable for, any shares of any class or series of capital stock of the Corporation, unless otherwise provided pursuant to any agreement with the Corporation. -13- 14 IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation, having been duly adopted in accordance with Sections 241 and 245 of the Delaware General Corporation Law, has been duly executed by its Chairman, and attested by its Secretary, this 3rd day of February, 1995. By: /s/ Sirjang Lal Tandon --------------------------------- Sirjang Lal Tandon, Chairman ATTEST: By: /s/ David Pearce ------------------------------ David Pearce, Secretary 15 16 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF JT STORAGE, INC. A DELAWARE CORPORATION JT Storage, Inc. (the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: FIRST: That at a regular meeting of the Board of Directors of this corporation, resolutions were duly adopted (in accordance with Section 242 of the General Corporation Law of the State of Delaware) setting forth the proposed amendment of the Restated Certificate of Incorporation of this corporation, declaring said amendments to be advisable, and calling for the approval by written consent of the stockholders of this corporation upon consideration thereof. The resolutions setting forth the proposed amendments are as follows: RESOLVED: That the Restated Certificate of Incorporation of this corporation be amended by deleting Section (A) of Article IV in its entirety and substituting in its place a new Section (A) of Article IV so that, as amended hereby, Section (A) of Article IV shall be and read as follows: (A) Classes of Stock. The total number of shares of stock which the Corporation shall have authority to issue is 91,200,000 shares, consisting of 60,000,000 shares of Common Stock having a par value of $0.000001 per share ("Common Stock") and 31,200,000 shares of Preferred Stock, all of which shall be designated Series A Preferred Stock, par value $0.000001 per share ("Series A Preferred"). SECOND: That thereafter, pursuant to a resolution of its Board of Directors, the written consent of the stockholders of this corporation was duly called for in accordance with Section 228(a) of the General Corporation Law of the State of Delaware, and holders of the necessary number of shares as required by statute consented to the adoption of said amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 17 IN WITNESS WHEREOF, JT Storage, Inc. has duly caused this Certificate of Amendment of Restated Certificate of Incorporation to be signed by David T. Mitchell, as President, and attested to by David Pearce, Secretary, this 1 day of August, 1995. JT STORAGE, INC. A DELAWARE CORPORATION /s/ D.T. Mitchell ----------------------- David T. Mitchell President ATTEST: /s/ David Pearce - -------------------------------- David Pearce Secretary 1. 18 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 02/05/1996 960033260 - 2375722 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION JT Storage, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: The name of the Corporation is JT Storage, Inc. SECOND: The date on which the Corporation's original Certificate of Incorporation was filed with the Delaware Secretary of State is February 3, 1994. THIRD: The Board of Directors of the Corporation consented to the adoption of the following resolution in accordance with Section 242 of the General Corporation Law of the State of Delaware, amending Section (A) of the Article numbered "IV" of the Amended and Restated Certificate of Incorporation of the Corporation to read in its entirety as follows: (A) The total number of shares that this Corporation shall have authority to issue is 160,000,000 shares, consisting of 90,000,000 shares of Common Stock having a par value of $0.000001 per share ("Common Stock") and 70,000,000 shares of Preferred Stock, all of which have been designated Series A Preferred Stock, par value $0.000001 per share ("Shares A Preferred"). FOURTH: Pursuant to a resolution of the Board of Directors of the Corporation, the written consent of the stockholders of the Corporation was duly called for in accordance with Section 228(a) of the General Corporation Law of the State of Delaware, in lieu of a meeting and vote of the stockholders of the Corporation, and holders of the necessary number of shares as required by statute consented to the adoption of the above Amendment. FIFTH: The above Amendment has been duly adopted in accordance with the provisions of Section 228 and 242 of the General Corporation Law of the State of Delaware. SIXTH: All other provisions of the Amended and Restated Certificate of Incorporation shall remain in full force and effect. 19 IN WITNESS WHEREOF, JT Storage, Inc. has caused this Certificate of Amendment to be signed by its President and attested to by its Secretary this 2nd day of February, 1996. JT STORAGE, INC. a Delaware corporation /s/ D.T. MITCHELL ---------------------- David T. Mitchell President ATTEST: /s/ W. VIRGINIA WALKER - ----------------------- W. Virginia Walker Secretary 20 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF JT STORAGE, INC. JT Storage, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby certifies as follows: FIRST: The name of the Corporation is JT Storage, Inc. SECOND: The date on which the Corporation's original Certificate of Incorporation was filed with the Delaware Secretary of State is February 3, 1994. THIRD: The Board of Directors of the Corporation consented to the adoption of the following resolution in accordance with Section 242 of the General Corporation Law of the State of Delaware, amending the Article numbered "I" of the Amended and Restated Certificate of Incorporation of the Corporation to read in its entirety as follows: ARTICLE I The name of the corporation (which is hereinafter referred to as the "Corporation") is: "JTS Corporation" FOURTH: Pursuant to a resolution of the Board of Directors of the Corporation, the written consent of the stockholders of the Corporation was duly called for in accordance with Section 228(a) of the General Corporation Law of the State of Delaware, in lieu of a meeting and vote of the stockholders of the Corporation, and holders of the necessary number of shares as required by statute consented to the adoption of the above Amendment. FIFTH: The above Amendment has been duly adopted in accordance with the provisions of Section 228 and 242 of the General Corporation Law of the State of Delaware. SIXTH: All other provisions of the Amended and Restated Certificate of Incorporation of the Corporation shall remain in full force and effect. 21 IN WITNESS WHEREOF, JT Storage, Inc. has caused this Certificate of Amendment to be signed by its President and attested to by its Secretary this 17th day of June, 1996. JT STORAGE, INC. A DELAWARE CORPORATION /s/ David T. Mitchell -------------------------------------- David T. Mitchell President ATTEST: /s/ W. Virginia Walker - ------------------------------- W. Virginia Walker Secretary 2. EX-3.2 5 FORM OF RESTATED CERT. OF INCORP - JTS CORP. 1 Exhibit 3.2 RESTATED CERTIFICATE OF INCORPORATION OF JTS CORPORATION ARTICLE I The name of this corporation is JTS Corporation. ARTICLE II The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company. ARTICLE III The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV a. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is One Hundred Sixty Million (160,000,000) shares. One Hundred Fifty Million (150,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Ten Million (10,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001) b. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. 2 ARTICLE V For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. I. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. II. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders for a term of one year. Each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. III. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock") or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. IV. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. I. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the 2. 3 Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. II. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. III. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. IV. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by two (2) directors, and shall be held at such place, on such date, and at such time as the Board of Directors shall fix. V. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. ARTICLE VI A. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General corporation Law, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. ARTICLE VII A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. 3. 4 B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI and VII. 4. EX-3.3 6 BY-LAWS OF JT STORAGE, INC. 1 EXHIBIT 3.3 BY-LAWS OF JT STORAGE, INC. ARTICLE I STOCKHOLDERS Section 1.1. ANNUAL MEETING. An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 1.2. SPECIAL MEETINGS. Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors, or by a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority, as expressly provided in a resolution of the Board of Directors, include the power to call such meetings, but such special meetings may not be called by any other person or persons. Section 1.3. NOTICE OF MEETINGS. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given that shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the certificate of incorporation or these by-laws, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 1.4. ADJOURNMENTS. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of 2 the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.5. QUORUM. Except as otherwise provided by law, the certificate of incorporation or these by-laws, at each meeting of stockholders the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum. In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 1.4 of these by-laws until a quorum shall attend. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the corporation or any subsidiary of the corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.6. ORGANIZATION. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in his absence by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of the meeting shall announce at the meeting of stockholders the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote. Section 1.7. VOTING; PROXIES. Except as otherwise provided by the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the corporation. Voting at meetings of stockholders need not be by written ballot. At all meetings of stockholders for the election of directors a plurality of the votes cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided by law, the certificate of incorporation or 3 these by-laws, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock which are present in person or by proxy and entitled to vote thereon. Section 1.8. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty nor less than ten days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than ten days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is give, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 1.9. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where 4 the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Upon the willful neglect or refusal of the directors to produce such a list at any meeting for the election of directors, they shall be ineligible for election to any office at such meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. Section 1.10. ACTION BY CONSENT OF STOCKHOLDERS. Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered (by hand or by certified or registered mail, return receipt requested) to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of minutes of stockholders are recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 1.11. INSPECTORS OF ELECTION. The corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital stock of the corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting 5 of proxies and ballots cast at any meeting of stockholders of the corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. Section 1.12. CONDUCT OF MEETINGS. The Board of Directors of the corporation may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not required to be held in accordance with the rules of parliamentary procedure. 6 ARTICLE II BOARD OF DIRECTORS Section 2.1. NUMBER; QUALIFICATIONS. The Board of Directors shall consist of one or more members, the number thereof to be determined from time to time by resolution of the Board of Directors. Directors need not be stockholders. Section 2.2. ELECTION; RESIGNATION; REMOVAL; VACANCIES. The Board of Directors shall initially consist of the persons named as directors in the certificate of incorporation, and each director so elected shall hold office until the first annual meeting of stockholders or until his successor is elected and qualified. At the first annual meeting of stockholders and at each annual meeting thereafter, the stockholders shall elect directors each of whom shall hold office for a term of one year or until his successor is elected and qualified. Any director may resign at any time upon written notice to the corporation. Any newly created directorship or any vacancy occurring in the Board of Directors for any cause may be filled by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum, or by plurality of the votes cast at a meeting of stockholders, and each director so elected shall hold office until the expiration of the term of office of the director whom he has replaced or until his successor is elected and qualified. Section 2.3. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine, and if so determined notices thereof need not be given. Section 2.4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the President, any Vice President, if any, the Secretary, or by any member of the Board of Directors. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting at least twenty-four hours before the special meeting. Section 2.5. TELEPHONIC MEETINGS PERMITTED. Members of the Board of Directors or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting. Section 2.6. QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the Board of Directors a majority of the whole Board of Directors shall constitute a quorum for the transaction of business. Except in cases in which the certificate of 7 incorporation, these by-laws or applicable law otherwise provides, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.7. ORGANIZATION. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. INFORMAL ACTION BY DIRECTORS. Unless otherwise restricted by the certificate of incorporation of these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee. 8 ARTICLE III COMMITTEES Section 3.1. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Section 3.2. COMMITTEE RULES. Unless the Board of Directors otherwise provides, each committee designed by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these by-laws. 9 ARTICLE IV OFFICERS Section 4.1. EXECUTIVE OFFICERS; ELECTION; QUALIFICATIONS; TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. The Board of Directors shall elect a President and Secretary, and it may, if it so determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its members. The Board of Directors may also choose one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding his election, and until his successor is elected and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the corporation. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the corporation. Any number of offices may be held by the same person. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. Section 4.2 POWERS AND DUTIES OF EXECUTIVE OFFICERS. The officers of the corporation shall have such powers and duties in the management of the corporation as may be prescribed in a resolution by the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Board of Directors may require any officer, agent or employee to give security for the faithful performances of his duties. 10 ARTICLE V STOCK Section 5.1. CERTIFICATES. Every holder of stock shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, if any, or the Secretary or an Assistant Secretary, of the corporation certifying the number of shares owned by him in the corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 5.2. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF NEW CERTIFICATES. The corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. 11 ARTICLE VI INDEMNIFICATION Section 6.1. RIGHT TO INDEMNIFICATION. The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans (an "indemnitee"), against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such indemnitee. The corporation shall be required to indemnify an indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if the initiation of such proceeding (or part thereof) by the indemnitee was authorized by the Board of Directors of the corporation. Section 6.2. PREPAYMENT OF EXPENSES. The corporation shall pay the expenses (including attorneys' fees) incurred by an indemnitee in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this Article or otherwise. Section 6.3. CLAIMS. If a claim for indemnification or payment of expenses under this Article is not paid in full within sixty days after a written claim therefor by the indemnitee has been received by the corporation, the indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the indemnitee was not entitled to the requested indemnification or payment of expenses under applicable law. Section 6.4. NONEXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Article VI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.5. OTHER INDEMNIFICATION. The corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or 12 nonprofit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise. Section 6.6. AMENDMENT OR REPEAL. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 13 ARTICLE VII MISCELLANEOUS Section 7.1. FISCAL YEAR. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. Section 7.2. SEAL. The corporate seal shall have the name of the corporation inscribed thereon and shall be in such a form as may be approved from time to time by the Board of Directors. Section 7.3. WAIVER OF NOTICE OF MEETING OF STOCKHOLDERS, DIRECTORS AND COMMITTEES. Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. Section 7.4. INTERESTED DIRECTORS; QUORUM. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence or a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 7.5. FORM OF RECORDS. Any records maintained by the corporation in the regular course of its business, including its stock ledger, books of account, 14 and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. Section 7.6. AMENDMENT OF BY-LAWS. These by-laws may be altered or repealed, and new by-laws made, by the Board of Directors, but the stockholders may make additional by-laws and may alter and repeal any by-laws whether adopted by them or otherwise. EX-3.4 7 FORM OF BY-LAWS OF JTS CORPORATION (POST MERGER) 1 EXHIBIT 3.4 BYLAWS OF JTS CORPORATION (A DELAWARE CORPORATION) 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 1 Section 1. Registered Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE III STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 7. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . 5 Section 10. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 11. Joint Owners of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 12. List of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE IV DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 15. Number and Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 17. Election of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 18. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 19. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 20. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (a) Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (b) Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (c) Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (d) Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (e) Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (f) Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 22. Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 24. Fees and Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (a) Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (b) Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (c) Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (d) Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 27. Officers Designated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 28. Tenure and Duties of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (b) Duties of Chairman of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 12 (c) Duties of President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (d) Duties of Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (e) Duties of Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (f) Duties of Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 29. Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 31. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 32. Execution of Corporate Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 33. Voting of Securities Owned by the Corporation . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE VII SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 34. Form and Execution of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 35. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 36. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 37. Fixing Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 38. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 39. Execution of Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE IX DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 40. Declaration of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 42. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 43. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents 18 (a) Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (b) Other Officers, Employees and Other Agents . . . . . . . . . . . . . . . . . . . . . . . . 18 (c) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (d) Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (e) Non-Exclusivity of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (f) Survival of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (g) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (h) Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (i) Saving Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (j) Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE XII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 44. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (a) Notice to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (b) Notice to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (c) Affidavit of Mailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (d) Time Notices Deemed Given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (e) Methods of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (f) Failure to Receive Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (g) Notice to Person with Whom Communication Is Unlawful . . . . . . . . . . . . . . . . . . . 22 (h) Notice to Person with Undeliverable Address . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE XIII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
042996 iii. 5 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE XIV LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 46. Loans to Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE XV MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 47. Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
iv. 6 BYLAWS OF JTS CORPORATION (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III STOCKHOLDERS' MEETINGS SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. 1. 7 SECTION 5. ANNUAL MEETING. (A) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (B) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he 2. 8 should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (C) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. (D) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. SECTION 6. SPECIAL MEETINGS. (A) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by two (2) 3. 9 directors, and shall be held at such place, on such date, and at such time as the Board of Directors, shall fix. (B) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the vote cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, however, that directors shall be elected by 4. 10 a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast, including abstentions, by the holders of shares of such class or classes or series shall be the act of such class or classes or series. SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. 5. 11 SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent. SECTION 14. ORGANIZATION. (A) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (B) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. 6. 12 ARTICLE IV DIRECTORS SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. SECTION 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. SECTION 17. ELECTION OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders for a term of one year. Each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director. SECTION 19. RESIGNATION. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. 7. 13 SECTION 20. REMOVAL. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock") or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. SECTION 21. MEETINGS. (A) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (B) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. (C) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors. (D) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (E) NOTICE OF MEETINGS. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, facsimile, telegraph or telex, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 8. 14 (F) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 22. QUORUM AND VOTING. (A) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (B) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. SECTION 25. COMMITTEES. (A) EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to 9. 15 the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, including without limitation the power or authority to declare a dividend, to authorize the issuance of stock and to adopt a certificate of ownership and merger, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation. (B) OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (C) TERM. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. 10. 16 (D) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V OFFICERS SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. 11. 17 SECTION 28. TENURE AND DUTIES OF OFFICERS. (A) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (B) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28. (C) DUTIES OF PRESIDENT. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (D) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (E) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. 12. 18 (F) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. SECTION 31. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or 13. 19 to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. ARTICLE VII SHARES OF STOCK SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the 14. 20 face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. SECTION 36. TRANSFERS. (A) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (B) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. SECTION 37. FIXING RECORD DATES. (A) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date 15. 21 upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (B) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII OTHER SECURITIES OF THE CORPORATION SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, 16. 22 shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX DIVIDENDS SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X FISCAL YEAR SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. 17. 23 ARTICLE XI INDEMNIFICATION SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. (A) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or (iv) such indemnification is required to be made under subsection (d). (B) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. (C) EXPENSES. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such 18. 24 person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (D) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Bylaw to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Article XI or otherwise shall be on the corporation. (E) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. 19. 25 (f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) INSURANCE. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (h) AMENDMENTS. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. (j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following definitions shall apply: (i) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (ii) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (iii) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or 20. 26 surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (iv) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (v) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. ARTICLE XII NOTICES SECTION 44. NOTICES. (a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (b) NOTICE TO DIRECTORS. Any notice required to be given to any director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. 21. 27 (d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (e) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General 22. 28 Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. ARTICLE XIII AMENDMENTS SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. ARTICLE XIV LOANS TO OFFICERS SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 23. EX-4.1 8 FORM OF COMMON STOCK CERTIFICATE JTS CORPORATION 1 EXHIBIT 4.1 COMMON STOCK [JTS CORPORATION LOGO] COMMON STOCK [LOGO] [LOGO] SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS ON SHARES CUSIP 466251 10 5 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK $.001 PAR VALUE PER SHARE OF JTS CORPORATION TRANSFERRABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTERED BY THE REGISTRAR. WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS. [SIGNATURE] [SIGNATURE] EXECUTIVE VICE PRESIDENT, PRESIDENT AND CHIEF EXECUTIVE FINANCE AND ADMINISTRATION CHIEF OFFICER FINANCIAL OFFICER AND SECRETARY [JTS CORPORATION SEAL] 2 A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS, AS ESTABLISHED, FROM TIME TO TIME, BY THE CERTIFICATE OF INCORPORATION OF THE CORPORATION AND BY ANY CERTIFICATE OF DETERMINATION, THE NUMBER OF SHARES CONSTITUTING EACH CLASS AND SERIES, AND THE DESIGNATIONS THEREOF, MAY BE OBTAINED BY THE HOLDER HEREOF UPON REQUEST AND WITHOUT CHARGE FROM THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL OFFICE OF THE CORPORATION. THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE OF THIS CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL ACCORDING TO APPLICABLE LAWS OR REGULATIONS: TEN COM - AS TENANTS IN COMMON TEN___NT - AS TENANTS BY THE JT TEN - AS JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP AND NOT ________ __________________ IN COMMON COMP PROP - AS COMMUNITY PROPERTY UNIF__________ - ______________________ CUSTODIAN __________________________ UNDER UNIFORM GIFTS TO ___________________________________ A ______ ____________________________________. (___________) ___________________________ CUSTODIAN (UNTIL AGE ______) _____________________, UNDER UNIFORM TRANSFERS TO MINORS ACT ___________________________________________ ADDITIONAL ABBREVIATIONS __________________________________ BE USED THROUGHOUT IN THE ABOVE LIST. FOR VALUE RECEIVED, __________________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________ ________________________________________ ____________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) _____________________________________________________________________________ _____________________________________________________________________________ ___________________________________________________________ SHARES OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ___________________________________ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED _________________________ X ____________________________________ X ____________________________________ THE ________________________________ NOTICE: ____________________OR ANY CHANGE ____________________________________ SIGNATURE(S) GUARANTEED BY ____________________________________________ THE SIGNATURES SHOULD BY GUARANTEED BY........ AMERICAN BANK NOTE COMPANY MAY 13, 1996 _604 ATLANTIC AVENUE SUITE 18 LONG BEACH, CA 90807 043980bk (310) ____-_____________ FAX (310) ____-_____________ NEW EX-4.2 9 JT STORAGE REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.2 JTS CORPORATION AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of the ___ day ___________, 1996, by and among JTS Corporation, a Delaware corporation (the "Company") and the persons listed on the attached Schedule A who become signatories to this Agreement (collectively referred to hereinafter as the "Investors" and each individually as an "Investor") who hereby amend and restate that certain Registration Rights Agreement, dated as of February 3, 1995, by and among the Company and certain Investors, as amended (the "Prior Agreement"). RECITALS WHEREAS, the Company and Atari Corporation, a Nevada corporation ("Atari"), are parties to that certain Amended and Restated Agreement and Plan of Reorganization (the "Merger Agreement"), dated as of April 8, 1996, pursuant to which Atari will merger with and into the Company (the "Merger"); WHEREAS, it is a condition to the closing of the Merger that certain affiliates of Atari will be extended the registration rights set forth herein with respect to the shares of Company common stock, $.001 par value ("Common Stock"), issued to such affiliates in the Merger; and WHEREAS, Section 14(b) of the Prior Agreement provides that the Prior Agreement may be amended with the consent of the Holders of at least two-thirds of the Registrable Securities voting as a class; NOW THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and in the Merger Agreement the parties mutually agree that the Prior Agreement is amended and restated to read in full as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "AFFILIATE" of any person or entity shall mean any other person or entity which, directly or indirectly, controls, is controlled by or is under common control with such person or entity. "COMMISSION" shall mean the Securities and Exchange Commission of the United States or any other U.S. federal agency at the time administering the Securities Act. 2 "HOLDER" shall mean each of the Investors (and their transferees as permitted by Section 11) holding Registrable Securities or securities convertible into or exercisable for Registrable Securities. "INITIATING HOLDERS" shall mean Holders who in the aggregate hold at least twenty percent (20%) of the Registrable Securities and join in a request referred to in Section 2(a). "OTHER HOLDERS" shall mean holders of Company securities, other than Holders, proposing to distribute their securities pursuant to a registration under this Agreement. "REGISTRABLE SECURITIES" means (i) the Common Stock issued or issuable upon conversion of the Company's Series A Preferred Stock, (ii) the Common Stock issued or issuable upon conversion of the JTS Shares and upon exercise of the JTS Warrant (as such terms are defined in that certain Stock Purchase Agreement, dated April 4, 1996, by and between the Company and Lunenburg S.A.), (iii) the Common Stock to be issued to certain affiliates of Atari identified on Schedule A in connection with the Merger, (iv) the Common Stock issued or issuable upon exercise of that certain Warrant to Purchase Shares of Common Stock dated March 24, 1995 issued by the Company to Venture Lending & Leasing, Inc. (the "Warrant Stock"), solely to the extent required to provide the registration rights set forth in Section 3 below to Venture Lending & Leasing, Inc. as a Holder with respect to the Warrant Stock, (v) any shares of Common Stock issued or issuable in respect of such Common Stock upon any stock split, stock dividend, recapitalization, or similar event, and (vi) Registrable Shares (as such term is defined in that certain Warrant to Purchase Shares of Series A Preferred Stock, dated as of February 13, 1996, issued by the Company to Atari). Shares of Common Stock or other securities shall only be treated as Registrable Securities if they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a single transaction exempt from the registration and prospectus delivery requirements of the Securities Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale." The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses, excluding Selling Expenses (as defined below) except as otherwise stated below, incurred by the Company in complying with Sections 2, 3 and 4 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company and reasonable fees and disbursements of one counsel for the Holders selected by the Holders and approved by the Company (which consent shall not be unreasonably withheld), Blue Sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). 2. 3 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar United States federal statute. "SELLING EXPENSES" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by Holders. Such expenses shall be borne by Holders. "SELLING HOLDERS" shall mean each Holder who holds Registrable Securities included in a registration statement under the Securities Act pursuant to this Agreement. 2. REQUESTED REGISTRATION. (a) REQUEST FOR REGISTRATION. In case the Company shall receive from Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to not less than ten percent (10%) of the then-outstanding Registrable Securities with an anticipated aggregate offering price, net of any underwriting discounts and commissions, in excess of $5,000,000 (a "Registration Notice"), the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable Blue Sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder joining in such request as are specified in a written request received by the Company from the Holder within twenty (20) days after receipt of such written notice from the Company. Notwithstanding the foregoing, the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 2: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) During the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date six (6) months immediately following the effective date of, any registration statement pertaining to securities of the Company sold by the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; 3. 4 (C) After the Company has effected three (3) registrations pursuant to this paragraph 2, and such registrations have been declared or ordered effective; or (D) If the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 2 shall be deferred for a period not to exceed ninety (90) days from the date of receipt of written request from the Initiating Holders, provided, however, that the Company shall not utilize this right more than once in any twelve (12) month period. Subject to the foregoing clauses (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Initiating Holders. (b) UNDERWRITING. In the event that a registration pursuant to this Section 2 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 2(a)(i). In such event, the right of any Holder to registration pursuant to Section 2 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 2, and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders and Other Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company, but subject to the reasonable approval of the Holders holding a majority of the Registrable Securities held by all Holders participating in the Offering. Notwithstanding any other provision of this Section 2, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders and Other Holders, and the number of shares that may be included in the registration and underwriting shall be allocated, FIRST, among all participating Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement and, SECOND, among any Other Holders in proportion to the number of shares proposed to be included in such registration by such Other Holders. No Registrable Securities or other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any holder to the nearest one hundred (100) shares. If any Holder or Other Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration and shall not be transferred in a public distribution prior to one hundred eighty (180) days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require pursuant to Section 12. 4. 5 3. COMPANY REGISTRATION. (a) NOTICE OF REGISTRATION. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to stock option or other employee benefit plans or (ii) a registration relating solely to a Commission Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after receipt of such written notice from the Company, by any Holder. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3(a)(i). In such event the right of any Holder to registration pursuant to this Section 3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall, together with the Company and Other Holders, enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities and other securities to be included in such registration. The Company shall so advise all Holders and Other Holders, and the number of shares that may be included in the registration and underwriting shall be allocated, FIRST, to the Company (if the registration has been initiated by the Company) or to such Other Holders as have initiated such registration, SECOND, among all the participating Holders in proportion to the respective amounts of Registrable Securities held by such Holders at the time of filing of the registration statement, and, THIRD, among the Other Holders (other than those shares included in the registration under "FIRST" above, if applicable) in proportion to the number of shares proposed to be included in such registration by such Other Holders; provided, however, that in a registered public offering, no less than twenty-five percent (25%) of the number of shares that may be included in such offering shall be allocated among the Holders of Registrable Securities. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder or Other Holder to the nearest one hundred (100) shares. If any Holder or Other Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to one hundred eighty (180) days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require pursuant to Section 12. 5. 6 (c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3 prior to the effectiveness of such registration whether or not any Holder has elected to include Registrable Securities in such registration; provided, however, if the Holders elect to use one of their demand registration rights, pursuant to Section 2 hereof, then such registration shall be governed by Section 2 and it shall not be terminated. 4. REGISTRATION ON FORM S-3. (a) REQUEST FOR REGISTRATION. If at any time or from time to time any Holder or Holders request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities with a reasonably anticipated aggregate price to the public of at least $500,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as the Holder or Holders may reasonably request. The substantive provisions of Section 2(b) shall be applicable to each such registration initiated under this Section 4 involving an underwriting. (b) LIMITATIONS. Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 4: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) if the Company, within ten (10) days of the receipt of the request of the Initiating Holders requesting registration under this Section 4, gives notice of its bona fide intention to effect the filing of a registration statement with the Commission within ninety (90) days of receipt of such request (other than with respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not appropriate for the registration of Registrable Securities); (iii) within a six (6) month period immediately following the effective date of any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to a stock option or other employee benefit plan); (iv) if the Company shall furnish to such Holder a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for registration statements to be filed in the near future, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed sixty (60) days from the 6. 7 receipt of the request to file such registration by such Holder; provided, however, that the Company shall not utilize this right more than once in any twelve (12) month period. 5. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date hereof, the Company will not, without the prior written consent of holders of at least eighty percent (80%) of the then outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which allows such holder or prospective holder of any securities of the Company to include such securities in any registration filed under Sections 2, 3 or 4 hereof, unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not diminish the amount of Registrable Securities which are included. 6. EXPENSES OF REGISTRATION. (a) REGISTRATION EXPENSES. The Company shall bear all Registration Expenses incurred in connection with all registrations pursuant to Sections 2, 3 and 4. In the event any Initiating Holders withdraw a Registration Notice, abandon a registration statement or, following an effective registration pursuant to Section 2 hereof, does not sell Registrable Securities, then all Registration Expenses in respect of such Registration Notice shall be borne, at the Initiating Holders' option, either by the Initiating Holders or by the Company (in which case, if borne by the Company, such withdrawn or abandoned registration shall be deemed to be an effective registration for purposes of Section 2(a)(ii)(D) hereof). (b) SELLING EXPENSES. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders and Other Holders shall be borne by the Holders and Other Holders pro rata on the basis of the number of shares so registered. 7. REGISTRATION AND QUALIFICATION. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will as promptly as is practicable: (a) prepare and file with the Commission, as soon as practicable, and use its best efforts to cause to become effective, a registration statement under the Securities Act relating to the Registrable Securities to be offered on such form as the Initiating Holders, or if not filed pursuant to Section 2 or Section 4 hereof, the Company, determines and for which the Company then qualifies; (b) prepare and file with the Commission such amendments (including post-effective amendments) and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities until the earlier of such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such registration statement or the expiration of ninety (90) days after such registration statement becomes effective; provided that such ninety (90) day period shall be extended in the case of a 7. 8 registration pursuant to Section 2 hereof for such number of days that equals the number of days elapsing from (i) the date the written notice contemplated by Section 7(f) hereof is given by the Company to (ii) the date on which the Company delivers to the Selling Holders the supplement or amendment contemplated by Section 7(f) hereof; (c) furnish to the Selling Holders and to any underwriter of Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as the Selling Holders or such underwriter may reasonably request; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of such registration statement at the earliest possible moment; (e) if requested by an Initiating Holder, (i) furnish to each Selling Holder an opinion of counsel for the Company addressed to each Selling Holder and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement), and (ii) use its best efforts to furnish to each Selling Holder a "comfort" or "special procedures" letter addressed to each Selling Holder and signed by the independent public accountants who have audited the Company's financial statements included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Selling Holders may reasonably request and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements; (f) immediately notify the Selling Holders in writing (i) at any time when a prospectus relating to a registration hereunder is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) of any request by the Commission or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case (i) or (ii) at the request of a Selling Holder prepare and furnish to such Selling Holders a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; 8. 9 (g) use its best efforts to list all such Registrable Securities covered by such registration statement on each securities exchange and inter-dealer quotation system on which a class of common equity securities of the Company is then listed, and to pay all fees and expenses in connection therewith; and (h) upon the transfer of shares by a Selling Holder in connection with a registration hereunder, furnish unlegended certificates representing ownership of the Registrable Securities being sought in such denominations as shall be requested by the Selling Holders or the underwriters. 8. INDEMNIFICATION. (a) BY COMPANY. The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers, directors and partners, each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein. If the Holders are represented by counsel other than counsel for the Company, the Company will not be obligated under this Section 8(a) to reimburse legal fees and expenses of more than one separate counsel for Holders. (b) BY HOLDERS. Each Selling Holder will indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other Selling Holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such 9. 10 registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Selling Holders, such directors, officers, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Selling Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Selling Holder under this subsection (b) shall be limited in an amount equal to the net proceeds of the shares sold by such Selling Holder, unless such liability arises out of or is based on willful misconduct by such Selling Holder. (c) PROCEDURE FOR INDEMNIFICATION. Each party indemnified under paragraph (a) or (b) of this Section 8 (the "Indemnified Party") shall, promptly after receipt of notice of any claim or the commencement of any action against such Indemnified Party in respect of which indemnity may be sought, notify the party required to provide indemnification (the "Indemnifying Party") in writing of the claim or the commencement thereof; provided that the failure of the Indemnified Party to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which it may have to an Indemnified Party on account of the indemnity agreement contained in paragraph (a) or (b) of this Section 8, unless the Indemnifying Party was materially prejudiced by such failure, and in no event shall relieve the Indemnifying Party from any other liability which it may have to such Indemnified Party. If any such claim or action shall be brought against an Indemnified Party, it shall notify the Indemnifying Party thereof and the Indemnifying Party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action, the Indemnifying Party shall not be liable (except to the extent the proviso to this sentence is applicable, in which event it will be so liable) to the Indemnified Party under this Section 8 for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided that each Indemnified Party shall have the right to employ separate counsel to represent it and assume its defense (in which case, the Indemnifying Party shall not represent it) if (i) upon the advice of counsel, the representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, or (ii) in the event the Indemnifying Party has not assumed the defense thereof within ten (10) days of receipt of notice of such claim or commencement of action, and in which case the fees and expenses of one such separate counsel shall be paid by the Indemnifying Party. If any Indemnified Party employs such separate counsel it will not enter into any settlement agreement which is not approved by the Indemnifying Party, such approval not to be unreasonably withheld. If the Indemnifying Party so assumes the defense thereof, it may not agree to any settlement of any such claim or action as the result of which any remedy or relief, other than monetary damages for which the Indemnifying Party shall be responsible hereunder, shall be 10. 11 applied to or against the Indemnified Party, without the prior written consent of the Indemnified Party. In any action hereunder as to which the Indemnifying Party has assumed the defense thereof with counsel reasonably satisfactory to the Indemnified Party, the Indemnified Party shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but, except as set forth above, the Indemnifying Party shall not be obligated hereunder to reimburse the Indemnified Party for the costs thereof. If the indemnification provided for in this Section 8 shall for any reason be unavailable to an Indemnified Party in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each Indemnifying Party shall, in lieu of indemnifying such Indemnified Party, contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability, or action in respect thereof, in such proportion as shall be appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party on the one hand or the Indemnified Party on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any Indemnified Party's stock ownership in the Company. In no event, however, shall a Holder of Registrable Securities be required to contribute in excess of the amount of the net proceeds received by such Holder in connection with the sale of Registrable Securities in the offering which is the subject of such loss, claim, damage or liability. The amount paid or payable by an Indemnified Party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this paragraph shall be deemed to include, for purposes of this paragraph, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. INFORMATION BY HOLDER. Holders including any Registrable Securities in any registration shall furnish to the Company such information regarding such Holders as shall be necessary to enable the Company to comply with the provisions hereof in connection with any registration, qualification or compliance referred to in this Agreement. 10. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"); 11. 12 (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) Furnish to any Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such Holder to sell any such securities without registration. 11. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted Holders under Sections 2, 3 and 4 may be assigned in connection with any transfer or assignment by a Holder of Registrable Securities provided that: (a) such transfer may otherwise be effected in accordance with applicable securities laws; (b) such transfer is effected in compliance with the restrictions on transfer contained in this Agreement and in any other agreement between the Company and the Holder; and (c) such assignee or transferee agrees to be bound by the terms of this Agreement and assumes all of the obligations of the transferring Holder hereunder. No transfer or assignment will divest a Holder or any subsequent owner of such rights and powers unless all Registrable Securities are transferred or assigned. 12. STANDOFF AGREEMENT. Each Holder agrees that if in connection with the first two public offerings by the Company of its securities after the date hereof, whether for the account of the Company or any Holder or Other Holder, the underwriters managing the offering so request, the Holders shall not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of such underwriters, for such period of time (not to exceed one hundred eighty (180) days in the case of the first offering and ninety (90) days in the case of the second offering) from the effective date of such registration (or offering) as may be requested by such underwriters; provided that each officer and director of the Company also agrees with such restrictions. The provisions of this Section 12 shall terminate and have no further force or effect on or after December 31, 1997. 13. TERMINATION. This Agreement shall terminate, with respect to each Holder, at such time as all Registrable Securities held by such Holder constitute less than one percent (1.0%) of the voting securities of the Company and can be sold pursuant to Rule 144 or Rule 144(k), within a consecutive three (3) month period without compliance with the registration requirements of the Securities Act. The respective indemnities, representations and warranties of the Investors and the Company shall survive such termination. 12. 13 14. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the State of California without given effect to the conflicts of law principles thereof. (b) AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least eighty percent (80%) of the Registrable Securities, voting as a class. Any amendment or waiver effected in accordance with this paragraph will be binding upon the Company, each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), and any transferee of such securities. (c) SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, invalid, unenforceable or void, this Agreement shall continue in full force and effect without said provision. In such event, the parties shall negotiate, in good faith, a legal, valid and binding substitute provision which most nearly effects the intent of the parties in entering into this Agreement. (d) NOTICES. All notices and other communications required or permitted hereunder shall be in writing (or in the form of a telex or telecopy (confirmed in writing) to be given only during the recipient's normal business hours unless arrangements have otherwise been made to receive such notice by telex or telecopy outside of normal business hours) and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand, messenger, or telex or telecopy (as provided above) addressed (a) if to a Purchaser, at such address as such Purchaser shall have furnished to the Company in writing or (b) if to any other Holder of Common Stock, at such address as such Holder shall have furnished the Company in writing or, until any such Holder so furnishes an address to the Company, then to and at the address of the last holder of such shares who has so furnished an address to the Company or (c) if to the Company, one copy should be sent to its principal executive offices and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or, if by telex or telecopy pursuant to the above, when received. (e) FACSIMILE SIGNATURES. Any signature page delivered by a fax machine or telecopy machine shall be binding to the same extent as an original signature page, with regard to any agreement subject to the terms hereof or any amendment thereto. Any party who delivers 13. 14 such a signature page agrees to later deliver an original counterpart to any party which requests it. (f) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (g) TITLES, SUBTITLES AND TABLE OF CONTENTS. The titles, subtitles and table of contents used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. [THIS SPACE INTENTIONALLY LEFT BLANK] 14. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "COMPANY" "INVESTOR" JTS CORPORATION, ----------------------------------- a Delaware corporation Name of Investor By: ----------------------------------- ----------------------------------- Name: Signature Title: ----------------------------------- Title, if applicable 15. 16 EXHIBIT A SCHEDULE OF INVESTORS Advanced Technology Ventures III Advanced Technology Ventures IV Alta V Limited Partnership Atherton Ventures BI Walden Ventures Kedua Sdn Bhd Brentwood Associates VI, L.P. C.V. Sofinnova Ventures Partners II C.V. Sofinnova Ventures Partners III Customs House Partners DPI 1995 Investment Partners Roger C. Davisson and Marjorie Davisson, Trustees of the Davisson Family Trust Dated November 20, 1994 Richard C. DeGolia Richard C. DeGolia and Sallie V.D. DeGolia, Trustees of the DeGolia Family Trust Robert Easton William Elmore Dr. Richard Emori Gilde IV B.V. Gilde Investment Fund B.V. Teddy Hadiono B. Kipling and Mary Ann Hagopian, Trustees UTD 3/25/88 Marie-Helene Habert-Dassault High Street Partners 1. 17 International Venture Capital Investment Corporation Steven L. Kaczeus, Sr. Greg Kudo Lunenburg S.A. David T. Mitchell Needham Capital Partners, L.P. Needham Capital SBIC, L.P. OCBC, Wearnes & Walden Investments (Singapore) Ltd. O, W & W Pacrim Investments Ltd. One Liberty Fund III, L.P. Timothy M. Pennington III and Melissa J. Pennington, Trustees of the Pennington Family Revocable Trust DTD 5/23/84 R&M Investors 1995 SBCB Holdings Seed Ventures II Limited Sofinnova Ventures III S.N. Venture Capital, Inc. Devinder L. Tandon, M.D. and Usha Tandon, Trustees of The Devinder and Usha Tandon Family Trust Dated 06/10/94 Jawahar L. Tandon, Trustee of The Jawahar L. Tandon Irrevocable Trust D. & U. Tandon, LLC, a California limited liability company J. & S. Tandon, LLC, a California limited liability company 2. 18 Sirjang Lal Tandon TEAC Corporation Richard J. Testa Jack Tramiel WS Investment Company 94A WS Investment Company 95B D.M. Laurice and M.M. Rosati, Trustees WSGR Retirement Plan U/A DTD 02/01/88, FBO Rick DeGolia Venture Lending & Leasing, Inc. Walden Capital Partners II, L.P. Walden Investors Walden Technology Ventures II, L.P. Walden Ventures Wallia, Perry Jasper A. Welch Western Digital Corporation 3. EX-4.3 10 ATARI & SECURITY PAC.NATL BANK INDENTURE 4/29/87 1 Exhibit 4.3 ATARI CORPORATION AND SECURITY PACIFIC NATIONAL BANK Trustee INDENTURE Dated as of April 29, 1987 $75,000,000 5-1/4% Convertible Subordinated Debentures Due 2002 2 CROSS-REFERENCE TABLE
TIA Section Indenture Section 310(a)(1) 7.10 (a)(2) 7.10 (a)(3) N.A. (a)(4) N.A. (b) 7.08; 7.10; 11.02 (c) N.A. 311(a) 7.11 (b) 7.11 (c) N.A. 312(a) 2.05 (b) 12.03 (c) 12.03 313(a) 7.06 (b)(1) N.A. (b)(2) 7.06 (c) 12.02 (d) 7.06 314(a) 4.02; 11.02 (b) N.A. (c)(1) 12.04 (c)(2) 12.04 (c)(3) N.A. (d) N.A. (e) 12.05 (f) N.A. 315(a) 7.01(b) (b) 7.05; 11.02 (c) 7.01(a) (d) 7.01(c) (e) 6.11 316(a)(last sentence) 2.09 (a)(1)(A) 6.05 (a)(1)(B) 6.04 (a)(2) N.A. (b) 6.07 317(a)(1) 6.08 (a)(2) 6.09 (b) 2.04 318(a) 12.01
N.A. means not applicable. Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS
Page ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Other Definitions . . . . . . . . . . . . . . . . . . . . 4 1.03 Incorporation by Reference of Trust Indenture Act . . . . . 4 1.04 Rules of Construction . . . . . . . . . . . . . . . . . . . 4 ARTICLE 2 The Securities SECTION 2.01 Form and Dating . . . . . . . . . . . . . . . . . . . . . . 5 2.02 Execution and Authentication . . . . . . . . . . . . . . . 5 2.03 Registrar, Paying Agent and Conversion Agent . . . . . . . 6 2.04 Paying Agent to Hold Money in Trust . . . . . . . . . . . . 7 2.05 Securityholder Lists . . . . . . . . . . . . . . . . . . . 7 2.06 Transfer and Exchange . . . . . . . . . . . . . . . . . . . 7 2.07 Replacement Securities . . . . . . . . . . . . . . . . . . 9 2.08 Outstanding Securities . . . . . . . . . . . . . . . . . . 10 2.09 Treasury Securities . . . . . . . . . . . . . . . . . . 10 2.10 Temporary Global Security; Exchange, Conversion or Redemption of Temporary Global Security . . . . . 11 2.11 Cancelation . . . . . . . . . . . . . . . . . . . . . . . . 13 2.12 Defaulted Interest . . . . . . . . . . . . . . . . . . . . 14 2.13 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 3 Redemption SECTION 3.01 Notices to Trustee . . . . . . . . . . . . . . . . . . . . 14 3.02 Selection of Securities to Be Redeemed . . . . . . . . . . 14 3.03 Notice of Redemption . . . . . . . . . . . . . . . . . . . 15 3.04 Effect of Notice of Redemption . . . . . . . . . . . . . . 16
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Page 3.05 Deposit of Redemption Price . . . . . . . . . . . . . . . . . . 16 3.06 Securities Redeemed in Part . . . . . . . . . . . . . . . . . . 16 ARTICLE 4 Covenants SECTION 4.01 Payment of Securities . . . . . . . . . . . . . . . . . . . . 16 4.02 SEC Reports . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.03 Certificate as to Default . . . . . . . . . . . . . . . . . . 17 ARTICLE 5 Successors SECTION 5.01 When Corporation May Merge, etc. . . . . . . . . . . . . . . 17 ARTICLE 6 Defaults and Remedies SECTION 6.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . 18 6.02 Acceleration . . . . . . . . . . . . . . . . . . . . . . . . 20 6.03 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . 21 6.04 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . 21 6.05 Control by Majority . . . . . . . . . . . . . . . . . . . . . 21 6.06 Limitation on Suits . . . . . . . . . . . . . . . . . . . . . 21 6.07 Rights of Holders to Receive Payment . . . . . . . . . . . . 22 6.08 Collection Suit by Trustee . . . . . . . . . . . . . . . . . 22 6.09 Trustee May File Proofs of Claim . . . . . . . . . . . . . . 22 6.10 Priorities . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.11 Undertaking for Costs . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 7 Trustee SECTION 7.01 Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . 23 7.02 Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . 24 7.03 Individual Rights of Trustee, etc. . . . . . . . . . . . . . . 25 7.04 Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . 25 7.05 Notice of Defaults . . . . . . . . . . . . . . . . . . . . . 25 7.06 Reports by Trustee to Holders . . . . . . . . . . . . . . . . 25 7.07 Compensation and Indemnity . . . . . . . . . . . . . . . . . 26 7.08 Replacement of Trustee . . . . . . . . . . . . . . . . . . . 26
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Page 7.09 Successor Trustee by Merger, etc. . . . . . . . . . . . . . . 28 7.10 Eligibility; Disqualification . . . . . . . . . . . . . . . . 28 7.11 Preferential Collection of Claims Against Corporations . . . 28 ARTICLE 8 Repayment to Corporation SECTION 8.01 Repayment to Corporation . . . . . . . . . . . . . . . . . . 28 ARTICLE 9 Amendments, Supplements and Waivers SECTION 9.01 Without Consent of Holders . . . . . . . . . . . . . . . . . 28 9.02 With Consent of Holders . . . . . . . . . . . . . . . . . . . 29 9.03 Compliance with Trust Indenture Act . . . . . . . . . . . . . 30 9.04 Revocation and Effect of Consents . . . . . . . . . . . . . . 30 9.05 Notation on or Exchange of Securities . . . . . . . . . . . . 30 9.06 Trustee Protected . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE 10 Conversion SECTION 10.01 Conversion Privilege . . . . . . . . . . . . . . . . . . . . 30 10.02 Conversion Procedure . . . . . . . . . . . . . . . . . . . . 31 10.03 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . 32 10.04 Taxes on Conversion . . . . . . . . . . . . . . . . . . . . . 32 10.05 Corporation to Provide Stock . . . . . . . . . . . . . . . . 32 10.06 Adjustment for Change in Capital Stock . . . . . . . . . . . 33 10.07 Adjustment for Rights Issue . . . . . . . . . . . . . . . . . 33 10.08 Adjustment for Other Distributions . . . . . . . . . . . . . 34 10.09 Current Market Price . . . . . . . . . . . . . . . . . . . . 35
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Page 10.10 When Adjustment May Be Deferred . . . . . . . . . . . . . . . 35 10.11 When No Adjustment Required . . . . . . . . . . . . . . . . . 35 10.12 Notice of Adjustment . . . . . . . . . . . . . . . . . . . . 36 10.13 Voluntary Reduction . . . . . . . . . . . . . . . . . . . . . 36 10.14 Notice of Certain Transactions . . . . . . . . . . . . . . . 36 10.15 Reorganization of Corporation . . . . . . . . . . . . . . . . 37 10.16 Corporation Determination Final . . . . . . . . . . . . . . . 37 10.17 Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE 11 Subordination SECTION 11.01 Agreement to Subordinate . . . . . . . . . . . . . . . . . . 38 11.02 Certain Definitions . . . . . . . . . . . . . . . . . . . . . 38 11.03 Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . 39 11.04 Default on Senior Debt . . . . . . . . . . . . . . . . . . . 39 11.05 Acceleration of Securities . . . . . . . . . . . . . . . . . 40 11.06 When Distribution Must Be Paid Over . . . . . . . . . . . . . 40 11.07 Notice by Corporation . . . . . . . . . . . . . . . . . . . . 40 11.08 Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.09 Relative Rights . . . . . . . . . . . . . . . . . . . . . . . 40 11.10 Subordination May Not Be Impaired by Corporation . . . . . . 41 11.11 Distribution or Notice to Representative . . . . . . . . . . 41 11.12 Rights of Trustee and Paying Agent . . . . . . . . . . . . . 41 ARTICLE 12 Miscellaneous SECTION 12.01 Trust Indenture Act Controls . . . . . . . . . . . . . . . . 42 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 12.03 Communications by Holders with Other Holders . . . . . . . . 43 12.04 Certificate and Opinion as to Conditions Precedent . . . . . 43 12.05 Statements Required in Certificate or Opinion . . . . . . . . 44
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Page 12.06 Rules by Trustee, Paying Agent, Registrar . . . . . . . . . . 44 12.07 Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . 44 12.08 No Recourse Against Others . . . . . . . . . . . . . . . . . 44 12.09 Duplicate Originals . . . . . . . . . . . . . . . . . . . . . 45 12.10 Variable Provisions . . . . . . . . . . . . . . . . . . . . . 45 12.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 46
Signatures Exhibit A -- Form of Registered Security Exhibit B -- Form of Bearer Security Exhibit C -- Form of Coupon Exhibit D -- Form of Global Debenture Exhibit E -- Form of Certificate of Non-U.S. Ownership Exhibit F -- Form of Investment Letter Exhibit G -- Form of Certificate of U.S. Institutional Investor Exhibit H-1 -- Form of Clearance System Certificate Exhibit H-2 -- Form of Clearance System Certificate Exhibit H-3 -- Form of Clearance System Certificate
-e- 8 INDENTURE dated as of April 29, 1987, between ATARI CORPORATION, a Nevada corporation (the "Corporation"), and SECURITY PACIFIC NATIONAL BANK, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Corporation's 5-1/4% Convertible Subordinated Debentures Due 2002 (the "Securities"): ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01. Definitions. "Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Corporation. "Agent" means any Registrar, Paying Agent, Conversion Agent or co-registrar. "Authorized Newspaper" means a newspaper of general circulation in the place of publication, printed in the official language of the country of publication and customarily published on each Business Day, whether or not published on Legal Holidays. Whenever successive weekly publications in an Authorized Newspaper are authorized or required by this Indenture, they may be made (unless otherwise expressly provided) on the same or different days of the week and in the same or different Authorized Newspapers. "Bearer Security" means any Security except a Registered Security. "Board of Directors" means the Board of Directors of the Corporation or the Executive Committee of the Board. "CEDEL" means Centrale de Livraisons de Valeurs Mobilieres, S.A. "Clearance Systems" means Euro-Clear and CEDEL. "Common Depository" means Morgan Guaranty Trust Company of New York, London Office, as common depositary for Euro-Clear and CEDEL. 9 2 "Corporation" means the party named as such in this Indenture until a successor replaces it and after that means the successor. "Coupon" means a Coupon in the form of Exhibit C. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "definitive Securities" means Registered Securities in the form of Exhibit A and Bearer Securities in the form of Exhibit B. "Dollar", "dollar", or "$" means a dollar in the currency of the United States as at the time shall be legal tender for the payment of public and private debts. "Euro-Clear" means the Euro-Clear System. "Exchange Date" means the date which is the later of 90 days after the distribution of the Securities has been completed, as determined by PaineWebber International Capital Inc, and the effectiveness of registration of the Debentures for resale under the United States Securities Act of 1933 (the "Securities Act"); provided, however, that if the Company shall furnish the Trustee with an Opinion of Counsel that registration of the Debentures for resale under the Securities Act is not necessary for distribution of the Securities to comply with the requirements of the Securities Act, the Exchange Date shall be the later of the date 90 days after the distribution of the Securities has been completed, as determined by PaineWebber International Capital Inc., and the date of receipt of such Opinion of Counsel by the Trustee. "Global Security" means a temporary Global Security in bearer form without interest coupons, portions of which may be converted, as provided in Section 2.10, for Securities of such series in definitive form. "Holder" or "Securityholder" means a person in whose name a Registered Security is registered on the Registrar's books and the bearer of a Bearer Security. "Indenture" means this Indenture as amended from time to time. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the President, the 10 3 Treasurer or a Vice President of the Corporation. See Sections 12.04 and 12.05. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Corporation or the Trustee. See Sections 12.04 and 12.05. "principal" of a debt security means the principal of the security plus the premium, if any, on the security. "Registered Holder" means the person in whose name a Registered Security is registered on the Registrar's books. "Registered Security"' means any Security registered on the Registrar's books as to the principal and interest, if any. "SEC" means the Securities and Exchange Commission. "Securities" means the Securities described above issued under this Indenture, including both Bearer Securities and Registered Securities. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sec. 77aaa-77bbbb) as in effect on the date of this Indenture. "Trustee" means the party named as such above until a successor replaces it and after that means the successor. "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "U.S. Institutional Investors" means certain United States institutional investors to whom sales can be made exempt from the registration requirements of the United States Securities Act of 1933. 11 4 SECTION 1.02. Other Definitions.
Defined in Term Section "Bankruptcy Law" 6.01 "Common Stock" 10.01 "Conversion Agent" 2.03 "Custodian" 6.01 "Event of Default" 6.01 "Legal Holiday" 12.07 "Officer" 12.10 "Paying Agent" 2.03 "Quoted Price" 12.10 "Registrar" 2.03 "Representative" 11.02 "Senior Debt" 11.02 "U.S. Government Obligations" 8.01
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Corporation. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings assigned to them. SECTION 1.04. Rules of Construction. Unless the context otherwise requires, (1) a term has the meaning assigned to it, 12 5 (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles, (3) "or" is not exclusive, (4) words in the singular include the plural, and in the plural include the singular, and (5) provisions apply to successive events and transactions. ARTICLE 2 The Securities SECTION 2.01. Form and Dating. The Registered Securities will be substantially in the form of Exhibit A and the Bearer Securities and the coupons will be substantially in the form of Exhibit B and Exhibit C, respectively, all of which are part of this Indenture. The Securities and the coupons may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Registered Security will be dated the date of its authentication. Each Bearer Security and the Global Security will be dated as of the date of this Indenture. SECTION 2.02. Execution and Authentication. An Officer will sign the Securities and the coupons for the Corporation by manual or facsimile signature. The Corporation's seal will be impressed, affixed, imprinted or reproduced on the Securities and the coupons. If an Officer whose signature is on a Security or a coupon no longer holds that office at the time the Trustee authenticates the Security or the coupon, the Security or the coupon will nevertheless be valid. A Security will not be valid until authenticated by the manual signature of the Trustee. The signature will be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee will authenticate Securities for original issue up to the total principal amount of U.S. $75,000,000 on a written order of the Corporation signed by two Officers. The total principal amount of Securities outstanding at any time may not exceed that 13 6 amount except as provided in Section 2.07 (Replacement Securities). The Trustee may appoint an authenticating agent acceptable to the Corporation to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such Agent. An authenticating agent has the same rights as an Agent to deal with the Corporation or an Affiliate. SECTION 2.03. Registrar, Paying Agent and Conversion Agent. The Corporation shall maintain an office or agency where Registered Securities may be presented for registration of transfer or for exchange ("Registrar" and "Transfer Agent"), an office or agency where Securities and coupons may be presented for payment ("Paying Agent") and an office where Securities may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Registered Securities and of their transfer and exchange. The Corporation may appoint one or more co-registrars, one or more additional paying agents and one or more additional conversion agents. The term "Paying Agent" includes any additional paying agent, and the term "Conversion Agent" includes any additional conversion agent. Initially, the Trustee with its corporate trust office at 127 John Street, New York, New York 10038, will act as Registrar and Transfer, Paying and Conversion Agent; Credit Suisse (France), 92, Avenue des Champs-Elysees, F-75008, Paris, France, and Credit Suisse (Luxembourg) SA, 23, Avenue Monterey, B.P. 40, Luxembourg, Grand Duchy of Luxembourg, will act as Transfer, Paying and Conversion Agents; Schweizerische Kreditanstalt (Deutschland) AG, P.O. Box 100529, D-6000 Frankfurt a/M 1, Federal Republic of Germany, and Credit Suisse, 24, Bishopsgate, London EC2N 4BQ, Great Britain, will act as Paying and Conversion Agents; and Credit Suisse, P.O. Box 590, CH-8021, Zurich, Switzerland will act as Paying Agent. The Corporation reserves the right to vary or terminate the appointment of the Registrar or any Transfer, Paying or Conversion Agent, or to appoint additional or other Registrars or Transfer, Paying or Conversion Agents, or to approve any change in the office through which the Registrar or any such agent acts, provided that there will at all times be a Transfer Agent or Registrar, and, with respect to the Registered Securities, a Paying Agent and Conversion Agent in New York, New York and, with respect to Bearer Securities and coupons, a Paying Agent and Conversion Agent in a European city which, so long as the Securities are listed on the Luxembourg Stock Exchange 14 7 and so long as the Luxembourg Stock Exchange so requires, shall be Luxembourg. If the Corporation fails to maintain a Registrar, Paying Agent or Conversion Agent within the United States, the Trustee will act as such. Except as otherwise provided in paragraph 2 of the Bearer Securities, Bearer Securities may only be paid or converted at offices outside the United States. SECTION 2.04. Paying Agent to Hold Money in Trust. The Corporation will require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and the coupons and will notify the Trustee of any default by the Corporation in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. If the Corporation acts as Paying Agent, it will segregate and hold as a separate trust fund all money held by it as Paying Agent. The Corporation at any time may require a Paying Agent to pay all money held by it to the Trustee. On payment over to the Trustee, the Paying Agent will have no further liability for the money. SECTION 2.05. Securityholder Lists. The Trustee will preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Registered Securityholders. If the Trustee is not the Registrar, the Corporation will furnish to the Trustee within two business days after each record date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Registered Securityholders. SECTION 2.06. Transfer and Exchange. Where Registered Securities are presented to the Registrar or a co-registrar with a request to register a transfer or to exchange them for an equal principal amount of Registered Securities of other denominations, the Registrar will register the transfer or make the exchange as requested if its requirements for such transactions are met. To permit registrations of transfers and exchanges, the Trustee will authenticate Registered Securities at the Registrar's request. Subject to the provisions of this Section 2.06 and such reasonable regulations as the Trustee, the Registrar 15 8 and the Corporation may prescribe, a Bearer Security or Bearer Securities may, at the option of the Holder, be exchanged at any time for a Registered Security or Registered Securities. The Corporation initially appoints the Transfer Agents (but not the Registrar), with their offices in Paris, France, and Luxembourg, Grand Duchy of Luxembourg as its agents to effect such exchanges and may appoint other Transfer Agents pursuant to Section 2.03. Any Bearer Security surrendered for exchange shall be accompanied by all unmatured coupons and all matured coupons in default and the Holder of the Registered Security or Registered Securities issued in exchange for any Bearer Security will be entitled to any such defaulted interest, provided that any Bearer Security so surrendered between the close of business on a Record Date for any payment of interest and the date on which such interest is to be paid need not have attached the coupon with respect to which such interest payment is to be made. If the Holder is unable to produce any such coupon, the surrender of any such coupon or coupons may be waived by the Corporation and the Trustee, if there be furnished to them, in the case of a matured coupon, a cash payment to the Corporation equal to the amount of interest on presentation, and in the case of an unmatured coupon, such security or indemnity as the Corporation and the Trustee may require to save each of them and any agent of each of them and any Paying Agent harmless. If thereafter, the Holder of such Security shall surrender to any Paying Agent outside the United States any such missing coupon, the amount of interest paid on the missing coupon shall be repaid to the Holder. The exchange of Bearer Securities for Registered Securities shall be subject to the provisions of United States income tax laws and regulations in effect at the time of such exchange, and the Registrar shall not make such exchange if it has received written notice from the Corporation that as a result of such exchange the Corporation would suffer adverse consequences under United States tax laws or be required to pay any additional amounts with respect to the Securities. Registered Securities may not be exchanged for Bearer Securities. In the event of a redemption in part, the Company will not be required (i) to register the transfer of or exchange Registered Securities or to exchange Bearer Securities for Registered Securities for a period of 15 days immediately preceding the date notice is given identifying 16 9 the serial numbers of Securities called for such redemption; (ii) to register the transfer of or exchange any Registered Security, or portion thereof, called for redemption; or (iii) to exchange any Bearer Security called for redemption, provided, however, that a Bearer Security called for redemption may be exchanged for a Registered Security which is simultaneously surrendered to the Registrar or Transfer Agent making such exchange with written instruction for payment consistent with the provisions of Paragraph 2 of the Registered Securities. Subject to the foregoing, whenever one or more Bearer Securities or Registered Securities shall be surrendered at the office of the Registrar or Transfer Agent for exchange for one or more Registered Securities, together with an executed instrument of assignment and transfer and a written request for the exchange, the Trustee shall authenticate and deliver or cause to be delivered a Registered Security or Registered Securities in a like aggregate principal amount and in such authorized denomination or denominations as may be requested, at such office of the Registrar or Transfer Agent or by mail (at the request, risk and expense of the Holder) to the address reflected in the books maintained by the Registrar for such purpose. No Bearer Security will be mailed to an address located in the United States. The Corporation may charge a reasonable fee for any registration of transfer or exchange but not for any exchange pursuant to Section 2.10 (Temporary Global Security; Exchange, Conversion or Redemption of Temporary Global Security), 3.06 (Securities Redeemed in Part), 9.05 (Notation on or Exchange of Securities) or 10.02 (Conversion Procedure). SECTION 2.07. Replacement Securities. If any Security is mutilated, defaced, destroyed, lost or stolen, and in the absence of notice to the Trustee that such Security has been acquired by a bona fide purchaser, the Trustee, if the Trustee's requirements are met, is authorized to authenticate and deliver a new Security of like principal amount with, in the case of a Bearer Security, coupons corresponding to the coupons, if any, appertaining to the mutilated, defaced, destroyed, lost or stolen Bearer Security. If a coupon is mutilated, defaced, destroyed, lost or stolen, the Trustee is authorized to authenticate and deliver a new Bearer Security in substitution for, and upon surrender of, the Bearer Security with respect to which the coupons have become so mutilated, defaced, destroyed, lost or stolen (with coupons corresponding to the coupons on such Bearer Security including those which were mutilated, 17 10 defaced, destroyed, lost or stolen). In each such case the applicant for a substitute Security or coupon shall furnish such evidence of destruction, loss or theft and such security and indemnity as the Corporation and the Trustee, the Paying Agent, the Transfer Agent or the Registrar may require to save each of them and any agent of each of them and any Paying Agent harmless, including, if required by the Trustee or the Corporation, an indemnity bond sufficient in the judgment of both to protect the Corporation, the Trustee, any Paying or Transfer Agent or any authenticating agent from any loss that any of them may suffer if a Security is replaced. Mutilated Securities and coupons must be surrendered before new ones will be issued. In case any Security or any coupon shall become mutilated, defaced, destroyed, lost or stolen, the Corporation may pay or authorize payment of the same (in the case of a Bearer Security or coupon, only outside the United States, except as otherwise provided in paragraph 2 of the Bearer Securities) without issuing a substitute Security. The Corporation may charge for its expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. SECTION 2.08. Outstanding Securities. The Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancelation and those described in this Section as not outstanding. If a Security is replaced pursuant to the foregoing Section, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If Securities are considered paid under Section 4.01 (Payment of Securities), they cease to be outstanding and interest on them ceases to accrue. A Security does not cease to be outstanding because the Corporation or an Affiliate holds the Security. SECTION 2.09. Treasury Securities. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or an Affiliate shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only 18 11 Securities which the Trustee knows are so owned shall be so disregarded. SECTION 2.10. Temporary Global Security; Exchange, Conversion or Redemption of Temporary Global Security. The Securities shall initially be represented by the Global Security in substantially the form of Exhibit D, without coupons, which the Trustee shall, upon written order of the Corporation, authenticate and deposit with the Common Depositary outside the United States for the respective accounts of Euro-Clear, and CEDEL for credit, directly or through Euro-Clear or CEDEL, as the case may be, to the respective accounts of the beneficial owners of the Securities. Not before the Exchange Date, the Global Security shall be surrendered outside the United States by the Common Depositary to the Trustee and the Global Security shall become exchangeable outside the United States, subject to the conditions below, by the beneficial owners of interests in the Global Security for definitive Securities in substantially the form of Exhibits A and B in an amount equal to the aggregate principal amount of the Global Security. PaineWebber International Capital Inc. shall provide written notice of such completion of distribution and effectiveness of registration to the Trustee, with copies to the Corporation, the Paying Agent, the Registrar, the Common Depositary and the Clearance Systems. On a date not later than three business days prior to the Exchange Date, the Corporation shall deliver the definitive Securities to the Trustee for issuance upon exchange of the Global Security. The Global Security shall, however, be exchangeable for definitive Securities, upon reasonable notice, as soon as practicable after the date of issuance of the Securities, but only for Registered Securities for the account of beneficial owners who are United States Institutional Investors. Such exchange shall be made free of charge by the Corporation to the holders and beneficial owners of the Securities, except that any person receiving definitive Securities must bear the cost of insurance, postage, transportation and the like in the event that such person does not receive such definitive Securities at the office of one of the Clearance Systems or the Registrar. A beneficial owner of Securities desiring to exchange its beneficial interest in the Global Security for Bearer Securities shall instruct one of the Clearance Systems to request such exchange on its behalf, but shall be entitled to receive Bearer Securities only after it shall 19 12 have delivered or caused to be delivered to such Clearance System a certificate of non-U.S. ownership substantially in the form of Exhibit E. A beneficial owner of Securities desiring to exchange its beneficial interest in the Global Security for Registered Securities shall instruct one of the Clearance Systems to request such exchange on its behalf, but shall be entitled to receive Registered Securities only (i) if it shall have delivered or caused to be delivered to one of the Clearance Systems a certificate of non-U.S. ownership as described above or (ii) if such beneficial owner is a U.S. Institutional Investor and shall have delivered to the Representative a letter (addressed to PaineWebber International Capital Inc. and the Corporation) substantially in the form of Exhibit F and there shall have been delivered to one of the Clearance Systems a certificate stating that the beneficial owner is a U.S. Institutional Investor substantially in the form of Exhibit G. Three business days prior to the Exchange Date (or the exchange of Securities by a U.S. Institutional Investor), the Corporation shall execute and deliver to the Trustee definitive Securities for authentication and delivery by it. If, however, Securities shall have been called for redemption prior to the Exchange Date (or the exchange of Securities by a U.S. Institutional Investor), then the Corporation shall not be required to deliver definitive Securities representing the Securities so called for redemption. On or after the Exchange Date (or the exchange of Securities by a U.S. Institutional Investor), unless the Securities shall have been called for redemption on or before such date, the Trustee shall, upon the request of a Clearance System, acting on behalf of beneficial owners of such Securities, authenticate and deliver to such Clearance System, for the accounts of such beneficial owners, in exchange for the portion of the Global Security beneficially owned by such owners, definitive Securities in an aggregate principal amount equal to the aggregate principal amount of the Securities beneficially owned by such owners. Delivery of the Bearer Securities shall be made at the office of the Transfer Agent in London, Great Britain, and Luxembourg, Grand Duchy of Luxembourg, and delivery of the Registered Securities shall be made at the corporate trust office of the Registrar in New York, New York. The Trustee shall so deliver the definitive Securities only if such request is accompanied by the delivery by such Clearance System, acting on behalf of such beneficial owners, to the Trustee and the Transfer Agents at their offices in London, Great Britain, and Luxembourg, Grand Duchy of Luxembourg, of a certificate, dated no earlier than the Exchange Date (or the date of 20 13 issuance of the Securities with respect to Registered Securities for the account of U.S. Institutional Investors), substantially in the form of Exhibit H-1 or H-2, a copy of which shall be delivered by the Transfer Agent to the Corporation. The delivery to the Transfer Agent by a Clearance System of any certificate referred to above may be relied upon by the Corporation, the Trustee and the Registrar as conclusive evidence that the corresponding certificates of non-U.S. ownership or certificates of U.S. Institutional Investors have been delivered to such Clearance System. Upon any exchange of a part of the Global Security for definitive Securities, the Global Security shall be endorsed by the Trustee to reflect the reduction of its principal amount. Until exchanged in full for definitive Securities, the Global Security shall in all respects be entitled to the same benefits under this Indenture as authenticated and delivered definitive Securities, provided that neither the holder nor the beneficial owners of any part of the Global Security shall (i) be entitled to receive payment of the principal or interest except in the case of a redemption prior to the Exchange Date (or the exchange by a U.S. Institutional Investor) and except that if any interest payment date occurs before the Exchange Date, the interest payment due on such date may be made upon certification of non-U.S. ownership substantially in the form of Exhibits E and H-3 (with appropriate modification) with respect to the relevant Securities, or (ii) be entitled to convert such interest in the Global Security into Common Stock, as defined in Section 10.01, until such interest in the Global Security is exchanged for definitive Securities. SECTION 2.11. Cancelation. The Corporation at any time may deliver Securities and coupons to the Trustee for cancelation. The Registrar and Transfer, Paying and Conversion Agents will forward to the Trustee any Securities and coupons surrendered to them for registration of transfer, exchange or payment. The Trustee will cancel all Securities and coupons surrendered for registration of transfer, exchange, payment, conversion or cancelation and will dispose of canceled Securities and coupons as the Corporation directs. The Corporation may not issue new Securities and coupons to replace Securities and coupons it has paid or delivered to the Trustee for cancelation or that any Securityholder has converted pursuant to this Indenture. 21 14 SECTION 2.12. Defaulted Interest. If the Corporation defaults in a payment of interest on any Securities, it will pay the defaulted interest in any lawful manner. It may pay the defaulted interest, plus any interest payable on the defaulted interest, to the persons who are Registered Securityholders on a subsequent special record date. The Corporation will fix the special record date and payment date. At least 15 days before the special record date, the Corporation will mail to Registered Securityholders a notice that states the special record date, the payment date, and the amount of defaulted interest to be paid. SECTION 2.13. Title. Title to the temporary Global Security, the Bearer Securities and the coupons will pass by delivery. The Corporation, the Trustee, the Registrar, any transfer agent, any paying agent and any conversion agent may treat the holder of any Bearer Security and the holder of any coupon and the registered owner of any Registered Security as the absolute owner thereof (whether or not such Security or coupon shall be overdue and notwithstanding any notice of ownership or writing thereon, or any notice of previous loss or theft or other interest therein) for the purpose of making payment and for all other purposes. ARTICLE 3 Redemption SECTION 3.01. Notices to Trustee. If the Corporation wants to redeem Securities pursuant to paragraph 5 (Optional Redemption) of the Securities, it will notify the Trustee of the redemption date and the principal amount of Securities to be redeemed. The Corporation will give the notice provided for in this Section at least 65 days before the redemption date. SECTION 3.02. Selection of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the Trustee will select the Securities to be redeemed pro rata or by lot. The Trustee will make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have a denomination larger than $5,000. Securities and portions of them it selects will be in amounts of $5,000 or an integral multiple of $5,000. Provisions of this Indenture that apply to Securities called 22 15 for redemption also apply to portions of Securities called for redemption. SECTION 3.03. Notice of Redemption. In the case of a partial redemption, notice will be given twice, the first such notice to be given not more than 75 nor less than 60 days prior to the date fixed for redemption and the second such notice to be given at least 30 days thereafter but not less than 30 days prior to the date fixed for redemption. In the case of a full redemption, notice shall be given at least 30, but not more than 60 days prior to the date fixed for redemption. The notice will identify the Securities to be redeemed and will state (1) the redemption date, (2) the redemption price, (3) the conversion price, (4) the name and address of the Paying Agent and the Conversion Agent (which, in the case of Bearer Securities, shall be outside the United States, except as provided in paragraph 2 of Bearer Securities), (5) that payment for Bearer Securities will only be made upon presentation and surrender of the Bearer Security, together with any coupons appertaining thereto maturing subsequent to the redemption date, (6) that Securities called for redemption may be converted at any time before the close of business on the redemption date, (7) that Holders who want to convert the Securities must satisfy the requirements in paragraph 8 of the Securities, (8) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price, (9) that interest on Securities called for redemption ceases to accrue on and after the redemption date, and (10) if less than the full principal amount of Securities outstanding is to be redeemed, the portion 23 16 of Securities to be redeemed and the aggregate principal amount of Securities to remain outstanding after the redemption and such other information as may be required pursuant to paragraph 5 of the Securities. At the Corporation's request, the Trustee will give the notice of redemption in the Corporation's name and at its expense. SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption is given in accordance with Section 12.02, Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. SECTION 3.05. Deposit of Redemption Price. Before the redemption date, the Corporation will deposit with the Paying Agent money sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date. The Paying Agent will return to the Corporation any money not required for that purpose because of conversion of Securities. SECTION 3.06. Securities Redeemed in Part. On surrender of a Security that is redeemed in part, the Trustee will authenticate for the Holder a new Security equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4 Covenants SECTION 4.01. Payment of Securities. The Corporation will pay the principal of and interest on the Securities and the coupons on the dates and in the manner provided in the Securities and the coupons. Principal and interest will be considered paid on the date due if the Paying Agent holds on that date money sufficient to pay all principal and interest then due. The Corporation will pay interest on overdue principal at the rate borne by the Securities, and it will pay interest on overdue installments of interest and coupons at the same rate to the extent lawful. SECTION 4.02. SEC Reports. The Corporation will file with the Trustee within 15 days after it files them 24 17 with the SEC copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that the Corporation is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The Corporation also will comply with the other provisions of TIA Sec. 314(a). SECTION 4.03. Certificate as to Defaults. The Corporation will deliver to the Trustee within 120 days after the end of each fiscal year of the Corporation an officers' Certificate stating whether or not the signers know of any Default that occurred during the fiscal year. If they do know of such a default, the certificate will describe the Default and its status. The certificate need not comply with Section 12.05. See Section 12.10. ARTICLE 5 Successors SECTION 5.01. When Corporation May Merge, etc. The Corporation will not consolidate or merge into, or transfer or lease all or substantially all of its assets to, any other entity unless (1) the other entity assumes by supplemental indenture all the obligations of the Corporation under the Securities, the coupons and this Indenture, except that it need not assume the obligations of the Corporation as to conversion of Securities if pursuant to Section 10.15 (Reorganization of Corporation) the Corporation or another person enters into a supplemental indenture obligating it to deliver securities, cash or other assets on conversion of Securities, (2) immediately after the transaction no Default exists, and (3) the Corporation delivers to the Trustee an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger or transfer or lease and such supplemental indenture comply with this Indenture. (4) immediately after such consolidation, merger, transfer or lease, the Securities will not be subject to United States Federal estate tax as a result thereof 25 18 if held by a person who at the time of death is not a citizen or resident of the United States of America unless the successor Corporation shall have agreed, by supplemental agreement, to indemnify the persons liable therefor for the amount of United States Federal estate tax attributable to and payable in respect of any Securities includable in the gross estate of the person who at the time of death is not a citizen or resident of the United States of America. The amount of any such estate tax attributable to any Securities for purposes of this paragraph (4) shall be calculated in accordance with the provisions of the Internal Revenue Code of 1986 and any successor thereto. The surviving, transferee or lessee entity will be the successor Corporation, and the obligations of the predecessor Corporation in the case of a transfer or lease will be terminated. ARTICLE 6 Defaults and Remedies SECTION 6.01. Events of Default. An "Event of Default" occurs if (1) the Corporation defaults in the payment of interest on any Security when the interest becomes due and payable and the default continues for 30 days, (2) the Corporation defaults in the payment of the principal of any Security when the principal becomes due and payable at maturity, upon redemption or otherwise, (3) the Corporation fails to comply with any of its other agreements in the Securities or this Indenture and the Default continues for the period and after the notice specified below in this Section, (4) the Corporation pursuant to or within the meaning of any Bankruptcy Law, (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, 26 19 (C) consents to the appointment of a Custodian of it or for any substantial part of its property, or (D) makes a general assignment for the benefit of its creditors or (5) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Corporation in an involuntary case, (B) appoints a Custodian of the Corporation or for any substantial part of its property or (C) orders the winding up or liquidation of the Corporation, and the order or decree remains unstayed and in effect for 60 days, or (6) an event of default as defined in any mortgage, indenture or instrument, under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money of the Corporation or any subsidiary (other than non-recourse indebtedness), whether such indebtedness now exists or shall be created after the date of this Indenture, shall happen and shall result in such indebtedness in excess of an aggregate of $5,000,000 becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, and within 30 days after there has been given, by registered or certified mail to the Corporation by the Trustee or to the Corporation and the Trustee by the Holders of at least 25% in principal amount of the then outstanding Securities, a written notice specifying such event of default and requiring the Corporation to cause such acceleration to be rescinded or annulled, such acceleration shall not have been rescinded or annulled; if, however, such event of default and such acceleration under such mortgage, indenture or instrument shall be remedied or cured whether by payment or otherwise by the Corporation, or waived by the holders of such indebtedness, prior to 27 20 acceleration of the maturity of the Securities, then the Event of Default under this Indenture by reason of such acceleration shall be deemed likewise to have been remedied, cured or waived without further action upon the part of either the Trustee or any of the Holders of the Securities; the Trustee shall not be charged with knowledge of any such event of default unless either (i) the Trustee shall have actual knowledge of such default or (ii) written notice of such event of default shall have been given to the Trustee by the Corporation, by the holder or an agent of the holder of any such indebtedness, by the Trustee then acting under any indenture or other instrument under which such default shall have occurred, or by the Holders of not less than 25% in aggregate principal amount of outstanding Securities. The term "Bankruptcy Law" means Title 11, United States Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clause (3) is not an Event of Default until the Trustee or the Holders of at least 25% in principal amount of the Securities notify the Corporation of the default and the Corporation does not cure the default within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." SECTION 6.02. Acceleration. If an Event of Default occurs and is continuing, the Trustee by notice to the Corporation or the Holders of at least 25% in principal amount of the Securities by notice to the Corporation and the Trustee may declare the principal of and accrued interest on all the Securities to be due and payable. Upon a declaration the principal and interest will be due and payable immediately. The Holders of a majority in principal amount of the Securities by notice to the Trustee may rescind an acceleration and its consequences if all existing 28 21 Events of Default have been cured or waived (except nonpayment of principal or interest that has become due solely because of the acceleration) and if the rescission would not conflict with any judgment or decree. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing on an Event of Default will not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All available remedies are cumulative to the extent permitted by law. SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in principal amount of the Securities by notice to the Trustee may waive an existing Default and its consequences except a default in the payment of the principal or interest on any Securities or a Default under Article 10. SECTION 6.05. Control by Majority. The Holders of a majority in principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability. SECTION 6.06. Limitation on Suits. A Securityholder may pursue a remedy with respect to this Indenture or the Securities only if (1) the Holder gives to the Trustee notice of a continuing Event of Default, (2) the Holders of at least 25% in principal amount of the Securities make a request to the Trustee to pursue the remedy, 29 22 (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense, (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the outstanding Securities. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over the other Securityholder. SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal of and interest on the Security and the coupons on or after the respective due dates expressed in the Security and the coupons, or to bring suit for the enforcement of any such payment on or after such respective dates, will not be impaired or affected without the consent of the Holder. Notwithstanding any other provision of this Indenture, the right of any holder of a Security to bring suit for the enforcement of the right to convert the Security will not be impaired or affected without the consent of the Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(l) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Corporation for the whole amount of principal and interest remaining unpaid. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Corporation, its creditors or its property. 30 23 SECTION 6.10. Priorities. If the Trustee collects any money pursuant to this Article, it will pay out the money in the following order: First: to the Trustee for amounts due under Section 7.07 (Compensation and Indemnity). Second: to holders of Senior Debt to the extent required by Article 11. Third: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively. Fourth: to the Corporation. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 (Rights of Holders to Receive Payment) or a suit by Holders of more than 10% in principal amount of the Securities. ARTICLE 7 Trustee SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee will exercise its rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. 31 24 (b) Except during the continuance of an Event of Default, (1) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, on certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee will examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (1) this paragraph does not limit the effect of paragraph (b) of this Section, (2) the Trustee will not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts, and (3) the Trustee will not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 (Control by Majority). (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee will not be liable for interest on any money received by it except as the Trustee may agree with the Corporation. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any document reasonably believed by it 32 25 to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee will not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or opinion. (c) The Trustee may act through non-employee agents and will not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee will not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers. SECTION 7.03. Individual Rights of Trustee, etc. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Corporation or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 (Eligibility; Disqualification) and 7.11 (Preferential Collection of Claims Against Corporations). SECTION 7.04. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it will not be accountable for the Corporation's use of the proceeds from the Securities, and it will not be responsible for any statement in the Securities other than its certificate of authentication. SECTION 7.05. Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee will give Securityholders notice in accordance with Section 12.02 of the Default within 90 days after it occurs. Except in the case of a Default in payment on any Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of such Securityholders. SECTION 7.06. Reports by Trustee to Holders. Within 60 days after the reporting date stated in Section 12.10, the Trustee will give to each Securityholder in accordance with Section 12.02 a brief report dated as of 33 26 such reporting date that complies with TIA Sec. 313(a). The Trustee also will comply with TIA Sec. 313(b)(2). A copy of each report at the time of its mailing to Registered Securityholders will be filed with the SEC and each stock exchange on which the Securities are listed. The Corporation will notify the Trustee when the Securities are listed on any stock exchange. SECTION 7.07. Compensation and Indemnity. The Corporation will pay to the Trustee from time to time reasonable fees for its services. The Corporation will reimburse the Trustee on request for all reasonable out-of-pocket expenses incurred by it. Such expenses will include the reasonable fees and expenses of the Trustee's agents and counsel. The Corporation will indemnify the Trustee against any loss or liability incurred by it in connection with the administration of this Indenture and its duties under it. The Trustee will notify the Corporation promptly of any claim for which it may seek indemnity. The Corporation will defend the claim and the Trustee will cooperate in the defense. The Trustee may have separate counsel and the Corporation will pay the reasonable fees and expenses of such counsel. The Corporation need not pay for any settlement made without its consent. The Corporation need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Corporation's payment obligations in this Section, the Trustee will have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal of and interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(4) or (5) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee will become effective only on the successor Trustee's acceptance of appointment as provided in this Section. 34 27 The Trustee may resign by so notifying the Corporation. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the removed Trustee and the Corporation. The Corporation may remove the Trustee if (1) the Trustee fails to comply with Section 7.10 (Eligibility; Disqualification), (2) the Trustee is adjudged a bankrupt or an insolvent, (3) a receiver or other public officer takes charge of the Trustee or its property or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of trustee for any reason, the Corporation shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Corporation. A successor Trustee will deliver a written acceptance of its appointment to the retiring Trustee and to the Corporation. Immediately after that, the retiring Trustee will transfer all property held by it as Trustee, the resignation or removal of the retiring Trustee will then become effective, and the successor Trustee will have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee will give notice of its succession to the Holders of the Securities in accordance with the provisions of Section 12.02. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Corporation or the Holders of at least 10% in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10 (Eligibility, Disqualification), any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 35 28 SECTION 7.09. Successor Trustee by Merger, etc. If the Trustee consolidates with, merges or converts into or transfers all or substantially all its corporate trust assets to another corporation, the successor corporation without any further act will be the successor Trustee. SECTION 7.10. Eligibility; Disqualification. This Indenture will always have a Trustee that satisfies the requirements of TIA Section 310(a)(1). Such Trustee must have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition. Such Trustee will comply with TIA Section 310(b), including the optional provision permitted by the second sentence of TIA Section 310(b)(9). SECTION 7.11. Preferential Collection of Claims Against Corporations. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed is subject to TIA Section 311(a) to the extent indicated. ARTICLE 8 Repayment to Corporation SECTION 8.01. Repayment to Corporation. The Trustee and the Paying Agent will promptly pay or deliver to the Corporation on request any excess money or securities held by them at any time. The Trustee and the Paying Agent will pay to the Corporation on request any money held by them for the payment of principal or interest that remains unclaimed for two years. Securityholders entitled to the money must look to the Corporation for payment as general creditors unless an applicable abandoned property law designates another person. ARTICLE 9 Amendments, Supplements and Waivers SECTION 9.01. Without Consent of Holders. The Corporation and the Trustee may amend this Indenture or the Securities without the consent of any Securityholder (1) to cure any ambiguity, defect or inconsistency, 36 29 (2) to comply with Section 5.01 (When Corporation may merge, etc.), (3) to provide for uncertificated Registered Securities in addition to or in place of certificated Registered Securities, or (4) to make any change that does not adversely affect the rights of any Securityholder. SECTION 9.02. With Consent of Holders. The Corporation and the Trustee may amend this Indenture or the Securities or coupons with the written consent of the Holders of at least 66-2/3% in principal amount of the Securities. However, without the consent of each Securityholder affected, an amendment under this Section may not (1) reduce the amount of Securities whose Holders must consent to an amendment, (2) reduce the rate of or change the time for payment of interest on any Registered Security or coupon, (3) reduce the principal of or extend the fixed maturity of any Security, (4) make any Security or interest payable in money other than that stated in the Security or coupon, (5) make any change that adversely affects the right to convert any Security, (6) make any change in Section 6.04 (Waiver of Past Defaults), 6.07 (Rights of Holders to Receive Payment) or this sentence, (7) make any change in Article 11 that adversely affects the rights of any Securityholders, (8) make any change to the right of the Securityholder to receive additional amounts as provided in paragraph 7 of the Securities (except as otherwise permitted in this Indenture or the Securities), or (9) modify the obligation of the Corporation to maintain offices or agencies in New York, New York and in a city outside of the United States. 37 30 An amendment under this Section may not make any change that adversely affects the rights under Article 11 of any holder of an issue of Senior Debt unless the holders of the issue pursuant to its terms consent to the change. After an amendment under this Section becomes effective, the Company will publish in an Authorized Newspaper and mail to Registered Securityholders a notice briefly describing the amendment. SECTION 9.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities will be set forth in a supplemental indenture that complies with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of that Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Securityholder. SECTION 9.05. Notation on or Exchange of Securities. The Trustee may place an appropriate notation about an amendment or waiver on any Security thereafter authenticated. The Corporation in exchange for all Securities may issue and the Trustee will authenticate new Securities that reflect the amendment or waiver. SECTION 9.06. Trustee Protected. The Trustee need not sign any supplemental indenture that adversely affects its rights. ARTICLE 10 Conversion SECTION 10.01. Conversion Privilege. A Holder of a Security may convert it into Common Stock at any time during the period stated in paragraph 8 of the Securities. The number of shares issuable upon conversion of a Security 38 31 is determined as follows: Divide the principal amount to be converted by the conversion price in effect on the conversion date. Round the result to the nearest 1/100th of a share. The initial conversion price is stated in paragraph 8 of the Securities. The conversion price is subject to adjustment. A Holder may convert a portion of a Registered Security if the portion is U.S. $5000 or a whole multiple of U.S. $5000. Provisions of this Indenture that apply to conversion of all of a Security also apply to conversion of a portion of it. "Common Stock" means Common Stock of the Corporation as it exists on the date of this Indenture as originally signed. SECTION 10.02. Conversion Procedure. To convert a Security a Holder must satisfy the requirements in paragraph 8 of the Securities. The date on which the Holder satisfies all those requirements is the conversion date. As soon as practical, the Corporation will deliver through the Conversion Agent a certificate for the number of full shares of Common Stock issuable upon the conversion and a check for any fractional share. The person in whose name the certificate is registered will be treated as a stockholder of record on and after the conversion date. Registered Securities surrendered for conversion during any period from the close of business on any Record Date (as stated on the face of the Securities) next preceding any interest payment date to the opening of business on such interest payment date (except Registered Securities or portions thereof called for redemption on a redemption date within such period) must be accompanied by payment in clearing house funds or other funds acceptable to the Corporation of an amount equal to the interest payable on such interest payment date on the principal amount of Securities then being converted which the registered holder is to receive. Bearer Securities surrendered for conversion must have all unmatured coupons appurtenant thereto. Except where Securities surrendered for conversion must be accompanied by payment as described above, no interest on converted Securities will be payable by the Corporation on any interest payment date subsequent to the date of conversion. No other payment or adjustment will be made for accrued interest on a converted Security. 39 32 If a Holder converts more than one Security at the same time, the number of full shares issuable upon the conversion will be based on the total principal amount of the Securities converted. On surrender of a Security that is converted in part, the Trustee will authenticate for the Holder a new Security equal in principal amount to the unconverted portion of the Security surrendered. If the last day on which a Security may be converted is a Legal Holiday in a place where a Conversion Agent is located, the Security may be surrendered to that Conversion Agent on the next succeeding day that is not a Legal Holiday. SECTION 10.03. Fractional Shares. The Corporation will not issue a fractional share of Common Stock on conversion of a Security. Instead the Corporation will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: Multiply the current market price of a full share by the fraction. Round the result to the nearest cent. The current market price of a share of Common Stock is the Quoted Price of the Common Stock on the last trading day before the conversion date. In the absence of such a quotation, the Company will determine the current market price on the basis of such quotations as it considers appropriate. SECTION 10.04. Taxes on Conversion. If a Holder of a Security converts it, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock on the conversion. However, the Holder shall pay any such tax which is due because the shares are issued in a name other than the Holder's name. SECTION 10.05. Corporation to Provide Stock. The Corporation will reserve out of its authorized but unissued Common Stock or its Common Stock held in treasury enough shares of Common Stock to permit the conversion of the Securities. All shares of Common Stock which may be issued on conversion of the Securities will be fully paid and non-assessable. 40 33 The Corporation will endeavor to comply with all securities laws regulating the offer and delivery of shares of Common Stock on conversion of Securities and will endeavor to list such shares on each national securities exchange on which the Common Stock is listed. SECTION 10.06. Adjustment for Change in Capital Stock. If the Corporation (1) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock, (2) subdivides its outstanding shares of Common Stock into a greater number of shares, (3) combines its outstanding shares of Common Stock into a smaller number of shares, (4) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock or (5) issues by reclassification of its Common Stock any shares of its capital stock, then the conversion privilege and the conversion price in effect immediately before such action will be adjusted so that the Holder of a Security thereafter converted may receive the number of shares of capital stock of the Corporation which the holder would have owned immediately following such action if the holder had converted the Security immediately before such action. The adjustment will become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. If after an adjustment a Holder of a Security on conversion of it may receive shares of two or more classes of capital stock of the Corporation, the Corporation will determine the allocation of the adjusted conversion price between the classes of capital stock. After such allocation, the conversion privilege and the conversion price of each class of capital stock will thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Article. SECTION 10.07. Adjustment for Rights Issue. If the Corporation distributes any rights or warrants to all 41 34 holders of its Common Stock entitling them for a period expiring within 60 days after the record date mentioned below to purchase shares of Common Stock at a price per share less than the current market price per share on that record date, the conversion price shall be adjusted in accordance with the following formula: N x P C' = C x 0 + M 0 + N where C' = the adjusted conversion price. C = the current conversion price. O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock offered. P = the offering price per share of the additional shares. M = the current market price per share of Common Stock on the record date. The adjustment will become effective immediately after the record date for the determination of stockholders entitled to receive the rights or warrants. SECTION 10.08. Adjustment for Other Distributions. If the Corporation distributes to all holders of its Common Stock any of its assets or debt securities or any rights or warrants to purchase securities of the Corporation, the conversion price will be adjusted in accordance with the formula: M - F C' = C X M where C' = the adjusted conversion price. C = the current conversion price. M = the current market price per share of Common Stock on the record date mentioned below. F = the fair market value on the record date of the assets, securities, rights or warrants applicable to one share of Common Stock. The Corporation will determine the fair market value. 42 35 The adjustment will become effective immediately after the record date for the determination of stockholders entitled to receive the distribution. This Section does not apply to cash dividends or cash distributions paid out of consolidated current or retained earnings as shown on the books of the Corporation. Also, this Section does not apply to rights or warrants referred to in the foregoing Section. SECTION 10.09. Current Market Price. In the foregoing two Sections the current market price per share of Common Stock on any date is the average of the Quoted Prices of the Common Stock for 30 consecutive trading days commencing 45 trading days before the date in question. In the absence of one or more such quotations, the Corporation will determine the current market price on the basis of such quotations as it considers appropriate. SECTION 10.10. When Adjustment May Be Deferred. No adjustment in the conversion price need be made unless the adjustment would require an increase or decrease of at least 1% in the conversion price. Any adjustments that are not made will be carried forward and taken into account in any subsequent adjustment. All calculations under this Article will be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. SECTION 10.11. When No Adjustment Required. No adjustment need be made for a transaction referred to in Section 10.06, 10.07 or 10.08 if Securityholders are to participate in the transaction on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction. No adjustment need be made for rights to purchase Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value or no par value of the Common Stock. To the extent the Securities become convertible into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash. 43 36 SECTION 10.12. Notice of Adjustment. Whenever the conversion price is adjusted, the Corporation will promptly provide to Securityholders a notice of the adjustment in the manner provided for in Section 12.02. The Corporation will file with the Trustee a certificate from the Corporation's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate will be conclusive evidence that the adjustment is correct. SECTION 10.13. Voluntary Reduction. The Corporation from time to time may reduce the conversion price by any amount for any period of time if the period is at least 20 days and if the reduction is irrevocable during the period. Whenever the conversion price is reduced, the Corporation will give Securityholders, the Trustee and Conversion Agents a notice of the reduction, in accordance with the provisions of Section 12.02. The Corporation will mail the notice at least 15 days before the date the reduced conversion price takes effect. The notice will state the reduced conversion price and the period it will be in effect. A reduction of the conversion price does not change or adjust the conversion price otherwise in effect for purposes of Sections 10.06 through 10.08. SECTION 10.14. Notice of Certain Transactions. If (1) the Corporation takes any action that would require an adjustment in the conversion price pursuant to Section 10.06, 10.07 or 10.08 and if the Corporation does not let Securityholders participate pursuant to Section 10.11, (2) the Corporation takes any action that would require a supplemental indenture pursuant to Section 10.15 or (3) there is a liquidation or dissolution of the Corporation, the Corporation shall give Securityholders, the Trustee and Conversion Agents a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, transfer, lease, liquidation or 44 37 dissolution. The Corporation shall give the notice in accordance with the provisions of Section 12.02 at least 15 days before such date. Failure to give the notice or any defect in it shall not affect the validity of the transaction. SECTION 10.15. Reorganization of Corporation. If the Corporation is a party to a transaction subject to Section 5.01 or a merger which reclassifies or changes its outstanding Common Stock, the person obligated to deliver securities, cash or other assets on conversion of Securities will enter into a supplemental indenture. If the issuer of securities deliverable on conversion of Securities is an affiliate of the surviving, transferee or lessee corporation, that issuer will join in the supplemental indenture. The supplemental indenture will provide that the Holder of a Security may convert it into the kind and amount of securities, cash or other assets which the Holder would have owned immediately after the consolidation, merger, transfer or lease if the Holder had converted the Security immediately before the effective date of the transaction if the Holder failed to exercise such Holder's right of election, if any, as to the kind or amount of securities, cash or other property receivable on such transaction or, if such kind or amount is not the same for each share of non-electing Common Stock, the kind and amount receivable per share by a plurality of the non-electing shares. The supplemental indenture will provide for adjustments which will be as nearly equivalent as may be practical to the adjustments provided for in this Article. The successor Corporation will mail to Securityholders a notice briefly describing the supplemental indenture. If this Section applies, Section 10.06 does not apply. SECTION 10.16. Corporation Determination Final. Any determination that the Corporation or the Board of Directors must make pursuant to Section 10.03, 10.06, 10.08, 10.09 or 10.11 is conclusive. SECTION 10.17. Trustee's Disclaimer. The Trustee has no duty to determine when an adjustment under this Article should be made, how it should be made or what it should be. The Trustee has no duty to determine whether any provisions of a supplemental indenture under Section 10.15 are correct. The Trustee makes no representation as to the validity or value of any securities or assets issued on conver- 45 38 sion of Securities. The Trustee will not be responsible for the Corporation's failure to comply with this Article. Each Conversion Agent other than the Corporation will have the same protection under this Section as the Trustee. ARTICLE 11 Subordination SECTION 11.01. Agreement to Subordinate. The Corporation agrees, and each Securityholder by accepting a Security or a beneficial interest in Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Debt, and that the subordination is for the benefit of the holders of Senior Debt. SECTION 11.02. Certain Definitions. "Representative" means the indenture trustee or other trustee, agent or representative for an issue of Senior Debt. "Senior Debt" (a) the principal of, premium, if any, and accrued and unpaid interest on (1) indebtedness of the Corporation for money borrowed, whether outstanding on the date of this Indenture or created, incurred or assumed after that date, (2) guaranties by the Corporation of indebtedness for money borrowed by any other person, whether outstanding on the date of this Indenture or created, incurred or assumed after that date, (3) indebtedness evidenced by notes, debentures, bonds or other instruments of indebtedness for the payment of which the Corporation is responsible or liable, by guaranty, or otherwise, whether outstanding on the date of this Indenture or created, incurred, or assumed after that date, and (4) obligations of the Corporation under any agreement to lease, or lease of any real or personal property, whether outstanding on the date of this Indenture or created, incurred or assumed after that date, (b) any other indebtedness, liability or obligation, contingent or otherwise, of the Corporation and any guaranty, endorsement or other contingent obligation in respect thereof, whether outstanding on the date of the Indenture or created, incurred or assumed after that date, and (c) modifications, renewals, extensions and refundings of any such indebtedness, liabilities or obligations, unless, in the instrument creating or evidencing the same or 46 39 pursuant to which the same is outstanding, it is provided that such indebtedness, liabilities or obligations, or such modification, renewal, extension or refunding, or the obligations of the Corporation pursuant to such guaranty, are not superior in right of payment to the Debentures. Senior Debt will not include any obligation of the Corporation to any other corporation a majority of the outstanding voting stock of which is owned by the Corporation. Senior Debt may be further defined in Section 12.10. A distribution may consist of cash, securities or other property. SECTION 11.03. Liquidation; Dissolution; Bankruptcy. On any distribution to creditors of the Corporation in a liquidation or dissolution of the Corporation or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Corporation or its property, (1) holders of Senior Debt will be entitled to receive payment in full in cash of the principal of and interest (including interest accruing after the commencement of any such proceeding) to the date of payment on the Senior Debt before Securityholders will be entitled to receive any payment of principal of or interest on Securities, and (2) until the Senior Debt is paid in full in cash, any distribution to which Securityholders would be entitled but for this Article will be made to holders of Senior Debt as their interests may appear, except that Securityholders may receive securities that are subordinated to Senior Debt to at least the same extent as the Securities. SECTION 11.04. Default on Senior Debt. The Corporation may not pay principal of or interest on the Securities and coupons and may not acquire any Securities for cash or property other than capital stock of the Corporation if (1) a default on Senior Debt occurs, and (2) the default is the subject of judicial proceedings or the Corporation receives a notice of the default from a person who may give it pursuant to Section 11.12. 47 40 The Corporation may resume payments on the Securities and may acquire them when (a) the default is cured or waived or (b) 120 days pass after the notice is given if the default is not the subject of judicial proceedings, if this Article otherwise permits the payment or acquisition at that time. SECTION 11.05. Acceleration of Securities. If payment of the Securities is accelerated because of an Event of Default, the Corporation will promptly notify holders of Senior Debt of the acceleration. The Corporation may pay the Securities when 120 days pass after the acceleration occurs if this Article permits the payment at that time. SECTION 11.06. When Distribution Must Be Paid Over. If a distribution is made to Securityholders that because of this Article should not have been made to them, the Securityholders who receive the distribution will hold it in trust for holders of Senior Debt and pay it over to them as their interests may appear. SECTION 11.07. Notice by Corporation. The Corporation will promptly notify the Trustee and the Paying Agent of any facts known to the Corporation that would cause a payment of principal of or interest on the Securities to violate this Article. SECTION 11.08. Subrogation. After all Senior Debt is paid in full and until the Securities are paid in full, Securityholders will be subrogated to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Securityholders have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt which otherwise would have been made to Securityholders is not, as between the Corporation and Securityholders, a payment by the Corporation on Senior Debt. SECTION 11.09. Relative Rights. This Article defines the relative rights of Securityholders and holders of Senior Debt. Nothing in this Indenture will (1) impair, as between the Corporation and Securityholders, the obligation of the Corporation, which 48 41 is absolute and unconditional, to pay principal of and interest on the Securities and coupons in accordance with their terms, (2) affect the relative rights of Securityholders and creditors of the Corporation other than holders of Senior Debt or (3) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Debt to receive distributions otherwise payable to Securityholders. If the Corporation fails because of this Article to pay principal of or interest on a Security on the due date, the failure is still a Default. SECTION 11.10. Subordination May Not Be Impaired by Corporation. No right of any holder of Senior Debt to enforce the subordination of the indebtedness evidenced by the Securities will be impaired by any act or failure to act by the Corporation or by its failure to comply with this Indenture. SECTION 11.11. Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. SECTION 11.12. Rights of Trustee and Paying Agent. The Trustee or Paying Agent may continue to make payments on the Securities until it receives notice of facts that would cause a payment of principal of or interest on the Securities to violate this Article. Only the Corporation, a Representative or a holder of an issue of Senior Debt that has no Representative may give the notice. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. 49 42 ARTICLE 12 Miscellaneous SECTION 12.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision that is required to be included in this Indenture by the TIA, the required provision will control. SECTION 12.02. Notices. Any notice or communication by the Corporation or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail to the other's address in Section 12.10. The Corporation or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Where this Indenture provides for notice to Holders of Securities of any event, (1) such notice shall be sufficiently given to Holders of Bearer Securities if published in an Authorized Newspaper in London, England, and, so long as the Securities are listed on the Luxembourg Stock Exchange and such stock exchange shall so require, in Luxembourg, or, if publication in either London or Luxembourg is not practicable, in Europe on a business day at least twice, each such publication to be not earlier than the earliest date, and not later than the latest date, prescribed for the giving of such notice; and (2) such notice shall be sufficiently given to Holders of Registered Securities if in writing and mailed, first-class postage prepaid, to each Holder of a Registered Security affected by such event, at the address of such Holder as it appears on the registration books of the Registrar, not earlier than the earliest date, and not later than the latest date, prescribed for the giving of such notice. Failure to give notice by publication to Holders of Bearer Securities or any defect in any notice so published shall not affect the sufficiency of any notice mailed to Holders of Registered Securities. In case by reason of the suspension of publication of any Authorized Newspaper or Authorized Newspapers or by reason of any other cause it shall be impracticable to publish any notice to Holders of 50 43 Bearer Securities as provided above, then notification to Holders of Bearer Securities as given with the approval of the Trustee shall constitute sufficient notice to such Holders for every purpose under this Indenture and under the Securities. Failure to mail a notice or communication to a Registered Securityholder or any defect in it will not affect its sufficiency with respect to other Registered Securityholders or Bearer Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. If the Corporation mails a notice or communication to Registered Securityholders, it will mail a copy to the Trustee and each Agent at the same time. All other notices or communications will be in writing. For purposes of this Section, the term "Holders of Bearer Securities" includes account holders with CEDEL or Euro-Clear who are beneficial owners of Securities. The Corporation will also comply with TIA Sec. 313(c)(2) and (3). SECTION 12.03. Communication by Holders with Other Holders. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Corporation, the Trustee, the Registrar and anyone else will have the protection of TIA Sec. 312(c). SECTION 12.04. Certificate and Opinion as to Conditions Precedent. On any request or application by the Corporation to the Trustee to take any action under this Indenture, the Corporation shall furnish to the Trustee (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. 51 44 SECTION 12.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition, (2) a brief statement as to the nature and scope of the examination or investigation on which the statements or opinions contained in such certificate or opinion are based, (3) a statement that, in the opinion of such person, the person has made such examination or investigation as is necessary to enable the person to express an informed opinion as to whether such covenant or condition has been complied with and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 12.06. Rules by Trustee, Paying Agent, Registrar. The Trustee may make reasonable rules for action by or a meeting of Securityholders and for the proving of holdings by Holders of Bearer Securities. The Paying Agent, Conversion Agent, Transfer Agent or Registrar may make reasonable rules and set reasonable requirements for its functions. SECTION 12.07. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday, a legal holiday or a day on which banking institutions in any city in which a Paying Agent is located are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment shall be made at that place on the next succeeding day that is not a Legal Holiday, and no interest will accrue for the intervening period. SECTION 12.08. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Corporation will not have any liability for any obligation of the Corporation under the Securities or Coupons or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. All liability described in the Securities of any director, officer, 52 45 employee or stockholder, as such, of the Corporation is waived and released. SECTION 12.09. Duplicate Originals. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. SECTION 12.10. Variable Provisions. "Officer" means the Chairman, President, any Vice-President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary of the Corporation. "Quoted Price" of the Common Stock means the last reported sales price of the Common Stock on the American Stock Exchange. The first certificate pursuant to Section 4.03 will be for the fiscal year ending on December 31, 1987. The reporting date for Section 7.06 is May 15 of each year. The first reporting date is May 15, 1988. The Company's address is: 1196 Borregas Avenue Sunnyvale, California 94088-3427 The Trustee's address is: 127 John Street New York, New York 10038 53 46 SECTION 12.11. Governing Law. The laws of the State of New York shall govern this Indenture and the Securities. SIGNATURES ATARI CORPORATION By [SIG] ------------------------------ SECURITY PACIFIC NATIONAL BANK By [SIG] ------------------------------ 54 EXHIBIT A (Face of Registered Security) No. R- U.S. $ ATARI CORPORATION promises to pay to , or registered assigns, the principal sum of United States Dollars on April 29, 2002. 5-1/4% Convertible Subordinated Debenture Due 2002 Interest Payment Dates: April 29 Record Dates: April 14 Dated: Authenticated: SECURITY PACIFIC NATIONAL BANK as Trustee By By Authorized Officer OR By , as Authenticating Agent By Authorized Officer (SEAL) (Back of Registered Security) 5-1/4% Convertible Subordinated Debenture Due 2002 1. Interest. Atari Corporation ("Corporation"), a Nevada corporation, promises to pay interest on the principal amount of this Security at the rate per annum 55 A-2 shown above. The Corporation will pay interest annually on April 29 of each year, commencing April 29, 1988. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from April 29, 1987. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Corporation will pay interest on the Registered Securities (except defaulted interest) to the persons who are registered holders of Registered Securities at the close of business on the record date for the next interest payment date even though Registered Securities are canceled after the record date and on or before the interest payment date. Holders must surrender Registered Securities to a Paying Agent which is also a Transfer Agent to collect principal payments. The Corporation will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Corporation may pay principal and interest by check payable in such money drawn on a bank in New York or for payment of principal, and interest upon application by a Holder with principal amount of $100,000 or more of Registered Securities to the Register not later than the record date in which payment is to be received, by transfer to a dollar account located in New York, New York. It may mail an interest check to a holder's registered address. 3. Paying Agent, Registrar, Conversion Agent. Initially, Security Pacific National Bank (the "Trustee"), New York, New York, will act as Paying Agent, Registrar and Conversion Agent; Credit Suisse (France), Paris, France, Credit Suisse (Luxembourg) SA, Luxembourg, Grand Duchy of Luxembourg; Schweizerische Kreditanstalt (Deutschland) AG, Frankfurt, Germany, and Credit Suisse, London, Great Britain, will serve as Paying and Conversion Agents and Credit Suisse, Zurich, Switzerland, will serve as Paying Agent. The Corporation may change any Paying Agent, Registrar, Conversion Agent or co-registrar without notice. The Corporation may act in any such capacity. 4. Indenture. The Corporation issued the Securities under an Indenture dated as of April 29, 1987 ("Indenture"), between the Corporation and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-7bbbb) as in effect on the date of the Indenture. The Securities are subject to all such terms, and Securityholders are referred 56 A-3 to the Indenture and the Act for a statement of such terms. The Securities are unsecured general obligations of the Corporation limited to U.S. $75,000,000 in total principal amount. 5. Optional Redemption. The Corporation may redeem all the Securities at any time or some of them from time to time after the expiration of 30 days from the Exchange Date at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date. If redeemed during the 12-month period beginning April 29,
Year Percentage Year Percentage ------ ------------ ------ ---------- 1987 106% 1990 103% 1988 105% 1991 102% 1989 104% 1992 101%
and thereafter of a redemption price equal to 100% of the principal amount plus accrued interest to the date of redemption. The Securities may not, however, be redeemed before April 29, 1990, unless the closing price of the Common Stock for any 20 trading days during a period of 30 consecutive trading days ending within 10 days before the date notice of redemption is given equals or exceeds 130% of the conversion price then in effect or unless the Securities may be redeemed at 100% of their principal amount in the circumstances described below. The Securities may also be redeemed in whole, but not in part, at 100% of their principal amount, together with interest accrued to the date fixed for redemption, at the option of the Corporation if, at any time, the Corporation determines, based on an opinion of independent legal counsel of recognized standing, that as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of the United States or any political subdivision or taxing authority thereof or therein affecting taxation, or any change in the application or official interpretation of such laws, regulations or rulings, which change or amendment becomes effective on or after April 6, 1987, there is a substantial probability that the Corporation has or will become obligated to pay additional amounts in respect of the Securities as described under Section 7 below. The Corporation may exercise this 57 A-4 redemption option at any time so long as the conditions specified in this Section 5 continue to exist at the time the notice of redemption is made. If the Corporation shall determine (the "Determination"), based upon an opinion of independent legal counsel of recognized standing, that any payment made outside the United States by the Corporation or any of its paying agents of the full amount of the next scheduled payment of principal, premium, if any, or interest due in respect of any Bearer Security or coupon appertaining thereto would, under any current or future laws or regulations of the United States affecting taxation or otherwise, be subject to any certification, information, documentation or other reporting requirement of any kind, the effect of which requirement is the disclosure to the Corporation, a paying agent or any United States government authority of the nationality, residence or identity of a beneficial owner of such Bearer Security or coupon who is a United States Alien (other than such a requirement that (i) would not be applicable to a payment made to a custodian, nominee or other agent of the beneficial owner or which can be satisfied by such a custodian, nominee or other agent certifying to the effect that such beneficial owner is a United States Alien, provided, however, in each case, that payment by such custodian, nominee or agent to such beneficial owner is not otherwise subject to any requirement referred to in this sentence, (ii) is applicable only to a payment by a custodian, nominee or other agent of the beneficial owner to such beneficial owner or (iii) would not be applicable to a payment made by any other paying agent of the Corporation), the Corporation shall either (x) redeem the Securities, as a whole, but not in part, at a price equal to 100% of the principal amount thereof, together with accrued interest to the date fixed for redemption, on such date, not later than one year after the publication of notice of the Determination, as the Corporation shall elect by at least 60 days prior notice to the Trustee, unless shorter notice is acceptable to the Trustee, or (y) if the conditions of the next succeeding paragraph are satisfied, pay the additional amounts specified in such paragraph. The Corporation shall make the Determination as soon as practicable and shall give prompt notice thereof to the Trustee, stating in the notice the effective date of such certification, information, documentation or other reporting requirement and the date by which the redemption shall take place. Upon receipt of such notice from the Corporation, the Trustee shall cause notice thereof to be duly given as provided in Section 6 below. Notwithstanding the foregoing, the Corporation shall not so 58 A-5 redeem the Securities if the Corporation shall subsequently determine, not less than 30 days prior to the date fixed for redemption, that subsequent payments would not be subject to any such requirement, in which case the Corporation shall give prompt notice of such determination to the Trustee, and the Trustee shall give notice in accordance with Section 6 and any earlier redemption notice shall be revoked and of no further effect. Notwithstanding the foregoing, if and so long as the certification, information, documentation or other reporting requirement referred to in the preceding paragraph would be fully satisfied by payment of a backup withholding tax or similar charge, the Corporation may elect, prior to publication of the notice of the Determination, to have the provisions of this paragraph apply in lieu of the provisions of the preceding paragraph. In such event, the Corporation will pay as additional amounts such amounts as may be necessary so that every net payment made following the effective date of such requirement outside the United States by the Corporation or any of its paying agents of principal, premium, if any, or interest due in respect of any Bearer Security or any coupon appertaining thereto of which the beneficial owner is a United States Alien (but without any requirement that the nationality, residence or identity of the beneficial owner of such Security or coupon be disclosed to the Corporation, any paying agent or any governmental authority) after deduction or withholding for or on account of such backup withholding tax or similar charge (other than a backup withholding tax or similar charge that (i) would not be applicable in the circumstances referred to in the second parenthetical of the first sentence of the preceding paragraph or (ii) is imposed as a result of presentation of such Bearer Security or coupon for payment more than 15 days after the date on which such payment became due and payable or on which payment thereof is duly provided for, whichever occurs later), will not be less than the amount provided for in such Bearer Security or such coupon to be then due and payable. If the Corporation elects to pay such additional amounts and as long as it is obligated to pay such additional amounts, the Corporation may subsequently redeem the Securities, in whole but not in part, subject to the last sentence of the preceding paragraph, at any time, at 100% of their principal amount, plus accrued interest and additional. amounts to the date fixed for redemption. Notice of intention to redeem Securities will be given in accordance with Section 6 below. In the case of a partial redemption, notice will be given twice, the first 59 A-6 such notice to be given not more than 75 nor less than 60 days prior to the date fixed for redemption and the second such notice to be given at least 30 days thereafter but not less than 30 days prior to the date fixed for redemption. In the case of a full redemption, notice shall be given at least 30, but not more than 60 days prior to the date fixed for redemption. Notices of redemption will specify the date fixed for redemption, the applicable redemption price and, in the case of a partial redemption, the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of the Securities which will be outstanding after such partial redemption. In addition, in the case of a partial redemption, the first notice will specify the last date on which exchanges or transfers of Securities may be made pursuant to the provisions of Section 10 below and the second notice will specify the serial numbers of the Bearer Securities called for redemption or, in the case of Registered Securities, the serial numbers and the portions thereof called for redemption, which shall have been selected for redemption pro rata or by lot. Any Registered Security that is to be redeemed only in part shall be surrendered at the principal corporate trust office of the Trustee in New York, New York, or, subject to applicable laws and regulations, any paying agent which is also a transfer agent (with, if the Corporation, the Trustee or such paying agent so requires with respect to a Registered Security, due endorsement by, or a written instrument of transfer in form satisfactory to the Corporation and the Registrar or such paying agent duly executed by, the Holder thereof or his attorney duly authorized in writing), and, subject to the restrictions contained herein, the Corporation shall execute, and the Trustee shall authenticate and deliver to the Securityholder without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. 6. Notice of Redemption. Notice of redemption will be mailed to each holder of Registered Securities to be redeemed at his registered address. Registered Securities in denominations larger than U.S. $5,000 may be redeemed in, part but only in whole multiples of U.S. $5,000. On and after the redemption date interest ceases to accrue on Securities or portions of them called for redemption. 60 A-7 7. Payment of Additional Amounts. The Corporation, subject to the limitations and exceptions set forth below, will pay to the holder of any Security or coupon who is a United States Alien such amounts as may be necessary in order that every net payment of principal of or premium, if any, or interest on such Security or coupon, after deduction or withholding for or on account of any present or future tax, assessment or other governmental charge imposed upon or as a result of such payment by the United States or any political subdivision or taxing authority thereof or therein, will not be less than the amount provided for in such Security or coupon to be then due and payable; provided, however that the foregoing obligation to pay additional amounts shall not apply to: (a) any tax, assessment or other governmental charge which would not have been so imposed but for (i) the existence of any present or former connection between such holder (or between a fiduciary, settlor, beneficiary, member or shareholder of, or possessor of a power over, such holder, if such holder is an estate, trust, partnership or corporation) and the United States, including without limitation, such holder (or such fiduciary, settlor, beneficiary, member, shareholder or possessor) being or having been a citizen or resident thereof or being or having been engaged in a trade or business therein or being or having been present therein or having or having had a permanent establishment therein, (ii) the failure of such holder or the beneficial owner of such Security or coupon to comply with any requirements under United States income tax laws and regulations, without regard to any tax treaty, to establish entitlement to exemption from deduction or withholding as a United States Alien, or (iii) such holder's present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a private foundation or other tax-exempt organization, or as a corporation which accumulates earnings to avoid United States federal income tax; (b) any tax, assessment or other governmental charge which would not have been so imposed but for the presentation by the holder of such Security or coupon for payment on a date more than 15 days after the date on which such payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later; 61 A-8 (c) any estate, inheritance, gift, sales, transfer, capital, personal property or any similar tax, assessment or governmental charge; (d) any tax, assessment or other governmental charge which is payable otherwise than by deduction and withholding from payments of principal of, premium, if any, or interest on such Security or coupon; (e) any tax, assessment or other governmental charge imposed by reason of the holder's present or former status as the actual or constructive owner of 10% or more of the total combined voting power of all classes of stock of the Corporation entitled to vote; (f) any tax, assessment or other governmental charge required to be withheld by any paying agent from any payment of principal of, premium, if any, or interest on such Security or coupon, if such payment could be paid without withholding by any other paying agent; (g) any combination of items (a), (b), (c), (d), (e) and (f); nor shall additional amounts be paid with respect to any payment of principal, premium, if any, or interest to any United States Alien who is a fiduciary or partnership or other than the sole beneficial owner of a Security or coupon to the extent a beneficiary or settlor with respect to such fiduciary or a member of such partnership or a beneficial owner of the Security or coupon would not have been entitled to payment of the additional amounts had such beneficiary, settlor, member or beneficial owner been the holder of the Security or coupon. "United States Alien", as used in this Security, means any corporation, partnership, individual or fiduciary that, is for United States federal income tax purposes (i) a foreign corporation, (ii) a foreign partnership one or more of the members of which is for United States federal income tax purposes, a foreign corporation, a nonresident alien individual or a nonresident alien fiduciary of a foreign estate or trust, (iii) a nonresident alien individual or (iv) a nonresident alien fiduciary of a foreign estate or trust. 8. Conversion. A holder of a Security may convert it into Common Stock of the Corporation at any time. 62 A-9 on or after the date on which definitive Securities are issued in exchange for the Global Security and before the close of business on April 29, 2002. If the Security is called for redemption, the holder may convert it at any time before the close of business on the redemption date. The initial conversion price is U.S. $32-5/8 per share, subject to adjustment in certain events. To determine the number of shares issuable upon conversion of a Security, divide the principal amount to be converted by the conversion price in effect on the conversion date. Registered Securities surrendered for conversion during any period from the close of business on any record date (as stated above) next preceding any interest payment date to the opening of business on such interest payment date (except Registered Securities or portions thereof called for redemption on a redemption date within such period) must be accompanied by payment in clearing house funds or other funds acceptable to the Corporation of an amount equal to the interest payable on such interest payment date on the principal amount of Securities then being converted which the registered holder is to receive. Except where Securities surrendered for conversion must be accompanied by payment as described above, no interest on converted Securities will be payable by the Corporation on any interest payment date subsequent to the date of conversion. On conversion no payment or adjustment for interest will be made. The Corporation will deliver a check for any fractional share. To convert a Security a holder must (1) complete and sign the conversion notice on the back of the Security, (2) surrender the Security to a Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Registrar or Conversion Agent, and (4) pay any transfer or similar tax if required. A holder may convert a portion of a Security if the portion is U.S. $5000 or a whole multiple of U.S. $5000. The conversion price will be adjusted for dividends or distributions on Common Stock payable in Company stock; subdivisions, combinations or certain reclassifications of Common Stock; distributions to all holders of Common Stock of certain rights to purchase Common Stock at less than the current market price at the time; distributions to such holders of assets or debt securities of the Company or certain rights to purchase securities of the Company (excluding cash dividends or distributions from current or retained earnings). However, no adjustment need be made if Securityholders may participate in the transaction or in certain other cases. The Company from time to 63 A-10 time may voluntarily reduce the conversion price for a period of time. If the Company is a party to a consolidation or merger or a transfer or lease of all or substantially all of its assets, the right to convert a Security into Common Stock may be changed into a right to convert it into securities, cash or other assets of the Company or another. 9. Subordination. The Securities are subordinated to all existing and future Senior Debt of the Corporation. To the extent provided in the Indenture, Senior Debt must be paid before the Securities may be paid. There are no restrictions in the Indenture on the amount of Senior Debt the Corporation may have outstanding. The Corporation agrees, and each Securityholder by accepting a Security agrees, to the subordination and authorizes the Trustee to give it effect. 10. Denominations, Transfer, Exchange. The Registered Securities are in registered form without coupons in denominations of U.S. $5,000 and whole multiples of U.S. $5,000. The transfer of Registered Securities may be registered and Registered Securities may be exchanged as provided in the Indenture. The Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Security or portion of a Security selected for redemption. Also, it need not exchange or register the transfer of any Securities for a period of 15 days before a selection of Securities to be redeemed. Registered Securities may not be exchanged for Bearer Securities. 11. Persons Deemed Owners. The registered holder of a Registered Security may be treated as its owner for all purposes. 12. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the holders of at least 66-2/3% in principal amount of the Securities, and any existing default may be waived with the consent of the holders of a majority in principal amount of the Securities. Without the consent of any Securityholder, the Indenture or the Securities may be amended to cure any ambiguity, defect or inconsistency, 64 A-11 to provide for assumption of Corporation obligations to Securityholders or to make any change that does not adversely affect the rights of any Securityholder. 13. Defaults and Remedies. An Event of Default is default for 30 days in payment of interest on the Securities, default in payment of principal on them, acceleration of any indebtedness for borrowed money of the Corporation exceeding U.S. $5,000,000 in the aggregate if such acceleration is not cured or waived within 30 days after notice to the Corporation from the Trustee or the holders of 25% in principal amount of the Securities, failure by the Corporation for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Securities, and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable immediately. 14. Trustee Dealings with Corporation. Security Pacific National Bank, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Corporation or its Affiliates, and may otherwise deal with the Corporation or its Affiliates, as if it were not Trustee. 15. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Corporation will not have any liability for any obligations of the Corporation under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 16. Authentication. This Security will not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=Custodian), and UGMA (=Uniform Gifts to Minors Act). 65 A-12 CONVERSION NOTICE The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security, or portion hereof (which is U.S. $5,000 or an integral multiple thereof) below designated, into Common Stock in accordance with the terms of the Indenture referred to in this Security, delivers herewith the amount of interest payable on the next interest payment date if this conversion is made between the record date for such interest payment date and such interest payment date, and directs that such shares, together with a check in payment for any fractional share and any Securities representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If the Common Stock is to be registered in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: If Common Stock or Securities are to be registered in the name of a Person other than the Securityholder, please print such Person's name and address, and taxpayer identification number, if applicable: - ------------------------------------ - ------------------------------------ - ------------------------------------ /s/ - ------------------------------------ (Signature must be guaranteed by a bank or stockbroker who is a member of a national stock exchange) If only a portion of the Securities is to be converted, please indicate: 1. Principal Amount to be converted: U.S.$ 2. Amount and denomination of Registered Securities representing unconverted principal amount to be issued: Amount: U.S.$ Denominations: U.S.$ (U.S. $5,000 or an integral multiple thereof) 66 EXHIBIT B (Face Of Bearer Security) ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE. No. BV U.S.$ ATARI CORPORATION promises to pay to bearer upon presentation and surrender of this Security the principal sum of Five Thousand United States Dollars on April 29, 2002. 5 1/4% Convertible Subordinated Debenture Due 2002 Interest Payment Dates: April 29 Dated: Authenticated: SECURITY PACIFIC NATIONAL BANK as Trustee By By Authorized Officer OR By , as Authenticating Agent By Authorized Officer (SEAL) (Back of Bearer Security) 5 1/4% Convertible Subordinated Debenture Due 2002 1. Interest. Atari Corporation ("Corporation"), a Nevada corporation, promises to pay interest oh the principal amount of this Security at the rate per annum 67 B-2 shown above. The Corporation will pay interest annually on April 29 of each year, commencing April 29, 1988. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from April 29, 1987. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. Bearer holders must surrender Bearer Securities or the attached coupons as they mature to a Paying Agent to collect principal and interest payments. The Corporation will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Corporation may pay principal and interest by check payable in such money. Payments of principal, premium, if any, and interest shall be made at offices of the Paying Agents, as stated in Section 3 or as the Corporation may otherwise designate, located outside the United States, subject to the laws and regulations applicable to such Paying Agents. Payments may be made, at the option of the Holder, by transfer of a United States dollar check drawn on a bank in New York, New York, or by transfer of United States dollars to a dollar account maintained by the payee with a bank in a European city. If such payment at the offices of the Paying Agents outside the United States, become illegal or effectively precluded because of the imposition of exchange controls or similar restrictions on the full payment or receipt of such amounts in dollars, the Corporation may instruct such payments to be made at an office or agency within the United States. 3. Paying and Conversion Agents. Initially, Security Pacific National Bank (the "Trustee"), New York, New York, will act as Paying Agent, Registrar and Conversion Agent; Credit Suisse (France), Paris, France, Credit Suisse (Luxembourg) SA, Luxembourg, Grand Duchy of Luxembourg; Schweizerische Kreditanstalt (Deutschland) AG, Frankfurt, Germany, and Credit Suisse, London, Great Britain, will serve as Paying and Conversion Agents and Credit Suisse, Zurich, Switzerland, will serve as Paying Agent. The Corporation may change any Paying or Conversion Agent without notice. The Corporation may act in any such capacity. Except as provided in Paragraph 2, Bearer Securities may only be paid or converted at offices outside the United States. 68 B-3 4. Indenture. The Corporation issued the Securities under an Indenture dated as of April 29, 1987 ("Indenture"), between the Corporation and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-7bbbb) as in effect on the date of the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of such terms. The Securities are unsecured general obligations of the Corporation limited to U.S. $75,000,000 in total principal amount. 5. Optional Redemption. The Corporation may redeem all the Securities at any time or some of them from time to time after the expiration of 30 days from the Exchange Date at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date. If redeemed during the 12-month period beginning April 29,
Year Percentage Year Percentage ---- ---------- ---- ---------- 1987 106% 1990 103% 1988 105% 1991 102% 1989 104% 1992 101%
and thereafter at a redemption price equal to 100% of the principal amount plus accrued interest at the date of redemption. The Securities may not, however, be redeemed before April 29, 1990, unless the closing price of the Common Stock for any 20 trading days during a period of 30 consecutive trading days ending within 10 days before the date notice of redemption is given equals or exceeds 130% of the conversion price then in effect or unless the Securities may be redeemed at 100% of their principal amount in the circumstances described below. The Securities may also be redeemed in whole, but not in part, at 100% of their principal amount, together with interest accrued to the date fixed for redemption, at the option of the Corporation if, at any time, the Corporation determines, based on an opinion of independent legal counsel of recognized standing, that as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of the United States or any 69 B-4 political subdivision or taxing authority thereof or therein affecting taxation, or any change in the application or official interpretation of such laws, regulations or rulings, which change or amendment becomes effective on or after April 6, 1987, there is a substantial probability that the Corporation has or will become obligated to pay additional amounts in respect of the Securities as described under Section 7 below. The Corporation may exercise this redemption option at any time so long as the conditions specified in this Section 5 continue to exist at the time the notice of redemption is made. If the Corporation shall determine (the "Determination"), based upon an opinion of independent legal counsel of recognized standing, that any payment made outside the United States by the Corporation or any of its paying agents of the full amount of the next scheduled payment of principal, premium, if any, or interest due in respect of any Bearer Security or coupon appertaining thereto would, under any current or future laws or regulations of the United States affecting taxation or otherwise, be subject to any certification, information, documentation or other reporting requirement of any kind, the effect of which requirement is the disclosure to the Corporation, a paying agent or any United States government authority of the nationality, residence or identity of a beneficial owner of such Bearer Security or coupon who is a United States Alien (other than such a requirement that (i) would not be applicable to a payment made to a custodian, nominee or other agent of the beneficial owner or which can be satisfied by such a custodian, nominee or other agent certifying to the effect that such beneficial owner is a United States Alien, provided, however, in each case, that payment by such custodian, nominee or agent to such beneficial owner is not otherwise subject to any requirement referred to in this sentence, (ii) is applicable only to a payment by a custodian, nominee or other agent of the beneficial owner to such beneficial owner or (iii) would not be applicable to a payment made by any other paying agent of the Corporation), the Corporation shall either (x) redeem the Security, as a whole, but not in part, at a price equal to 100% of the principal amount thereof, together with accrued interest to the date fixed for redemption, on such date, not later than one year after the publication of notice of the Determination, as the Corporation shall elect by at least 60 days prior notice to the Trustee, unless shorter notice is acceptable to the Trustee, or (y) if the conditions of the next succeeding paragraph are satisfied, pay the additional amounts specified in such paragraph. The Corporation shall make the 70 B-5 Determination as soon as practicable and shall give prompt notice thereof to the Trustee, stating in the notice the effective date of such certification, information, documentation or other reporting requirement and the date by which the redemption shall take place. Upon receipt of such notice from the Corporation, the Trustee shall cause notice thereof to be duly published as provided in Section 6 below. Notwithstanding the foregoing, the Corporation shall not so redeem the Securities if the Corporation shall subsequently determine, not less than 30 days prior to the date fixed for redemption, that subsequent payments would not be subject to any such requirement, in which case the Corporation shall give prompt notice of such determination to the Trustee, and the Trustee shall publish notice in accordance with Section 6 and any earlier redemption notice shall be revoked and of no further effect. Notwithstanding the foregoing, if and so long as the certification, information, documentation or other reporting requirement referred to in the preceding paragraph would be fully satisfied by payment of a backup withholding tax or similar charge, the Corporation may elect, prior to publication of the notice of the Determination, to have the provisions of this paragraph apply in lieu of the provisions of the preceding paragraph. In such event, the Corporation will pay as additional amounts such amounts as may be necessary so that every net payment made following the effective date of such requirement outside the United States by the Corporation or any of its paying agents of principal, premium, if any, or interest due in respect of any Bearer Security or any coupon appertaining thereto of which the beneficial owner is a United States Alien (but without any requirement that the nationality, residence or identity of the beneficial owner of such Security or coupon be disclosed to the Corporation, any paying agent or any governmental authority) after deduction or withholding for or on account of such backup withholding tax or similar charge (other than a backup withholding tax or similar charge that (i) would not be applicable in the circumstances referred to in the second parenthetical of the first sentence of the preceding paragraph or (ii) is imposed as a result of presentation of such Bearer Security or coupon for payment more than 15 days after the date on which such payment became due and payable or on which payment thereof is duly provided for, whichever occurs later), will not be less than the amount provided for in such Bearer Security or such coupon to be then due and payable. If the Corporation elects to pay such additional amounts and as long as it is obligated to pay such additional amounts, the Corporation may subsequently redeem the 71 B-6 Securities, in whole but not in part, subject to the last sentence of the preceding paragraph, at any time, at 100% of their principal amount, plus accrued interest and additional amounts to the date fixed for redemption. Notice of intention to redeem Securities will be given in accordance with Section 6 below. In the case of a partial redemption, notice will be given twice, the first such notice to be given not more than 75 nor less than 60 days prior to the date fixed for redemption and the second such notice to be given at least 30 days thereafter but not less than 30 days prior to the date fixed for redemption. In the case of a full redemption, notice shall be given at least 30, but not more than 60 days prior to the date fixed for redemption. Notices of redemption will specify the date fixed for redemption, the applicable redemption price and, in the case of a partial redemption, the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of the Securities which will be outstanding after such partial redemption. In addition, in the case of a partial redemption, the first notice will specify the last date on which exchanges or transfers of Securities may be made pursuant to the provisions of Section 10 below and the second notice will specify the serial numbers of the Bearer Securities called for redemption or, in the case of Registered Securities, the serial numbers and the portions thereof called for redemption, which shall have been selected for redemption pro rata or by lot. Any Bearer Security that is redeemed must be presented for payment together with all unmatured coupons failing which the amount of any missing unmatured coupons will be deducted from the sum due for payment. Each amount so deducted will be paid against surrender of the relevant missing coupon. 6. Notice of Redemption. Notice of redemption as required by Section 5 above will be published in an Authorized Newspaper, in London, England, and, so long as the Securities are listed on the Luxembourg Stock Exchange and such stock exchange shall so require, in Luxembourg, or, if publication in either London or Luxembourg is not practicable, in Europe on a business day at least twice, the first such publication to be not earlier than the earliest date, and not later than the latest date, prescribed for the giving of such notice. On and after the redemption date 72 B-7 interest ceases to accrue on Securities called for redemption. 7. Payment of Additional Amounts. The Corporation, subject to the limitations and exceptions set forth below, will pay to the holder of any Security or coupon who is a United States Alien such amounts as may be necessary in order that every net payment of principal of or premium, if any, or interest on such Security or coupon, after deduction or withholding for or on account of any present or future tax, assessment or other governmental charge imposed upon or as a result of such payment by the United States or any political subdivision or taxing authority thereof or therein, will not be less than the amount provided for in such Security or coupon to be then due and payable; provided, however, that the foregoing obligation to pay additional amounts shall not apply to: (a) any tax, assessment or other governmental charge which would not have been so imposed but for (i) the existence of any present or former connection between such holder (or between a fiduciary, settlor, beneficiary, member or shareholder of, or possessor of a power over, such holder, if such holder is an estate, trust, partnership or corporation) and the United States, including without limitation, such holder (or such fiduciary, settlor, beneficiary, member, shareholder or possessor) being or having been a citizen or resident thereof or being or having been engaged in a trade or business therein or being or having been present therein or having or having had a permanent establishment therein, (ii) the failure of such holder or the beneficial owner of such Security or coupon to comply with any requirements under United States income tax laws and regulations, without regard to any tax treaty, to establish entitlement to exemption from deduction or withholding as a United States Alien, or (iii) such holder's present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a private foundation or other tax-exempt organization, or as a corporation which accumulates earnings to avoid United States federal income tax; (b) any tax, assessment or other governmental charge which would not have been so imposed but for the presentation by the holder of such Security or coupon for payment on a date more than 15 days after the date 73 B-8 on which such payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later; (c) any estate, inheritance, gift, sales, transfer, capital, personal property or any similar tax, assessment or governmental charge; (d) any tax, assessment or other governmental charge which is payable otherwise than by deduction and withholding from payments of principal of, premium, if any, or interest on such Security or coupon; (e) any tax, assessment or other governmental charge imposed by reason of the holder's present or former status as the actual or constructive owner of 10% or more of the total combined voting power of all classes of stock of the Corporation entitled to vote; (f) any tax, assessment or other governmental charge required to be withheld by any paying agent from any payment of principal of, premium, if any, or interest on such Security or coupon, if such payment could be paid without withholding by any other paying agent; (g) any combination of items (a), (b), (c), (d), (e) and (f); nor shall additional amounts be paid with respect to any payment of principal, premium, if any, or interest to any United States Alien who is a fiduciary or partnership or other than the sole beneficial owner of a Security or coupon to the extent a beneficiary or settlor with respect to such fiduciary or a member of such partnership or a beneficial owner of the Security or coupon would not have been entitled to payment of the additional amounts had such beneficiary, settlor, member or beneficial owner been the holder of the Security or coupon. "United States Alien", as used in this Security, means any corporation, partnership, individual or fiduciary that, is for United States federal income tax purposes (i) a foreign corporation, (ii) a foreign partnership one or more of the members of which is for United States federal income tax purposes, a foreign corporation, a non-resident alien individual or a non-resident alien fiduciary of a foreign estate or trust, (iii) a non-resident alien 74 B-9 individual or (iv) a non-resident alien fiduciary of a foreign estate or trust. 8. Conversion. A holder of a Security may convert it into Common Stock of the Corporation at any time on or after the date on which definitive Securities are issued in exchange for the Global Security and before the close of business on April 29, 2002. If the Security is called for redemption, the holder may convert it at any time before the close of business on the redemption date. The initial conversion price is U.S. $32-5/8 per share, subject to adjustment in certain events. To determine the number of shares issuable upon conversion of a Security, divide the principal amount to be converted by the conversion price in effect on the conversion date. No interest on converted Bearer Securities will be payable by the Corporation on any interest payment date subsequent to the date of conversion. On conversion no payment or adjustment for interest will be made. The Corporation will deliver a check for any fractional share. Surrender of Bearer Securities must occur in the offices of the Conversion Agents in Section 3 above which are located outside the United States. Each Bearer Security must be delivered with all unmatured coupons appurtenant thereto. To convert a Security a holder must (1) complete and sign the conversion notice on the back of the Security, (2) surrender the Security to a Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Registrar or Conversion Agent, and (4) pay any transfer or similar tax if required. The conversion price will be adjusted for dividends or distributions on Common Stock payable in Company stock; subdivisions, combinations or certain reclassifications of Common Stock; distributions to all holders of Common Stock of certain rights to purchase Common Stock at less than the current market price at the time; distributions to such holders of assets or debt securities of the Company or certain rights to purchase securities of the Company (excluding cash dividends or distributions from current or retained earnings). However, no adjustment need be made if Securityholders may participate in the transaction or in certain other cases. The Company from time to time may voluntarily reduce the conversion price for a period of time. 75 B-10 If the Company is a party to a consolidation or merger or a transfer or lease of all or substantially all of its assets, the right to convert a Security into Common Stock may be changed into a right to convert it into securities, cash or other assets of the Company or another. 9. Subordination. The Securities are subordinated to all existing and future Senior Debt of the Corporation. To the extent provided in the Indenture, Senior Debt must be paid before the Securities may be paid. There are no restrictions in the Indenture on the amount of Senior Debt the Corporation may have outstanding. The Corporation agrees, and each Securityholder by accepting a Security agrees, to the subordination and authorizes the Trustee to give it effect. 10. Denominations, Transfer, Exchange. The Bearer Securities are in bearer form with coupons in denominations of U.S. $5,000. The transfer of Securities may be by delivery and Securities may be exchanged for Registered Securities as provided in the Indenture. 11. Persons Deemed Owners. The holder of a Bearer Security may be treated as its owner for all purposes. 12. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the holders of at least 66-2/3% in principal amount of the Securities, and any existing default may be waived with the consent of the holders of a majority in principal amount of the Securities. Without the consent of any Securityholder, the Indenture or the Securities may be amended to cure any ambiguity, defect or inconsistency, to provide for assumption of Corporation obligations to Securityholders or to make any change that does not adversely affect the rights of any Securityholder. 13. Defaults and Remedies. An Event of Default is default for 30 days in payment of interest on the Securities, default in payment of principal on them, acceleration of any indebtedness for borrowed money of the Corporation exceeding U.S. $5,000,000 in the aggregate if such acceleration is not cured or waived within 30 days after notice to the Corporation from the Trustee or the holders of 25% in principal amount of the Securities, failure by the Corporation for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Securities, and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee or the holders 76 B-11 of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable immediately. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Corporation must furnish an annual compliance certificate to the Trustee. 14. Trustee Dealings with Corporation. Security Pacific National Bank, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Corporation or its Affiliates, and may otherwise deal with the Corporation or its Affiliates, as if it were not Trustee. 15. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Corporation will not have any liability for any obligations of the Corporation under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 16. Authentication. This Security will not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=Custodian), and UGMA (=Uniform Gifts to Minors Act). CONVERSION NOTICE The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security 77 B-12 into Common Stock in accordance with the terms of the Indenture referred to in this Security and directs that such shares be registered in the name of and delivered, together with a check in payment for any fractional share, to the undersigned unless a different name has been indicated below. If shares are to be registered in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Pursuant to the provisions of the Indenture and Security, the undersigned surrenders all outstanding coupons appertaining to this Security. Dated: If shares are to be registered in the name of and delivered to a Person other than the Holder, please print such Person's name and address, and taxpayer identification number, if applicable: ---------------------------- ---------------------------- ---------------------------- - -------------------------- HOLDER Please print name and address, and taxpayer identification number, if applicable, of Holder: ---------------------------- ---------------------------- ---------------------------- 78 EXHIBIT C [FORM OF FACE OF COUPON) ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTION 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE. ATARI CORPORATION No. U.S. $ Due 5-1/4% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2002 Unless the Debenture to which this coupon appertains shall have been called for previous redemption with payment duly provided for or converted, on the date set forth above, Atari Corporation (the "Company") will pay to bearer, upon presentation and surrender of this coupon, the amount shown above (together with any additional amounts which the Company may be required to pay according to the terms of the Debenture and the Indenture for the Debenture) at the Paying Agents set out on the reverse hereof or at such other places (which, except as otherwise provided in the Debenture to which this coupon appertains, shall be located outside the United States of America (including the States and the District of Columbia), its territories, its possessions or other areas subject to its jurisdictions (the "United States")) as the Company may determine from time to time, by United States dollar check drawn on a bank in New York, New York, or by transfer of United States dollars to a dollar account maintained by the payee with a bank in a European city, being one year's interest then payable on the Debenture. ATARI CORPORATION, By Chief Financial Officer 79 2 [Reverse of Coupon] CREDIT SUISSE (FRANCE) CREDIT SUISSE (LUXEMBOURG) SA 92, Avenue des Champs-Elysees 23, Avenue Monterey, B.P. 40 F-75008 Paris Luxembourg France Grand Duchy of Luxembourg SCHWEIZERISCHE KREDITANSTALT CREDIT SUISSE (Deutschland) AG 24, Bishopsgate P. 0. Box 100529 London EC2N 4BQ D-6000 Frankfurt a/M 1 Great Britain Federal Republic of Germany CREDIT SUISSE P. 0. Box 590 CH-8021 Zurich Switzerland
80 EXHIBIT D THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (the "SECURITIES ACT"). NEITHER THIS SECURITY NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD OR DELIVERED DIRECTLY OR INDIRECTLY IN THE UNITED STATES OF AMERICA (INCLUDING THE STATES AND THE DISTRICT OF COLUMBIA), ITS TERRITORIES, ITS POSSESSIONS OR OTHER AREAS SUBJECT TO ITS JURISDICTION (THE "UNITED STATES"), OR TO ANY CITIZEN OR RESIDENT THEREOF OR TO ANY CORPORATION, PARTNERSHIP OR OTHER ENTITY CREATED OR ORGANIZED IN OR UNDER THE LAWS OF THE UNITED STATES OR TO ANY ESTATE OR TRUST THE INCOME OF WHICH IS SUBJECT TO UNITED STATES FEDERAL INCOME TAXATION REGARDLESS OF ITS SOURCE ("U.S. PERSON") EXCEPT IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF SUCH ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION PROVISIONS. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE. U.S. $75,000,000 ATARI CORPORATION 5-1/4% Convertible Subordinated Debentures Due 2002 TEMPORARY GLOBAL DEBENTURE ATARI CORPORATION (the "Corporation") promises to pay to bearer upon presentation and surrender of this Global Debenture the principal sum of Seventy Five Million United States Dollars on April 29, 2002, and to pay interest from April 29, 1987, annually in arrears on April 29 in each year, commencing April 29, 1988, at the rate of 5-1/4% per annum, until the principal of this Global Debenture is paid or made available for payment. Interest, however, on this Global Debenture shall be payable only after the issuance of the definitive Debentures for which this Global Debenture is exchangeable (except that if any interest payment date occurs before the Exchange Date, the interest payment due on such date may be made upon certification that the beneficial owners of the relevant Debentures are not U.S. Persons or persons who have purchased for resale to U.S. Persons) and, in the case of definitive Debentures in bearer form, only 81 D-2 upon presentation and surrender (at an office or agency outside the United States, except as otherwise provided in the Indenture referred to below) of the interest coupons attached as they mature. This Global Debenture is one of a duly authorized issue of Debentures of the Corporation designated as specified in the above title, issued and to be issued under the Indenture dated as of April 29, 1987 (the "Indenture"), between the Corporation and the Security Pacific National Bank, as trustee (the "Trustee"). It is a temporary debenture and is exchangeable in whole or from time to time in part without charge upon request to the holder of this Global Debenture for definitive Debentures in bearer form, with interest coupons attached, or in registered form, without coupons, of authorized denominations, (a) not before the later of 90 days after the date on which the distribution of the Debentures has been completed, as PaineWebber International Capital Inc. shall have advised the Trustee in writing, and the effectiveness of the registration of the Debentures for resale under the Securities Act, and (b) as promptly as practicable following presentation of certification, in the form set forth in the Indenture for this purpose, that the beneficial owner or owners of this Global Debenture (or, if such exchange is only for a part of this Global Debenture, of such part) are not U.S. Persons or persons who have purchased for resale to any U.S. Person. If, however, a beneficial owner of any Debenture is a sophisticated United States institutional investor (a "U.S. Institutional Investor"), the Trustee will exchange the portion of the temporary Global Debenture owned by such U.S. Institutional Investor for definitive Registered Debentures as soon as practicable after issuance of the Debentures, upon certification that such Debentures have been sold to such U.S. Institutional Investor in a private sale of Registered Debentures only to certain U.S. Institutional Investors to whom the sale of the Registered Debentures would be exempt from the registration requirements of the Securities Act. Such Registered Debentures, if and when sold, will be sold subject to such restrictions as to preclude a distribution prior to the effectiveness of registration of the Debentures for resale under the Securities Act. Such Registered Debentures will be issued in registered form only and will not be exchangeable at any time for Bearer Debentures. Definitive Debentures in bearer form to be delivered in exchange for any part of this Global Debenture shall be delivered only outside the United States. Upon any exchange of a part of this Global Debenture for definitive Debentures, the portion of the principal amount 82 D-3 of this Global Debenture so exchanged shall be endorsed by the Trustee on the schedule attached to this Global Debenture, and the principal amount of this Global Debenture shall be reduced for all purposes by the amount so exchanged. Until exchanged in full for definitive Debentures, this Global Debenture shall in all respects be entitled to the same benefits under, and subject to the same terms and conditions of, the Indenture as authenticated and delivered definitive Debentures, except that neither the Holder of nor the beneficial owners of this Global Debenture shall be entitled to receive payment of interest (except as provided above) or to convert this Global Debenture into Common Shares of the Company or any other security, cash or other property. This Global Debenture shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Global Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. Unless the certificate of authentication has been executed by the Trustee by the manual signature of one of its authorized officers, this Global Debenture shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. 83 D-4 IN WITNESS WHEREOF, the Company has caused this Global Debenture to be duly executed. Dated: April 29, 1987 ATARI CORPORATION By Title: Authenticated: SECURITY PACIFIC NATIONAL BANK, as Trustee By Authorized Officer 84 D-5 SCHEDULE OF EXCHANGES
Principal Remaining amount principal exchanged for amount definitive Debentures following or converted into such exchange Notation made by or Date Common Shares or conversion on behalf of the made or redeemed or redemption Trustee - -------- ----------------------- ------------- ------------------- ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ ................. ........ ....................... ............ .................
85 EXHIBIT E [Form of Certificate of Non-U.S. Ownership] CERTIFICATE OF NON-U.S. OWNERSHIP ATARI CORPORATION 5-1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 (the "Securities") CEDEL S.A. 67 Boulevard Grande-Duchesse Charlotte Luxembourg-Ville Luxemboug l/ Morgan Guaranty Trust Company of New York, Brussels Office Operator of the Euro-clear System Euro-clear Operations Centre Rue de la Regence, 4 B-1000 Brussels, Belgium l/ This is to certify that, except as provided in the second paragraph, none of the principal amount of the Securities credited to you for our account is beneficially owned by U.S. persons or persons who have purchased the Securities for resale to U.S. persons. We undertake to advise you by telex if the above statement as to beneficial ownership is not correct on any interest payment date occurring prior to the Exchange Date (as defined in the Indenture dated as of April 29, 1987 between Atari Corporation and Security Pacific National Bank, as Trustee) and also immediately prior to the Exchange Date with respect to such of said Securities as then appear in your books as being held for our account. We understand that this certificate is required in connection with United States securities and tax laws. We irrevocably authorize you to produce this certificate or a copy hereof to any interest party in any administrative or legal proceedings with respect to the matters covered by this certificate. "U.S. person", in this Certificate, shall mean a citizen or resident of the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States"), a corporation, partnership or other entity l/ Delete inappropriate reference. 86 2 created or organized in or under the laws of the United States, or an estate or trust the income of which is subject to United States Federal income taxation regardless of its source. This certificate excepts and does not relate to $ principal amount of Securities credited to you for our account as to which we are not now able to make the certification set forth above. We understand that definitive certificates cannot be delivered and interest cannot be paid until we are able to so certify, or to deliver Certificates of U.S. Institutional Investors, with respect to such principal amount of Securities. [We hereby request that the Trustee deliver Registered Securities in the following denominations and registered in the following name(s) at the corporate trust office of the Registrar in New York City. Denominations: ---------------------------------------- Name of Registered Owner: ----------------------------- Registered Owner's Address: --------------------------- ]2/ ---------------------------------------------------- [Name] Dated: 3/ By: ---------------------------------- Signature as, or as agent for, the beneficial owner(s) of the Security or Securities to which this certificate relates. - ------------------------ 2/ To be inserted only if Registered Securities are requested. 3/ Not prior to 15 days before the earlier of the Exchange Date or the first interest payment date occurring prior to the Exchange Date. 87 EXHIBIT F [Date) PaineWebber International Capital Inc. 1 Finsbury Avenue London EC2M 2PA England Atari Corporation 1196 Borregas Avenue Sunnyvale, California 94088-3427 Re: $75,000,000 principal amount 5-1/4% Convertible Subordinated Debentures Due 2002 (the "Securities") of Atari Corporation (the "Issuer") Dear Sirs: In connection with our purchase of $ principal amount of the Securities, we confirm that: (1) We have received (a) the Offering Circular dated April 7, 1987, relating to the Securities and (b) such other information as we deem necessary in order to make our investment decision. (2) We acknowledge that the distribution of the Securities has not been registered under the Securities Act of 1933. As a purchaser of the Securities in a private placement not registered under the Securities Act of 1933, we represent that we are (a) a sophisticated institutional investor and (b) an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933, and are purchasing such Securities for our own account for investment and (subject, to the extent necessary, to the disposition of our property being at all times within our control) not with a view to any distribution or other disposition thereof, and we are proceeding on the assumption that we must bear the economic risk of the investment for an indefinite period since the Securities may not be sold except as provided below. (3) We agree that, if in the future we should decide to dispose of any of the Securities (which we do not presently contemplate), we will not offer, sell or deliver any such Securities, directly or indirectly, unless: (a) (i) the sale is of at least $50,000 principal amount of Securities to an Eligible Purchaser (as 88 2 defined below), (ii) a letter to substantially the same effect as paragraphs (1)(b), (2), (3), (4), (5) and (7) of this letter is executed prior to such sale by such Eligible Purchaser and (iii) all offers or solicitations in connection with such sale, whether directly or through any agent acting on our behalf, are limited only to Eligible Purchasers and are not made by means of any form of general solicitation or general advertising whatsoever; or (b) the Securities are sold pursuant to Rule 144 under the Securities Act of 1933 by us after we have held them for not less than three years, provided that we are not an "affiliate" of the Issuer (as defined by such Rule 144) at the time of such sale and have not been such an affiliate during the preceding three months; or (c) the Securities are sold pursuant to a registration statement in effect under the Securities Act of 1933, it being understood that the Issuer shall have no obligation to us to effect any such registration; or (d) the Securities are sold in any other transaction that is made in compliance with the Securities Act of 1933 and we heretofore have furnished to the Issuer a satisfactory opinion to such effect. (4) The Securities that we have purchased, when issued in definitive form, shall be issued in Registered form, as will any Securities issued in exchange or substitution for or on registration of transfer of such Securities. Such Securities (and, unless the Issuer shall otherwise agree on the basis of an opinion of the nature set forth in paragraph (5) below, any Securities so issued) shall bear the following legend: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 AND ACCORDINGLY MAY NOT BE OFFERED, SOLD OR DELIVERED UNLESS SUCH OFFER, SALE OR DELIVERY IS EITHER REGISTERED PURSUANT TO OR IS EXEMPT FROM REGISTRATION UNDER SAID ACT. THE TRANSFER OR EXCHANGE OF THIS SECURITY IS SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN AN INVESTMENT LETTER FROM THE HOLDER TO THE ISSUER INCLUDING THE RIGHT OF THE ISSUER TO REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER PRIOR TO ANY TRANSFER OR EXCHANGE OF THIS SECURITY." 89 3 (5) In addition to the requirements of paragraph (3)(d) above, we understand that, in connection with any proposed transfer of Securities or exchange of Securities for Securities of other authorized denominations, an opinion of counsel experienced in giving opinions with respect to questions relating to the securities laws of the United States may be required to the effect that such transfer or exchange will be in compliance with the Securities Act of 1933. (6) We request that the definitive Securities we have purchased be registered [in our name] [in the name of , our nominee,] */ and that such Securities be delivered to [insert address] by registered mail, which delivery shall be for our sole risk and expense. (7) As used in this letter, the term "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction, and "Eligible Purchaser" means a corporation, partnership or other entity which we have reasonable grounds to believe and do believe can make representations with respect to itself to the effect set forth in paragraphs (1)(b) and (2) of this letter. Very truly yours, [Name of U.S. Institutional Investor] By: ------------------------------ Authorized Signature - -------------------- */ Delete inappropriate reference. 90 EXHIBIT G [Form of Certificate of U.S. Institutional Investor] CERTIFICATE OF U.S. INSTITUTION INVESTOR ATARI CORPORATION 5-1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 (the "Securities") CEDEL S.A. 67 Boulevard Grande-Duchesse Charlotte Luxembourg-Ville Luxembourg 1/ Morgan Guaranty Trust Company of New York, Brussels Office Operator of the Euro-clear System Euro-clear Operations Centre Rue de le Regence, 4 B-1000 Brussels, Belgium l/ This certificate is delivered in connection with the Securities credited to you for our account. This is to certify that (i) we have received from (name of U.S. Institutional Investor] a letter in the form required by the Indenture under which the Securities are issued, to the effect that it is purchasing for its own account for investment and without a view to any distribution or other disposition, $ principal amount of the Securities credited to you for our account and agreeing to certain restrictions on any disposition of such Securities, (ii) one of our registered broker-dealer affiliates offered Securities for sale to such investor and (iii) we and our affiliate believe that such investor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment and we and our affiliate believes that such investor (and any account or accounts as to which such investor exercises investment discretion and for which such investor may be purchasing Securities) is able to bear the economic risk of investment in the Securities. We understand that this certificate is required in connection with United States law. We irrevocably authorize - -------------------- 1/ Delete inappropriate reference. 91 2 you to produce this certificate or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered by this certificate. The definitive Securities to be issued in respect of this certificate are to be issued in registered form and shall bear the following legend: "A REGISTRATION STATEMENT FOR THIS SECURITY HAS NOT YET BEEN DECLARED EFFECTIVE UNDER THE UNITED STATES SECURITIES ACT OF 1933 AND ACCORDINGLY THIS SECURITY MAY NOT BE OFFERED, SOLD OR DELIVERED UNLESS SUCH OFFER, SALE OR DELIVERY IS EITHER REGISTERED PURSUANT TO OR IS EXEMPT FROM REGISTRATION UNDER SAID ACT. THE TRANSFER OR EXCHANGE OF THIS SECURITY IS SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN AN INVESTMENT LETTER FROM THE HOLDER TO ATARI CORPORATION INCLUDING THE RIGHT OF ATARI CORPORATION TO REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO ATARI CORPORATION PRIOR TO ANY TRANSFER OR EXCHANGE OF THIS SECURITY BEFORE THE EFFECTIVENESS OF REGISTRATION OF THE SECURITIES ACT OF 1933." We request that the Trustee deliver Registered Securities in the following denominations and registered in the following names to the undersigned at the corporate trust office of the Registrar in New York, New York:
Registered Registered Owner's Registered Registered Owner's Taxpayer Denomination Owner Address I.D. Number - ------------ ---------- ---------- -----------
PaineWebber International Capital Inc. Dated: 2/ By ---------------------------------- Signature - -------------------- 2/ Not prior to the date established for exchange of the Global Security for Registered Securities for the account of U.S. Institutional Investors. 92 EXHIBIT H-1 [Form of Clearance System Certificate For Exchange for Bearer Security] CLEARANCE SYSTEM CERTIFICATE ATARI CORPORATION 5-1/4% Convertible Subordinated Debentures Due 2002 We refer to that portion, U.S. $ principal amount, of the Global Security representing the above issue that is submitted to be exchanged for Bearer Securities (the "Submitted Portion"). This is to certify (i) that we have received from each of the persons appearing in our records as being entitled to a beneficial interest in the Submitted Portion a certificate of non-U.S. ownership with respect to such person's beneficial interest in the form attached to this Certificate and (ii) that the Submitted Portion includes no part of the Global Security which was excepted in such a certificate of non-U.S. ownership. We further notify that as of the date hereof we have not received any notification from any of the persons giving such certificates to the effect that the statements made by them with respect to any part of the Submitted Portion are no longer true and cannot be relied on. Dated: 1/ [CEDEL S.A.] [Morgan Guaranty Trust Company of New York, Brussels Office, as Operator of the Euro-clear System] 2/ By ------------------------------- - -------------------- 1/ Not prior to the Exchange Date. 2/ Delete inappropriate reference. 93 EXHIBIT H-2 [Form of Clearance System Certificate For Exchange for Registered Security] CLEARANCE SYSTEM CERTIFICATE ATARI CORPORATION 5-1/4% Convertible Subordinated Debentures Due 2002 We refer to that portion, U.S. $ principal amount, of the Global Security representing the above issue which is submitted to be exchanged for Registered Securities (the "Submitted Portion"). This is to certify that we have received from each of the persons appearing in our records as being entitled to a beneficial interest in the Submitted Portion either (a) a certificate of U.S. Institutional Investor with respect to such person's beneficial interest in the form attached to this Certificate or (b) a certificate of non-U.S. ownership with respect to such person's beneficial interest in the form attached to this Certificate. We hereby request that you deliver to the corporate trust office of the Registrar in New York City Registered Securities in the denominations and registered in the names appearing on the attached certificates of U.S. Institutional Investor and certificates of non-U.S. ownership. We further certify that as of the date hereof we have not received any notification from any of the persons giving such certificates to the effect that the statements made by them with respect to any part of the Submitted Portion are no longer true and cannot be relied on. Dated: 1/ [CEDEL S.A.] [Morgan Guaranty Trust Company of New York, Brussels Office, as Operator of the Euro-clear System] 2/ By ------------------------------------- - -------------------- 1/ Not prior to the Exchange Date. 2/ Delete inappropriate reference. 94 EXHIBIT H-3 [Form of Clearance System Certificate For Payment of Interest Prior to Exchange Date] CLEARANCE SYSTEM CERTIFICATE ATARI CORPORATION 5-1/4% Convertible Subordinated Debentures Due 2002 We refer to that portion, U.S. $ principal amount, of the Global Security representing the above issue, the beneficial owners of which have requested payment of the interest payment due on (the "Submitted Portion"). This is to certify that we have received from each of the persons appearing in our records as being entitled to a beneficial interest in the Submitted Portion a certificate of non-U.S. ownership with respect to such person's beneficial interest in the form attached to this Certificate. We further certify that as of the date hereof we have not received any notification from any of the persons giving such certificates to the effect that the statements made by them with respect to any part of the Submitted Portion are no longer true and cannot be relied on. Dated: 1/ [CEDEL S.A.] [Morgan Guaranty Trust Company of New York, Brussels Office, as Operator of the Euro-clear System] 2/ By ------------------------------------- - -------------------- 1/ Not prior to the the relevant interest payment date. 2/ Delete inappropriate reference. EX-4.4 11 FEDERATED GRP/SECURITY PACIFIC NATL BANK INDENTURE 1 Exhibit 4.4 =============================================================================== THE FEDERATED GROUP, INC. TO SECURITY PACIFIC NATIONAL BANK Trustee ---------------- INDENTURE Dated as of April 15, 1985 ---------------- 7 1/2% Convertible Subordinated Debentures due April 15, 2010 2 THE FEDERATED GROUP, INC. RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND INDENTURE, DATED AS OF APRIL 15, 1985 TRUST INDENTURE ACT SECTION INDENTURE SECTION Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . 609 (a)(2) . . . . . . . . . . . . . . . . . . . . . . 609 (a)(3) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (a)(4) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . . . 608 610 Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . 613(a) (b) . . . . . . . . . . . . . . . . . . . . . . . 613( b) (b)(2) . . . . . . . . . . . . . . . . . . . . . . 703(a)(2) 703(b) Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . 701 702(a) (b) . . . . . . . . . . . . . . . . . . . . . . . 702(b) (c) . . . . . . . . . . . . . . . . . . . . . . . 702(c) Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . 703(a) (b) . . . . . . . . . . . . . . . . . . . . . . . 703(b) (c) . . . . . . . . . . . . . . . . . . . . . . . 703(a).703(b) (d) . . . . . . . . . . . . . . . . . . . . . . . 703(c) Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . 704 (b) . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (c)(1) . . . . . . . . . . . . . . . . . . . . . . 102 (c)(2) . . . . . . . . . . . . . . . . . . . . . . 102 (c)(3) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (d) . . . . . . . . . . . . . . . . . . . . . . . Not Applicable (e) . . . . . . . . . . . . . . . . . . . . . . . 102 Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . 601(a) (b) . . . . . . . . . . . . . . . . . . . . . . . 602 703(a)(6) (c) . . . . . . . . . . . . . . . . . . . . . . . 601(b) (d) . . . . . . . . . . . . . . . . . . . . . . . 601(c) (d)(1) . . . . . . . . . . . . . . . . . . . . . . 601(a)(1) (d)(2) . . . . . . . . . . . . . . . . . . . . . . 601(c)(2) (d)(3) . . . . . . . . . . . . . . . . . . . . . . 601(c)(3) (e) . . . . . . . . . . . . . . . . . . . . . . . 514 Section 316(a) . . . . . . . . . . . . . . . . . . . . . . . 101 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . 502 512 (a)(1)(B). . . . . . . . . . . . . . . . . . . . . 513 (a)(2) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . . . 508 Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . 503 (a)(2) . . . . . . . . . . . . . . . . . . . . . . 504 (b) . . . . . . . . . . . . . . . . . . . . . . . 1003 Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . 107
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS
PAGE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RECITALS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Affiliate; control . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Board Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Closing Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Company Request; Company Order . . . . . . . . . . . . . . . . . . . . . . 4 Corporate Trust Office . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Debenture Register, Debenture Registrar . . . . . . . . . . . . . . . . . 4 Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Interest Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Predecessor Debenture . . . . . . . . . . . . . . . . . . . . . . . . . . 6
NOTE: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. 4 ii
PAGE Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Redemption Notice Date . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 102. Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . 8 SECTION 103. Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . 8 SECTION 104. Acts of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 105. Notices, Etc., to Trustee and Company . . . . . . . . . . . . . . . . . . 10 SECTION 106. Notice to Holders; Waiver . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 107. Conflict with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . 11 SECTION 108. Effect of Headings and Table of Contents . . . . . . . . . . . . . . . . . 11 SECTION 109. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 110. Separability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 111. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 112. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 113. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE TWO DEBENTURE FORM SECTION 201. Form Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 202. Form of Face of Debenture . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 203. Form of Reverse of Debenture . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 204. Form of Trustee's Certificate of Authentication . . . . . . . . . . . . . . 19 SECTION 205. Form of Notice of Election to Convert . . . . . . . . . . . . . . . . . . . 19
5 iii ARTICLE THREE THE DEBENTURES
PAGE SECTION 301. Title and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 303. Execution, Authentication, Delivery and Dating . . . . . . . . . . . . . . 22 SECTION 304. Temporary Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 305. Registration, Registration of Transfer and Exchange . . . . . . . . . . . 23 SECTION 306. Mutilated, Destroyed, Lost and Stolen Debentures . . . . . . . . . . . . . 24 SECTION 307. Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . 25 SECTION 308. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 309. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 310. Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . 28 SECTION 402. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE FIVE REMEDIES SECTION 501. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 502. Acceleration of Maturity, Rescission and Annulment . . . . . . . . . . . . 32 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 504. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . 34 SECTION 505. Trustee May Enforce Claims Without Possession of Debentures . . . . . . . 35 SECTION 506. Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert . . . . . . . . . . . . . . . . . . 37
6 iv
PAGE SECTION 509. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . 37 SECTION 510. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 511. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 512. Control by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 514. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 515. Waiver of Stay or Extension Laws . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities . . . . . . . . . . . . . . . . . . . 40 SECTION 602. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 603. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 604. Not Responsible for Recitals or Issuance of Debentures . . . . . . . . . . 43 SECTION 605. May Hold Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 606. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 607. Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 608. Disqualification; Conflicting Interests . . . . . . . . . . . . . . . . . 44 (a) Elimination of Conflicting Interest or Resignation . . . . . . . . . 44 (b) Notice of Failure to Eliminate Conflicting Interest . . . . . . . . 44 (c) "Conflicting Interest" Defined . . . . . . . . . . . . . . . . . . . 44 (d) Definitions of Certain Terms Used in This Section . . . . . . . . . 48 (e) Calculation of Percentages of Securities . . . . . . . . . . . . . . 49 SECTION 609. Corporate Trustee Required. Eligibility . . . . . . . . . . . . . . . . . 50 SECTION 610. Resignation and Removal; Appointment of Successor . . . . . . . . . . . . 50 SECTION 611. Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . 52 SECTION 612. Merger, Conversion, Consolidation or Succession to Business . . . . . . . 53
7 v
PAGE SECTION 613. Preferential Collection of Claims Against Company . . . . . . . . . . . . 53 (a) Segregation and Apportionment of Certain Collections by Trustee; Certain Exceptions . . . . . . . . . . . . . . . . . . . . . . . 53 (b) Certain Creditor Relationships Excluded from Segregation and Apportionment . . . . . . . . . . . . . . . . . . . . . . . . . . 56 (c) Definitions of Certain Terms Used in This Section. . . . . . . . . . 57 SECTION 614. Appointment of Authenticating Agent . . . . . . . . . . . . . . . . . . . 58 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . 60 SECTION 702. Preservation of information; Communications to Holders . . . . . . . . . . 61 SECTION 703. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 704. Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms . . . . . . . . . . . 65 SECTION 802. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . . . 65 ARTICLE NINE SUPPLEMENTAL INDENTURE SECTION 901. Supplemental Indentures Without Consent of Holders . . . . . . . . . . . . 66 SECTION 902. Supplemental Indentures with Consent of Holders . . . . . . . . . . . . . 66 SECTION 903. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . 68 SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . 68 SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . 68 SECTION 906. Reference in Debentures to Supplemental Indentures . . . . . . . . . . . . 68 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest . . . . . . . . . . . . . . . . 69
8 vi
PAGE SECTION 1002. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . 69 SECTION 1003. Money for Debenture Payments to be Held in Trust . . . . . . . . . . . . . 70 SECTION 1004. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 1005. Statement by Officers as to Default . . . . . . . . . . . . . . . . . . . 71 SECTION 1006. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . 72 SECTION 1007. Statement by Officers as to Default . . . . . . . . . . . . . . . . . . . 72 ARTICLE ELEVEN REDEMPTION OF DEBENTURES SECTION 1101. Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 1102. Applicability of Article . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 1103. Election to Redeem; Notice to Trustee . . . . . . . . . . . . . . . . . . 73 SECTION 1104. Selection by Trustee of Debentures to be Redeemed . . . . . . . . . . . . 74 SECTION 1105. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 1106. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 1107. Debentures Payable on Redemption Date . . . . . . . . . . . . . . . . . . 75 SECTION 1108. Debentures Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . 76 ARTICLE TWELVE SINKING FUND SECTION 1201. Sinking Fund Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 1202. Satisfaction of Sinking Fund Payments with Debentures . . . . . . . . . . 77 SECTION 1203. Redemption of Debentures for Sinking Fund . . . . . . . . . . . . . . . . 77 ARTICLE THIRTEEN CONVERSION OF DEBENTURES SECTION 1301. Conversion Privilege and Conversion Price . . . . . . . . . . . . . . . . 78 SECTION 1302. Exercise of Conversion Privileges . . . . . . . . . . . . . . . . . . . . 78 SECTION 1303. Fractions of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 1304. Adjustment of Conversion Price . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 1305. Notice of Adjustments of Conversion Price . . . . . . . . . . . . . . . . 83 SECTION 1306. Notice of Certain Corporate Action . . . . . . . . . . . . . . . . . . . . 83 SECTION 1307. Company to Reserve Common Stock . . . . . . . . . . . . . . . . . . . . . 84 SECTION 1308. Taxes on Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 1309. Covenant as to Common Stock . . . . . . . . . . . . . . . . . . . . . . . 85 SECTION 1310. Cancellation of Converted Debentures . . . . . . . . . . . . . . . . . . . 85 SECTION 1311. Provisions in Case of Consolidation. Merger, or Sale of Assets . . . . . . 85 SECTION 1312. Disclaimer by Trustee for Responsibility for Certain Matters . . . . . . . 86
9 vii ARTICLE FOURTEEN SUBORDINATION OF DEBENTURES
PAGE SECTION 1401. Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . 86 SECTION 1402. Payment Prohibited If Senior Indebtedness in Default . . . . . . . . . . . 87 SECTION 1403. Priority of Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . 87 SECTION 1404. Subrogation of Holders of Debentures . . . . . . . . . . . . . . . . . . . 88 SECTION 1405. Subordination of Debentures Not Affected by Changes in Provisions of Senior Indebtedness . . . . . . . . . . . . . . . . . . . 89 SECTION 1406. Subordination Provisions for Benefit of Holders of Senior Indebtedness . . 89 SECTION 1407. Rights of Trustee as Holder of Senior Indebtedness . . . . . . . . . . . . 89 SECTION 1408. Obligation of Company to Holders of Debentures Not impaired . . . . . . . 89 SECTION 1409. Reliance Upon Court Order or Decree . . . . . . . . . . . . . . . . . . . 90 SECTION 1410. Subordination Rights Not Impaired by Acts or Omissions of Company or Holders of Senior Indebtedness . . . . . . . . . . . . . . . 90 SECTION 1411. Trustee to Effectuate Subordination . . . . . . . . . . . . . . . . . . . 91 SECTION 1412. Trustee Not Charged With Knowledge of Senior Indebtedness . . . . . . . . 91 SECTION 1413. Events of Default Not Prevented . . . . . . . . . . . . . . . . . . . . . 91 TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 SIGNATURES AND SEALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
10 INDENTURE, dated as of April 15, 1985, between The Federated Group, Inc., a Delaware corporation (hereinafter called the "Company"), having its principal office at 5655 E. Union Pacific Avenue, City of Commerce, California 90022, and Security Pacific National Bank, a national banking association with its principal offices in Los Angeles, California (hereinafter called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of its 7 1/2% Convertible Subordinated Debentures (hereinafter called the "Debentures") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Debentures, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Debentures by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Debentures, as follows: ARTICLE ONE DEFINITIONS, AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular: 11 2 (2) all other terms used herein which are defined in the Trust Indenture Act either directly or by reference therein, have the meanings assigned to them therein: (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "Act" when used with respect to any Holder has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise: and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate Debentures. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. 12 3 "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in the City of Los Angeles, California are authorized or obligated by law or executive order to close. "Closing Price" means with respect to the Common Stock of the Company on any day, (i) the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, Inc. or (ii) if the Common Stock is not listed or admitted to trading on such Exchange, the last reported sales price regular way, or in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, on the principal national securities exchange on which the Common Stock is Listed or admitted to trading, or (iii) if the Common Stock is not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" means any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 1311, shares issuable on conversion of Debentures shall include only shares of the class designated as Common Stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be 13 4 substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President, and by its Senior Financial Officer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered; said principal office at the date of the execution of this Indenture is located at 333 South Hope Street, Los Angeles, California, 90071. "Corporation" includes corporations, associations, companies and business trusts. "Debenture Register" and "Debenture Registrar" have the respective meanings specified in Section 305. "Defaulted Interest" has the meaning specified in Section 307. "Event of Default" has the meaning specified in Section 501. "Holder" means a Person in whose name a Debenture is registered in the Debenture Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Interest Payment Date" means the Stated Maturity of an Installment of interest on the Debentures. "Maturity" when used with respect to any Debenture means the date on which the principal of such Debenture becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. 14 5 "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or a Vice President, and by the Senior Financial Officer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee. "Outstanding" when used with respect to Debentures means, as of the date of determination, all Debentures theretofore authenticated and delivered under this Indenture, except: (i) Debentures theretofore cancelled by the Trustee or delivered to the Trustee for cancellation: (ii) Debentures or portion thereof for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Debentures; provided that, if such Debentures are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Debentures in exchange for or in lieu of which other Debentures have been authenticated and delivered pursuant to this Indenture: provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Debentures have given any request, demand, authorization, direction, notice, consent or waiver hereunder. Debentures owned by the Company or any other obligor upon the Debentures or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Debentures which the Trustee knows to be so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debentures and that the pledgee is not the Company or any other obligor upon the Debentures or any Affiliate of the Company or of such other obligor. 15 6 "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Debentures on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. " Predecessor Debenture" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Debenture shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Debenture. "Redemption Date", when used with respect to any Debenture to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Notice Date", when used with respect to any Debenture to be redeemed, means the date on which the notice of such redemption is mailed. "Redemption Price", when used with respect to any Debenture to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or, any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular 16 7 corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Senior Indebtedness" has the meaning specified in Section 1401. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Debenture or any installment of interest thereon, means the date specified in such Debenture as the fixed date on which the principal of such Debenture or such installment of interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed, except as provided in Section 905. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such 17 8 counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such. Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters to one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be 18 9 based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. (a) Any request demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duty appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601 ) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by any reasonable method. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any reasonable manner. (c) The ownership of Debentures shall be proved by the Debenture Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Debenture shall bind every future Holder of the same Debenture and the Holder of every Debenture issued 19 10 upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee any Debenture Registrar, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Debenture. SECTION 105. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event at his address as it appears in the Debenture Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. 20 11 In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Indenture Act, such required provision shall control. SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause. In case any provision in this Indenture or in the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. Nothing In this Indenture or in the Debentures, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders of Debentures, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. This indenture and the Debentures shall be governed by and construed in accordance with the laws of the State of California. 21 12 SECTION 113. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Debenture or any date on which a payment is required to be made to the sinking fund or the last date on which a Holder has the right to convert his Debentures shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Debentures) payment of interest or principal (and premium, if any) or conversion of the Debentures need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, or on such last day for conversion, provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, or sinking fund payment date, or on such last day for conversion as the case may be. ARTICLE TWO DEBENTURE FORM SECTION 201. Form Generally. The Debentures and the Trustee's certificates of authentication shall be in substantially the form set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Debentures, as evidenced by their execution of the Debentures. The definitive Debentures shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Debentures may be listed, all as determined by the officers executing such Debentures, as evidenced by their execution of such Debentures. 22 13 SECTION 202. Form of Face of Debenture. THE FEDERATED GROUP, INC. 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURE DUE APRIL 15, 2010 No. $ ------------------- ---------------- THE FEDERATED GROUP, INC., a Delaware corporation (herein called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of DOLLARS on April 15, 2010 and to pay interest thereon from April 15, 1985, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on April 15 and October 15 in each year, commencing October 15, 1985, at the rate of 7 1/2% per annum (computed on the basis of a 360-day year consisting of 12 30-day months), until the principal hereof is paid or duly provided for. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture hereinafter referred to, be paid to the Person in whose name this Debenture (or one or more Predecessor Debentures) is registered at the close of business on the Regular Record Date for such interest, which shall be the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Debenture (or one or more Predecessor Debentures) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Debentures not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) on this Debenture will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City and State of New York, or in the City of Los Angeles, California or at any other office or agency maintained by the Company for such purpose. Payment of interest on the Debentures will be made by the Trustee in Los 23 14 Angeles, California by check or draft mailed to the address of the Person entitled thereto as such address shall appear in the Debenture Register. Payment will be made in such currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The term "Company" under the Indenture includes any successor corporation. Reference is hereby made to the further provisions of this Debenture set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if sat forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof (directly or through an Authenticating Agent) by manual signature, this Debenture shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: [SEAL] THE FEDERATED GROUP, INC. Attest: By -------------------------------- [Title] - --------------------------------- [Title] SECTION 203. Form of Reverse of Debenture. This Debenture is one of a duly authorized issue of Debentures of the Company designated as its 7 1/2% Convertible Subordinated Debentures due April 15, 2010 (herein called the "Debentures"), limited in aggregate principal amount to $40,000,000, issued and to be issued under an Indenture, dated as of April 15, 1985 (herein called the "Indenture"), between the Company and Security Pacific National Bank (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the Holders of Senior Indebtedness and the Holders of the Debentures and of the terms upon which the Debentures are, and are to be, authenticated and delivered. 24 15 Subject to and upon compliance with the provisions of the Indenture, the Holder of this Debenture is entitled at his option, at any time on or before the close of business on April 15, 2010, or in case this Debenture or a portion hereof is called for redemption, then in respect of this Debenture or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption) not after, the close of business on the fifth day prior to the Redemption Date, to convert this Debenture (or any portion of the principal amount hereof which is $1,000 or an integral multiple thereof), at the principal amount hereof, or of such portion, into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock, $.10 par value ("Common Stock") of the Company at a conversion price equal to $35 aggregate principal amount of Debentures for each share of Common Stock (or at the current adjusted conversion price if an adjustment has been made as provided in the Indenture) by surrender of this Debenture, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency maintained for such purpose in the Borough of Manhattan, The City and State of New York, or the City of Los Angeles, California, accompanied by written notice to the Company that the Holder hereof elects to convert this Debenture, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and, in case such surrender shall be made during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (unless this Debenture or the portion thereof being converted has been called for redemption during such period), also accompanied by payment in New York clearing house funds or Los Angeles clearing house funds, as the case may be, or other funds acceptable to the Company and the Trustee of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Debenture then being converted. Subject to the aforesaid requirement for payment and, in the case of a conversion after the Regular Record Date next preceding any Interest Payment Date and on or before such Interest Payment Date, to the right of the Holder of this Debenture (or any Predecessor Debenture) of record at such Regular Record Date to receive an installment of interest (with certain exceptions provided in the Indenture), no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on the Common Stock issued on conversion. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest the Company shall pay a 25 16 cash adjustment as provided in the Indenture. The conversion price is subject to adjustment as provided in the Indenture. In addition, the Indenture provides that in case of certain consolidations or mergers to which the Company is a party or the sale or transfer of all or substantially all of the assets of the Company, the Indenture shall be amended, without the consent of any Holders of Debentures, so that this Debenture, if then outstanding, will be convertible thereafter, during the period this Debenture shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company into which this Debenture might have been converted immediately prior to such consolidation, merger, sale or transfer. Any Holder of a Debenture who surrenders his Debenture or any portion thereof for conversion prior to the close of business on May 2, 1985 shall receive a due bill representing the right to receive on or after May 3, 1985 the additional number of shares which such Holder would have been entitled to receive if such Debenture or portion thereof were surrendered for conversion on May 3, 1985, computed in accordance with the third paragraph of Section 1301 of the Indenture. The Debentures are not redeemable on or prior to April 15, 1987, unless the last reported sale price for the Common Stock on each of any 20 trading days within the period of 30 consecutive trading days ending within five Business Days of the date on which the notice of such redemption is given, equals or exceeds 140% of the conversion price then in effect as provided in the Indenture. With respect to redemptions in that event on or prior to April 15, 1987, and with respect to redemptions after April 15, 1987, Debentures are subject to redemption upon not less than 30 nor more than 60 days notice by first-class mail, postage prepaid. The redemption may be made in whole, or from time to time in part, at the option of the Company at a redemption price equal to the percentage of the principal amount set forth below if redeemed during the twelve-month period beginning April 15 in each of the years indicated, plus accrued interest to the date fixed for redemption (provided that, if the date fixed for redemption (including through the operation of the Sinking Fund hereinafter provided for) is an Interest Payment Date, the interest payable on such date shall, subject to exceptions provided in the Indenture, be paid to the person in whose name this Debenture, or the Debenture or Debentures in exchange or substitution for which this Debenture shall have been issued, shall have been registered at the close of business on the April 1 or October 1, as the case may be, next 26 17 preceding such Interest Payment Date, whether or not such April 1 or October 1 is a Business Day), all as provided in the Indenture:
Year Percentage Year Percentage 1985 . . . . . . . . 107.50 1991 . . . . . . . . . 103.00 1986 . . . . . . . . 106.75 1992 . . . . . . . . . 102.25 1987 . . . . . . . . 106.00 1993 . . . . . . . . . 101.50 1988 . . . . . . . . 105.25 1994 . . . . . . . . . 100.75 1989 . . . . . . . . 104.50 1995 or thereafter . . 100.00 1990 . . . . . . . . 103.75
Notice to the holders of Debentures to be redeemed shall be given by mailing to such holders a notice of such redemption at their last addresses as they shall appear on the books maintained for the registration of the Debentures, all as provided in the Indenture. Any notice which is mailed in the manner provided in the Indenture shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail, or any defect in such notice, to the holder of any Debenture designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture. The sinking fund provides for the redemption on April 15 in each year beginning with the year 1996 to and including the year 2009 of $2,000,000 aggregate principal amount of the Debentures. Debentures acquired by the Company or redeemed otherwise than through the sinking fund or converted may be credited against subsequent sinking fund requirements. In the event of redemption or conversion of this Debenture in part only, a new Debenture or Debentures for the unredeemed or unconverted portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The indebtedness evidenced by the Debentures is, to the extent and in the manner provided in the Indenture, expressly subordinate and subject in right of payment to the prior payment in full of any Senior Indebtedness of the Company or provision for such payment, whether outstanding at the date of the indenture or thereafter incurred, and each Holder of this Debenture, by his acceptance hereof, agrees to and shall be bound by such 27 18 provisions of the Indenture and authorizes and directs the Trustee in his behalf to take such action as may be necessary or appropriate to effectuate such subordination and appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Debentures may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Debentures under the Indenture at any time by the Company and the Trustee with the consent of the Holders of 66 2/3% in aggregate principal amount of the Debentures at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Debentures at the time Outstanding, on behalf of the Holders of all the Debentures, to waive certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Debenture shall be conclusive and binding upon such Holder and upon all future Holders of this Debenture and of any Debenture issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Debenture. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Debenture at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Debenture at the rate and upon the terms provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Debenture is registrable in the Debenture Register upon surrender of this Debenture for registration of transfer at the office or agency of the Company maintained for that purpose in the Borough of Manhattan. The City and State of New York or the City of Los Angeles, California duty endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Debenture Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or move new Debentures, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. 28 19 The Debentures are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof, As provided in the Indenture and subject to certain limitations therein set forth, Debentures are exchangeable for a like aggregate principal amount of Debentures of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Debenture for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Debenture is registered as the owner hereof for all purposes, whether or not this Debenture be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 204. Form of Trustee's Certificate of Authentication. This is one of the Debentures referred to in the within mentioned Indenture. SECURITY PACIFIC NATIONAL BANK, as Trustee By ------------------------------------ Authorized Officer SECTION 205. Form of Notice of Election to Convert. TO THE FEDERATED GROUP, INC.: The undersigned owner of this Debenture hereby: (i) irrevocably exercises the option to convert this Debenture, or the portion hereof below designated (which shall be $1,000 or an integral multiple thereof) into 29 20 shares of Common Stock of the Company, in accordance with the terms of the Indenture referred to in this Debenture, and (ii) directs that the shares and any due bills issuable and deliverable upon conversion, together with any check in payment for fractional shares and any Debenture(s) representing any unconverted principal amount hereof, be issued in the name of and delivered to the undersigned, unless a different name has been indicated below. If shares or other securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Debenture. Dated: ------------------------------- ---------------------------------------- Signature Fill in for registration of shares of Common Stock and Debentures if to be issued otherwise than to and in the name of the registered holder. - --------------------------------------- (Name) - --------------------------------------- ----------------------------------- (Address) Social Security or Other Taxpayer Identifying Number - --------------------------------------- Please print name and address (including zip code) Principal Amount to be Converted: $ ------------------- 30 21 ARTICLE THREE THE DEBENTURES SECTION 301. Title and Terms. The aggregate principal amount of Debentures which may be authenticated and delivered under this Indenture is limited to $40,000,000, except for Debentures authenticated and delivered upon registration of transfer of or in exchange for, or in lieu of, other Debentures pursuant to Section 304, 305, 306, 906, 1108 or 1302. The Debentures shall be known and designated as the "7 1/2% Convertible Subordinated Debentures due April 15, 2010," of the Company. Their Stated Maturity shall be April 15, 2010, and they shall bear interest at the rate of 7 1/2% per annum, from April 15, 1985 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable semi-annually on April 15 and October 15, commencing October 15, 1985, until the principal thereof is paid or made available for payment. The principal of, and premium (if any) on the Debentures shall be payable at the office or agency of the Company maintained for such purpose in the Borough of Manhattan, The City and State of New York or the City of Los Angeles, California and at any other office or agency maintained by the Company for such purpose. Payment of interest on the Debentures will be made by the Trustee in Los Angeles, California by check or draft mailed to the address of the Person entitled thereto as such address shall appear in the Debenture Register. The Debentures shall be redeemable as provided in Article Eleven. The Debentures shall be entitled to the benefits, and be redeemable through operation, of the sinking fund as provided in Article Twelve. The Debentures shall be convertible into shares of Common Stock as provided in Article Thirteen. The Debentures shall be subordinated in right of payment to Senior Indebtedness as provided in Article Fourteen. SECTION 302. Denominations. The Debentures shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. 31 22 SECTION 303. Execution, Authentication, Delivery and Dating. The Debentures shall be executed on behalf of the Company by one or more of its Chairman of the Board, its President or its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Debentures may be manual or facsimile. Debentures bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Debentures or did not hold such offices at the dates of such Debentures. At any time and from time to time after the execution and delivery of this Indenture. the Company may deliver Debentures executed by the Company to the Trustee for authentication. Each Debenture shall be dated the date of its authentication. No Debenture shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Debenture a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature of one of its authorized officers and such certificate upon any Debenture shall be conclusive evidence, and the only evidence, that such Debenture has been duly authenticated and delivered hereunder. SECTION 304. Temporary Debentures. Pending the preparation of definitive Debentures, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Debentures which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Debentures in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Debentures may determine, as evidenced by their execution of such Debentures. If temporary Debentures are issued, the Company will cause definitive Debentures to be prepared without unreasonable delay. After the prepara- 32 23 tion, of definitive Debentures, the temporary Debentures shall be exchangeable for definitive Debentures upon surrender of the temporary Debentures at any office or agency of the Company designated pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Debentures, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Debentures of authorized denominations. Until so exchanged the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures. SECTION 305. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at one of its offices or agencies designated pursuant to Section 1002 (initially such office shall be the Corporate Trust Office) a register (the register maintained in such office or agency being herein sometimes collectively referred to as the "Debenture Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Debentures and of transfers of Debentures. Said office or agency is hereby initially appointed "Debenture Registrar" For the purpose of registering Debentures and transfers of Debentures as herein provided. Upon surrender for registration of transfer of any Debenture at an office or agency of the Company designated pursuant to Section 1002 for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees. one or more now Debentures of any authorized denominations, of a like aggregate principal amount. At the option of the Holder, Debentures may be exchanged for other Debentures of any authorized denominations, of a like aggregate principal amount, upon surrender of the Debentures to be exchanged at such office or agency. Whenever any Debentures are so surrendered For exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Debentures which the Holder making the exchange is entitled to receive. All Debentures issued upon any registration of transfer or exchange of Debentures shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Debentures surrendered upon such registration of transfer or exchange. 33 24 Every Debenture presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Debenture Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental, charge that may be imposed in connection with any registration of transfer or exchange of Debentures, other than exchanges pursuant to Section 304, 906, 1108 or 1302 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Debenture during a period beginning at the opening of business IS days before the day of the mailing of a notice of redemption of Debentures selected for redemption under Section 1104 and ending at the dose of business on the day of such mailing, or (ii) to register the transfer of or exchange any Debenture so selected for redemption in whole or in part, except the unredeemed portion of any Debenture being redeemed in part. SECTION 306. Mutilated, Destroyed, Lost and Stolen Debentures. If any mutilated Debenture is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Debenture of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Debenture and (d) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee chat such Debenture has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Debenture, a new Debenture of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Debenture has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Debenture, pay such Debenture. 34 25 Upon the issuance of any new Debenture under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Debenture issued pursuant to this Section in lieu of any destroyed, lost or stolen Debenture shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures. SECTION 307. Payment of Interest, Interest Rights Preserved. Interest on any Debenture which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Debenture (or one or more Predecessor Debentures) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Debenture which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest) shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Debentures (or their respective Predecessor Debentures) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Debenture and the method of calculation 35 26 thereof and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Debenture Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Debentures (or their respective Predecessor Debentures) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Debenture. In the case of any Debenture which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date 36 27 (other than any Debenture whose Maturity is prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Debenture (or one or more Predecessor Debentures) is registered at the close of business on such Regular Record Date. SECTION 308. Persons Deemed Owners. Prior to due presentment of a Debenture for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Debenture is registered as the owner of such Debenture for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 307) interest on such Debenture, for the purpose of the conversion thereof and for all other purposes whatsoever, whether or not such Debenture be overdue, and neither the Company, the Trustee, nor any agent Of the Company, or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. All Debentures surrendered for payment, redemption, exchange, registration of transfer or conversion or for credit against any sinking fund payment pursuant to Section 1202 shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Debentures previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Debentures so delivered shall be promptly cancelled by the Trustee. No Debentures shall be authenticated in lieu of or in exchange for any Debentures cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Debentures held by the Trustee shall be destroyed and certification of their destruction delivered to [he Company unless by a Company Order the Company shall direct that canceled Debentures be returned to it. 37 28 SECTION 310. Computation of Interest. Interest on the Debentures shall be computed on the basis of a 360-day year consisting of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to any surviving rights of conversion of Debentures herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Debentures theretofore authenticated and delivered (other than (i) Debentures which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Debentures for whose payment money has theretofore been deposited in Trust or segregated and held in trust by the Company and thereafter repaid to the Company or Discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation or (B) all such Debentures not theretofore delivered to the Trustee for cancellation. (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, 38 29 and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds (which shall be immediately due and payable) in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Debentures not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Debentures which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607 and the obligations of the Trustee to any Authenticating Agent under Section 614 shall survive. SECTION 402. Application of Trust Money. All money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Debentures and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. All moneys deposited with the Trustee pursuant to Section 401 (and held by it or any Paying Agent) for the payment of Debentures subsequently converted shall be returned to the Company upon Company Request. 39 30 ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the Following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Fourteen or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Debenture when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Debenture at its Maturity; or (3) default in the deposit of any sinking fund payment, when and as due by the terms of Article Twelve; or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Debentures a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder, or (5) one or more defaults under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness 40 31 for money borrowed by the Company, whether such indebtedness now exists or shall hereafter be created, which default or defaults shall have resulted in indebtedness, aggregating $1,000,000 or more, becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such acceleration having been rescinded or annulled, or such indebtedness having been discharged, within a period of 10 days after there shall have been given, by registered or certified mail to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Debentures a written notice specifying such default and requiring the Company to cause such acceleration to be rescinded or annulled or cause such indebtedness to be discharged and stating that such notice is a "Notice of Default" hereunder, provided, however, that, subject to the provisions of Sections 601 and 602, the Trustee shall not be deemed to have knowledge of such default unless either (A) a Responsible Officer of the Trustee assigned to its Corporate Trust Department shall have actual knowledge of such default or (B) the Trustee shall have received written notice thereof from the Company, from any Holder, from the holder of any such indebtedness or from the trustee under any such mortgage, indenture or other instruments; or (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or (7) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or 41 32 proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Debentures may declare the principal of all the Debentures to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal, plus interest, if any, accrued on such Debentures to the date of such declaration, shall become immediately due and payable. Upon payment (i) of (A) such aggregate principal amount and (B) interest and (ii) of interest on any overdue principal and overdue interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company's obligations in respect of the payment of the principal of (and premium, if any) and interest on the Debentures shall terminate. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Debentures, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay 42 33 (A) all overdue installments of interest on all Debentures. (B) the principal of (and premium, if any, on) any Debentures which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Debentures, (C) to the extent that payment of such interest is lawful, interest upon overdue installments of interest at the rate borne by the Debentures, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of the principal of Debentures which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any installment of interest on any Debenture when such interest becomes due and payable and such default continues for a period of 30 days, (2) default is made in the payment of the principal of (or premium, if any, on) any Debenture at the Maturity thereof, or (3) default is made in the deposit of any sinking fund payment when and as due by the terms of Article Twelve, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Debentures, the whole amount then due and payable on such Debentures for principal (and premium, if any) and interest, with interest upon the overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon overdue 43 34 installments of interest, at the rate borne by the Debentures; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Debentures and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Debentures, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Debentures or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise. (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Debentures and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, 44 35 disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Debentures. All rights of action and claims under this Indenture or the Debentures may be prosecuted and enforced by the Trustee without the possession of any of the Debentures or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Debentures in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Debentures and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: 45 36 FIRST: To the payment of all amounts due the Trustee under Sections 607; SECOND: Subject to Article 14, to the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Debentures in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Debentures for principal (and premium, if any) and interest, respectively; and THIRD: Subject to Article 14, the remainder, if any, to the Company, its successors or assigns, or to whomsoever may be lawfully entitled to receive such remainder or as a court of competent jurisdiction shall direct. SECTION 507. Limitation on Suits. No Holder of any Debenture shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default: (2) the Holders of not less than 25% in principal amount of the Outstanding Debentures shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer, of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Debentures; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any 46 37 provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Debenture shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) interest on such Debenture on the respective Stated Maturities expressed in such Debenture (or, in the case of redemption, on the Redemption Date) and to convert such Debenture in accordance with Article Thirteen and to institute suit for the enforcement of any such payment and right to exchange, and such rights shall nor be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 47 38 SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Debenture to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of a majority in principal amount of the Outstanding Debentures shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) the Trustee shall have the right to decline to follow such direction if the Trustee in good faith shall determine that such would be prejudicial to the Holders not joining in such direction or would involve the Trustee in personal liability. SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Debentures may on behalf of the Holders of all the Debentures waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest on any Debenture, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Debenture affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every 48 39 purpose of this Indenture, but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Debenture by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Debentures, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debenture on or after the respective Stated Maturities expressed in such Debenture (or, in, the case of redemption, on or after the Redemption Date) or for the enforcement of the right to convert any Debenture in accordance with Article Thirteen. SECTION 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter la force, which may affect the covenants or the performance of this Indenture, and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. 49 40 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) The Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture: but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve The Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section, (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the 50 41 Outstanding Debentures relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting, the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602. Notice of Defaults. Within 90 days after the occurrence of any default hereunder, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Debenture Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Debenture or in the payment of any sinking fund installment, the Trustee shall be protected in withholding such notice if and so long, as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders; and provided, further, that in the case of any default of the character specified in Section 501(4), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. SECTION 603. Certain Rights of Trustee. Except as otherwise provided in Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, 51 42 instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note or other paper or document but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct 52 43 or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 604. Not Responsible for Recitals or Issuance of Debentures. The recitals contained herein and in the Debentures, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee shall not be accountable for the use or application by the Company of Debentures or the proceeds thereof. SECTION 605. May Hold Debentures. The Trustee, any Authenticating Agent, any Paying Agent, any Debenture Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Debentures and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Debenture Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any 53 44 provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section shall not be subordinated to the payment of Senior Indebtedness pursuant to Article 14. As security for the performance of those obligations the Trustee shall have a lien prior to the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Debentures. SECTION 608. Disqualification; Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign in the manner and with the effect hereinafter specified in this Article. (b) In the event that the Trustee shall fail to comply with the provisions of Subsection (a) of this Section, the Trustee shall, within 10 days after the expiration of such 90-day period, transmit by mail to all Holders, as their names and addresses appear in the Debenture Register, notice of such failure. (c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest if (1) the Trustee is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Debentures issued under this Indenture, provided that there shall be excluded from the operation of this paragraph any indenture or 54 45 indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if (i) this Indenture and such other indenture or indentures are wholly unsecured and such other indenture or indentures are hereafter qualified under the Trust Indenture Act, unless the Commission shall have found and declared by order pursuant to Section 305(b) or Section 307(c) of the Trust Indenture Act that differences exist between the provisions of this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture and such other indenture or indentures, or (ii) the Company shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture and such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under one of such indentures: (2) the Trustee or any of its directors or executive officers is an obligor upon the Debentures or an underwriter for the Company; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Company or an underwriter for the Company; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee or representative of the Company, or of an underwriter (other than the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (i) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Company but may not be at the same time an executive officer of both the Trustee and the Company; (ii) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Company; and (iii) the Trustee may be 55 46 designated by the Company or by any underwriter for the Company to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this Subsection, to act as trustee, whether under an indenture or otherwise; (5) 10% or more of the voting securities of the Trustee is beneficially owned either by the Company or by any director, partner or executive officer thereof, or 20% or more of such voting securities is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (6) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), (i) 5% or more of the voting securities, or 10% or more of any other class of security, of the Company not including the Debentures issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (ii) 10% or more of any class of security of an underwriter for the Company; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Company; or (9) the Trustee owns, on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of 56 47 security, of any person, the beneficial, ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7) or (8) of this Subsection. As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Company fails to make payment in full of the principal of (or premium, if any) or interest on any of the Debentures when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this Subsection. The specification of percentages in paragraphs (5) to (9), inclusive, of this Subsection shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this Subsection. For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection only, (i) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be "in default" when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (A) any security 57 48 which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (B) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (C) any security which it holds as agent for collection, or as custodian, escrow agent or depositary, or in any similar representative capacity. (d) For the purposes of this Section: (1) The term "underwriter", when used with reference to the Company, means every person who, within three years prior to the time as of which the determination is made, has purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" means any director of a corporation or any individual performing similar functions with respect to any organization, whether incorporated or unincorporated. (3) The term "person" means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" means any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person. (5) The term "Company" means any obligor upon the Debentures. 58 49 (6) The term "executive officer" means the president, every vice president, every trust officer, the cashier, the secretary and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (1) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (2) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (3) The term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares and the number of units i relating to any other kind of security. (4) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: (i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; (iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and 59 50 (iv) securities held in escrow if placed in escrow by the issuer thereof; provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (5) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $25,000,000 and subject to supervision or examination by Federal, State or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 611. 60 51 (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Debentures, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 608(a) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Debenture for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation. then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Debenture for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Debentures delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appoint- 61 52 ment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Debenture for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail postage prepaid, to all Holders as their names and addresses appear in the Debenture Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject nevertheless to its lien, if any, provided for in Section 607. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. 62 53 SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Debentures shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Debentures so authenticated with the same effect as if such successor Trustee had itself authenticated such Debentures. SECTION 613. Preferential Collection of Claims Against Company. (a) Subject to Subsection (b) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company within four months prior to a default, as defined in Subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Debentures and the holders of other indenture securities, as defined in Subsection (c) of this Section: (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such four months' period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this Subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and (2) all property received by the Trustee in respect of any claims as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months' 63 54 period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any Person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third Person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in Subsection (c) of this Section, would occur within four months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. 64 55 If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned among the Trustee, the Holders and the holders of other indenture securities in such manner that the Trustee, the Holders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee and the Holders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceedings for reorganization is pending shall have jurisdiction (i) to apportion among the Trustee, the Holders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee and the Holders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. 65 56 Any Trustee which has resigned or been removed after the beginning of such four months' period shall be subject to the provisions of this Subsection as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months' period, it shall be subject to the provisions of this Subsection if and only if the following conditions exist: (i) the receipt of property or reduction of claim, which would have given rise to the obligation to account, if such Trustee had continued as Trustee, occurred after the beginning of such four months' period: and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of Subsection (a) of this Section a creditor relationship arising from: (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee, (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Holders at the time and in the manner provided in this Indenture; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented, or an indebtedness created as a result of goods or securities sold in a cash transaction, as defined in Subsection (c) of this Section; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve 66 57 Act, as amended which is directly or indirectly a creditor of the Company; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper, as defined in Subsection (c) of this Section. (c) For the purposes of this Section only: (1) the term "default" means any failure to make payment in full of the principal of or interest on any of the Debentures or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) the term "other indenture securities" means securities upon which the Company is an obligor outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in such special account; (3) the term "cash transaction" means any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; (4) the term "self-liquidating paper" means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; (5) the term "Company" means any obligor upon the Debentures; and 67 58 (6) the term "Federal Bankruptcy Code" means Title 11 of the United States Code as amended from time to time. SECTION 614. Appointment of Authenticating Agent. At any time when any of the Debentures remain Outstanding the Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Debentures issued upon exchange, except for authentication upon original issue pursuant to Section 303 and in connection with lost, stolen or destroyed Debentures pursuant to Section 306, registration of transfer or partial redemption or exchange thereof. Debentures so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Debentures by the Trustee or the Trustee's certificate of authentication such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $25,000,000 and subject to supervision or examination by Federal, State or District of Columbia authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate 68 59 agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Debenture Register in accordance with Section 106. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Trustee agrees (1) to pay to each Authenticating Agent from time to time reasonable compensation for all services rendered by it hereunder; (2) except as otherwise expressly provided herein, to reimburse the Authenticating Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by the Authenticating Agent in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Authenticating Agent for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. 69 60 Such payments by the Trustee shall be reimbursable expenses, Subject to the provisions of Section 607. If an appointment is made pursuant to this Section, the Debentures may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Debentures described in the within-mentioned Indenture. ------------------------------- As Trustee By ----------------------------- As Authenticating Agent By ----------------------------- Authorized Officer ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided no such list need be furnished if the Trustee shall be the Debenture Registrar. 70 61 SECTION 702. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Debenture Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) If three or more Holders (herein referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Debenture for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders with respect to their rights under this Indenture or under the Debentures and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 702(a), or (ii) inform such applicants as to the approximate number of Holders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 702(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information the Trustee shall, upon the written request of such applicants, mail to each Holder whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 702(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders or would be in violation of applicable law. Such 71 62 written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender, otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Every Holder of Debentures, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 702(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702(b). SECTION 703. Reports by Trustee. (a) Within 60 days after May 15 of each year commencing with the year 1986, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Debenture Register, a brief report dated as of such May 1 with respect to: (1) its eligibility under Section 609 and its qualifications under Section 608, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under said Sections, a written statement to such effect; (2) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Debentures, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the Debentures Outstanding on the date of such report; 72 63 (3) the amount, interest rate and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Debentures) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising any manner described in Section 613(b)(2), (3), (4) or (6); (4) the property and funds, if any, physically in the possession of the Trustee as such on the date of such report; (5) any additional issue of Debentures which the Trustee has not previously reported; and (6) any action taken by the Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Debentures, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 602. (b) The Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Debenture Register, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of execution of this instrument for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Debentures, on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of the Debentures Outstanding at such time, such report to be transmitted within 90 days after such time. (c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Debentures are listed, with the Commission and with the Company. The Company, will notify the Trustee when the Debentures are listed on any stock exchange. 73 64 (d) Notwithstanding paragraphs (a)-(c) of this Section, if subsequent to the date hereof, Section 313 of the Trust Indenture Act is amended to eliminate the requirement of such report, no such report need be mailed or filed. SECTION 704. Reports by Company. The Company shall: (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to all Holders, as their names and addresses appear in the Debenture Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. 74 65 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or, transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Debentures and the performance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 1311; (2) immediately after giving effect to such transaction and creating any indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. Successor Corporation Substituted. Upon any consolidation or merger or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to 75 66 any Person in accordance with Section 801, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, and thereafter, except in the case of a lease to another Person, the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Debentures. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company herein and in the Debentures; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to comply with the requirements of Section 1311; or (4) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided such other provisions shall not adversely affect the interests of the Holders in any material respect. SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than 66 2/3% in principal amount of the Outstanding Debentures, by Act of said Holders delivered to 76 67 the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall without the consent of the Holder of each Outstanding Debenture affected thereby, (1) change the Stated Maturity of the principal of, or any installment of interest on, any Debenture, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Debenture or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or adversely affect the right to convert any Debenture as provided in Article Thirteen or modify the provisions of this Indenture with respect to the subordination of the Debentures in a manner adverse to the Holders, or (2) reduce the percentage in principal amount of the Outstanding Debentures, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section or Section 513, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Debenture affected thereby. It shall not be necessary For any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. 77 68 SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Debentures theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity with Trust indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Debentures to Supplemental Indentures. Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Debentures so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplement indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Debentures. 78 69 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Debentures in accordance with the terms of the Debentures and this Indenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City and State of New York, and the City of Los Angeles, California, an office or agency where Debentures may be presented or surrendered for payment, where Debentures may be surrendered for registration of transfer or exchange for other Debentures, where Debentures may be surrendered for conversion, where due bills issued pursuant to Section 1301 may be presented for exchange for shares of Common Stock and where notices and demands to or upon the Company in respect of the Debentures and this Indenture may be served. The Company hereby initially appoints the Trustee, its office or agency, for each of such purposes. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City and State of New York and the City of Los Angeles, California) where the Debentures may be presented or surrendered for any or all such purposes and may from time to time rescind such designations provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City and State of New York and the City of Los Angeles, California for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. 79 70 SECTION 1003. Money for Debenture Payments to Be Held in Trust. If the Company shall at any time act as its own paying agent, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Debentures, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of (and premium, if any) or interest on any Debentures, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Debentures in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Debentures) in the making of any payment of principal (and premium, if any) or interest; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held 80 71 by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Debenture and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Debenture shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be mailed to Holders at last known address, or to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The Borough of Manhattan, The City of New York, or mailed to each Holder, or both, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and rights (charter and statutory). SECTION 1005. Maintenance of Properties. The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary, in each case which are material to the Company and its Subsidiaries taken as a whole, to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements 81 72 thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1006. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien with respect to the Company and its Subsidiaries taken as a whole; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings or other appropriate action. SECTION 1007. Statement by Officers as to Default. The Company shall notify the Trustee within 5 days after the occurrence thereof of any acceleration which with the giving of notice and the lapse of Lime could become an Event of Default under Section 501(5). The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this indenture, and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. 82 73 ARTICLE ELEVEN REDEMPTION OF DEBENTURES SECTION 1101. Right of Redemption. The Debentures are not redeemable on or prior to April 15, 1987, unless the last reported sale price for the Common Stock on each of any 20 trading days within the period of 30 consecutive trading days ending within five business days of the date on which the notice of such redemption is given to the Trustee equals or exceeds 140% of the conversion price then in effect as provided in Sections 1301 and 1304. With respect to redemptions in that event on or prior to April 15, 1987, and with respect to redemptions after April 15, 1987, the redemption may be made in whole, or from time to time in part, at the option of the Company at the Redemption Price then applicable thereto as specified in the form of Debenture hereinabove recited together with accrued interest to the date fixed for redemption; provided, that if the date fixed for redemption (including through the operation of the Sinking Fund hereinafter provided for) is an Interest Payment Date, the interest payable on such date shall, subject to exceptions provided in this Indenture, be paid to the person in whose name the Debenture shall have been registered at the close of business on the April 1 or October 1, as the case may be, next preceding such Interest Payment Date, whether or not such April or October 1 is a Business Day. SECTION 1102. Applicability of Article. Redemption of Debentures at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Trustee. The election of The Company to redeem any Debentures pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all of the Debentures, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Debentures to be redeemed. 83 74 SECTION 1104. Selection by Trustee of Debentures to Be Redeemed. If less than all the Debentures are to be redeemed, the particular Debentures to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Debentures not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $1,000 or any integral multiple thereof) of the principal amount of Debentures of a denomination larger than $1,000. If any Debenture selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Debenture so selected, the converted portion of such Debenture shall be deemed (so far as may be) to be the portion selected for redemption. Debentures which have been converted during a selection of Debentures to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. The Trustee shall promptly notify the Company and the Debenture Registrar in writing of the Debentures selected for redemption and, in the case of any Debenture selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Debentures shall relate, in the case of any Debenture redeemed or to be redeemed only in part, to the portion of the principal amount of such Debenture which has been or is to be redeemed. SECTION 1105. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Debentures to be redeemed, at his address appearing in the Debenture Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Debentures are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Debentures to be redeemed, 84 75 (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Debenture to be redeemed and that interest thereon will cease to accrue on and after said date, (5) the conversion price, the date on which the right to convert the principal of the Debentures to be redeemed will terminate and the place or places where such Debentures may be surrendered for conversion, (6) the place or places where such Debentures are to be surrendered for payment of the Redemption Price, and (7) that the redemption is for the sinking fund, if such is the case. Notice of redemption of Debentures to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1106. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Debentures which are to be redeemed on that date other than any Debentures called for redemption on that date which have been converted prior to the date of such deposit. If any Debenture called for redemption is so converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Debenture shall (subject to any right of the Holder of such Debenture or any Predecessor Debenture to receive interest as provided in the last paragraph of Section 307) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. SECTION 1107. Debentures Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Debentures so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date 85 76 (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Debentures shall cease to bear interest. Upon surrender of any such Debenture for redemption in accordance with said notice, such Debenture shall be paid by the Company at the Redemption Price, together with accrued interest to the redemption date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Debentures, or one or more Predecessor Debentures, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Debenture called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Debenture. SECTION 1108. Debentures Redeemed in Part. Any Debenture which is to be redeemed only in part shall be surrendered at the office or agency of the Company designated for that purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Debenture, without service charge, a new Debenture or Debentures, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Debentures so surrendered. ARTICLE TWELVE SINKING FUND SECTION 1201. Sinking Fund Payments. As and for a sinking fund for the retirement of the Debentures, the Company will until all Debentures are paid or payment thereof provided for, deposit in accordance with Section 1106, on or prior to April 15 in each 86 77 year, commencing in 1996 and ending in 2009, an amount in cash sufficient to redeem on such April 15 $2,000,000 in aggregate principal amount of Debentures in each case at the Redemption Price specified in the form of Debenture hereinbefore set forth for redemption through operation of the sinking fund. The amount of the sinking fund payment as specified in this Section is herein referred to as a "mandatory sinking fund payment." The cash amount of any mandatory sinking fund payment is subject to reduction as provided in Section 1202 and the Company shall specify the amount of such reduction in the Officers' Certificate delivered pursuant to Section 1203. Each sinking fund payment shall be applied to the redemption of Debentures on such April 15, as herein provided. SECTION 1202. Satisfaction of Sinking Fund Payments with Debentures. The Company (1) may deliver Outstanding Debentures (other than any previously called for redemption) for a mandatory sinking fund payment and (2) may apply as a credit Debentures which have been redeemed at the election of the Company pursuant to Section 1101, or converted or otherwise acquired and not previously credited in each case in satisfaction of all or any part of any mandatory sinking fund payment required to be made pursuant to Section 1201, provided that such Debentures have not been previously so credited. Each such Debenture shall be received and credited for such purpose by the Trustee at the Redemption Price specified in the form of Debenture hereinbefore set forth for redemption through operation of the sinking fund and the amount of such mandatory sinking fund payment shall be reduced accordingly. SECTION 1203. Redemption of Debentures for Sinking Fund. On or before March 1 in each year commencing with the year 1996 and ending in 2009, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment pursuant to Section 1201, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Debentures pursuant to Section 1202 and will also deliver to the Trustee any Debentures to be so delivered. Before March 15 in each such year the Trustee shall select the Debentures to be redeemed upon the next ensuing April 15 in the manner specified in Section 1104 and cause notice of the redemption thereof to be given in the name of and at the 87 78 expense of the Company in the manner provided in Section 1105. Such notice having been duly given, the redemption of such Debentures shall be made upon the terms and in the manner stated in Sections 1107 and 1108. ARTICLE THIRTEEN CONVERSION OF DEBENTURES SECTION 1301. Conversion Privilege and Conversion Price. Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Debenture or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may be converted at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company, at the conversion price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on April 15, 2010. In case a Debenture or portion thereof is called for redemption, such conversion right in respect of the Debenture or portion so called shall expire at the close of business on the fifth day prior to the Redemption Date, unless the Company defaults in making the payment due upon redemption. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $35 per share of Common Stock. The conversion price shall be adjusted in certain instances as provided in paragraphs (1), (2), (3), (4), (7), (8) and (9) of Section 1304. Notwithstanding the foregoing, in addition to the shares of Common Stock issued in connection with the conversion of any Debenture or portion thereof surrendered prior to the close of business on May 2, 1985, the Trustee shall deliver to the holder of such Debenture a due bill evidencing such Holder's right to receive on May 3, 1985 a number of shares of Common Stock equal to the number of additional shares of Common Stock which such Holder would be entitled to receive if such Debenture or portion thereof were converted on May 3, 1985 (without giving effect to any adjustment of the conversion price pursuant to this Article other than the adjustment referred to in paragraph (9) of Section 1304). Any such due bill may be presented at any office or agency of the Company maintained for that purpose pursuant to Section 1002 on or after May 3, 1985 for exchange for the shares of Common Stock covered thereby. SECTION 1302. Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Debenture to be converted shall surrender such Debenture, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose pursuant to Section 1002, accompanied by written notice to the Company at such office or agency that the Holder elects to convert such Debenture or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Such notice shall also state the name or names (with address and social security number or other taxpayer identification number) in which said certificate or certificates 88 79 are to be issued. Debentures surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall (except in the case of Debentures or portions thereof which have been called for redemption on a Redemption Date within such period) be accompanied by payment in New York clearing house funds or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Debentures being surrendered for conversion. Except as provided in the preceding sentence and subject to the fourth paragraph of Section 307, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Debentures surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. Debentures shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Debentures for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Debentures as Holders shall cease, and the person or persons entitled to receive the Common Stock or due bills referred to in Section 1301 issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock or due bills, as the case may be, at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency to or upon the written order of the Holder of the Debenture or Debentures surrendered a certificate or certificates for the number of full shares of Common Stock issuable upon conversion (but excluding any shares issuable in respect of any such due bill), together with payment in lieu of any fraction of a share, as provided in Section 1303. On May 3, 1985, or as promptly thereafter as possible the Company shall issue and shall deliver at such office or agency, to or upon the written order of the holder of the due bills surrendered, a certificate or certificates for the number of full shares of Common Stock issuable upon exchange for such due bill or due bills, together with payment in lieu of any fraction of a share as provided in Section 1303. In the case of any Debenture which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Debenture. SECTION 1303. Fractions of Shares. No fractional shares of Common Stock shall be issued upon conversion of Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of 89 80 the aggregate principal amount of the Debentures (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Debenture or Debentures (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock (as determined by the Board of Directors or in any manner prescribed by the Board of Directors) at the close of business on the day of conversion. SECTION 1304. Adjustment of Conversion Price. (1) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company in Common Stock (other than the dividend referred to in paragraph (9) of this Section 1304), the conversion price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (1) and paragraph (9) of this Section 1304, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) In case the Company shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (6) of this Section) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights or warrants, the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such 90 81 determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in paragraph (2) of this Section, any dividend or distribution paid in cash out of the retained earnings of the Company and any dividend or distribution referred to in paragraph (1) or paragraph (9) of this Section), the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (6) of this Section) of the Common Stock on the 91 82 date fixed for such determination less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution filed with the Trustee) of the portion of the assets or evidences of indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such distribution. (5) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 1311 applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of stockholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraph (4) of this Section), and (b) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (3) of this Section). (6) For the purpose of any computation under paragraphs (2) and (4) of this Section, the current market price per share of Common Stock on any date shall be deemed to be the average of the Closing Prices for the 15 consecutive Business Days selected by the Company commencing not less than 20 nor more than 30 Business Days before the day in question. (7) No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustment which by reason of this paragraph (7) is not required to be made shall be carried forward and taken into account in any subsequent adjustment; and provided, further, that adjustment shall be required and shall be made in accordance with the provisions of this Section (other than this paragraph (7)) not later than 92 83 such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of any Debenture. All calculations under this paragraph (7) shall be made to the nearest cent. (8) The Company may make such reductions in the conversion price, in addition to those required by paragraphs (1), (2), (3) and (4) of this Section, as it considers to be advisable in order than any event created for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (9) As of the opening of business on May 3, 1985, the conversion price will be reduced by multiplying such conversion price by 2/3 to reflect a three-for-two stock split in the form of a fifty percent stock dividend on each share of outstanding Common Stock of the Company payable on May 3, 1985 to all stockholders of record on April 10, 1985. SECTION 1305. Notice of Adjustments of Conversion Price. Whenever the conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 1304 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of Debentures pursuant to Section 1002; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the Company to the Trustee and all Holders at their last addresses as they shall appear in the Debenture Register. SECTION 1306. Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its earned surplus (other than the dividend referred to in paragraph (9) of Section 1304); or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or, combination of its outstanding shares of 93 84 Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Debentures pursuant to Section 1002, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Debenture Register, at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. SECTION 1307. Company to Reserve Common Stock. The Company shall at all times reserve and keep available, free from pre-emptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Debentures, the full number of shares of Common Stock then issuable upon the conversion of all Outstanding Debentures including shares issuable upon presentation of any due bill issued pursuant to Section 1301. SECTION 1308. Taxes on Conversions. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Debentures or in exchange for any due bills pursuant hereto. The Company shall nor however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of 94 85 Common Stock a name other than that of the Holder of the Debenture or Debentures to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 1309. Covenant as to Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of Debentures or in exchange for any due bills will upon issue be fully paid and, nonassessable and, except as provided in Section 1308, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 1310. Cancellation of Converted Debentures. All Debentures delivered for conversion shall be delivered to The Trustee to be cancelled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 309. SECTION 1311. Provisions in Case of Consolidation, Merger or Sale of Assets. (1) In case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any merger of another corporation into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), or in case of any sale or transfer of all or substantially all of the assets of the Company, the corporation formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to The Trustee a supplemental indenture providing that the Holder of each Debenture then outstanding shall have the right thereafter, during the period such Debenture shall be convertible as specified in Section 1301, to convert such Debenture only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company into which such Debenture might have been converted immediately prior to such consolidation, merger, sale or transfer. Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this 95 86 Article. The above provisions of this Section shall similarly apply to successive consolidations, mergers, sales or transfers. (2) The Trustee shall not be under any responsibility to determine the correctness of any provisions contained in any such supplemental indenture relating either to the kind or amount of shares of stock or securities or property receivable by Holders upon the conversion of their Debentures after any such reclassification, change, consolidation, merger, sale or conveyance or to any adjustment to be made with respect thereto. SECTION 1312. Disclaimer by Trustee of Responsibility for Certain Matters. The Trustee shall not at any time be under any duty or responsibility to any Holder of Debentures to determine whether any facts exist which may require any adjustment of the conversion price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee shall not be accountable with respect to the validity, value, kind or amount of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Debenture: and it makes no representation with respect thereto. The Trustee shall not be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property upon the surrender of any Debenture for the purpose of conversion or, subject to Section 601, to comply with any of the covenants of the Company contained in this Article. ARTICLE FOURTEEN SUBORDINATION OF DEBENTURES SECTION 1401. Agreement to Subordinate. The Company covenants and agrees, and each Holder of Debentures, by his acceptance thereof, likewise covenants and agrees, that the indebtedness represented by the Debentures and the payment of the principal of (and premium, if any) and interest on each and all of the Debentures is hereby expressly subordinated and subject in right of payment, to the extent and in the manner hereinafter set forth, to the prior payment in full of all Senior Indebtedness, or provision for such payment. 96 87 For the purposes of this Article the term "Senior Indebtedness" means principal of (and premium, if any) and unpaid interest on (a) indebtedness (secured or unsecured) incurred, assumed or guaranteed by the Company either before, on or after the date of this Indenture and which is for money borrowed, or which is evidenced by notes, debentures, bonds or other similar securities whether or not for money borrowed, and (b) renewals, extensions or refundings of any such indebtedness, unless it is provided by the instrument creating, evidencing, renewing, extending or refunding the same or pursuant to which the same is outstanding, that such indebtedness is not senior in right of payment to the Debentures. SECTION 1402. Payment Prohibited If Senior Indebtedness in Default. No payment on account of principal, premium (if any) or interest on, or sinking fund payments for, the Debentures shall be made, nor shall any property or assets be applied to the purchase or other acquisition or retirement of the Debentures, unless full payment of amounts due for principal, premium (if any), sinking funds, and interest on Senior Indebtedness has been made or duly provided for in money or money's worth, provided, however, that nothing in this Article Fourteen shall prevent the conversion of Debentures or the giving of any notice of redemption of Debentures required pursuant to Section 1203 or the credit of Debentures against any sinking fund payment pursuant to Section 1202. SECTION 1403. Priority of Senior Indebtedness. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or total or partial liquidation, rehabilitation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, rehabilitation, receivership or other proceedings, all principal premium (if any) and interest due upon all Senior Indebtedness shall first be paid in full, or payment thereof provided for in money or money's worth, before the Holders of the indebtedness evidenced by the Debentures or the Trustee on their behalf shall be entitled to receive or retain any assets so paid or distributed in respect thereof (for principal, premium (if any) or interest) or of this Indenture; and upon any such dissolution or winding up or liquidation, rehabilitation or reorganization, any payment or distribution of assets of the Company of any kind or 97 88 character, whether in cash, property or securities, to which the Holders of the Debentures or the Trustee on their behalf would be entitled, except for the provisions of this Article, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holders of the Debentures or by the Trustee on their behalf if received by them or it, direct to the holders of Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of Senior Indebtedness held by such holder) or their representatives, to the extent necessary to pay all Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the Holders of the indebtedness evidenced by the Debentures or to the Trustee on their behalf. SECTION 1404. Subrogation of Holders of Debentures. No payment or distribution of assets of the Company to which the Holders of the Debentures or the Trustee on their behalf would have been entitled except for the provisions of this Article and which shall have been received by the holders of Senior Indebtedness or their representative or representatives, or by the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness may have been issued, shall, as between the Company, its creditors, and the Holders of Debentures, be deemed to be a payment by the Company to holders of the Senior Indebtedness or on account thereof, and, subject to the payment in full of all Senior Indebtedness, or provisions for payment thereof in cash, the Holders of the Debentures shall be subrogated to the rights of the Holders of Senior indebtedness to receive payments or distributions of assets of tile Company applicable to Senior Indebtedness until the principal of (and premium if any) and interest on the Debentures shall be paid in full, and no such payments or distributions to the Holders of the Debentures of cash, property or securities, which otherwise would be payable or distributable to holders of Senior Indebtedness shall, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders of Debentures, be deemed to be a payment by the Company to the Holders of Debentures or on account of the Debentures. 98 89 SECTION 1405. Subordination of Debentures Not Affected by Changes in Provisions of Senior Indebtedness. The subordination of the Debentures in accordance with this Article shall not be affected or released by any amendment, modification, change, consent or waiver with respect to any Senior Indebtedness or any agreement under which any Senior Indebtedness may be issued, or by any extension or indulgence or surrender, substitution, alteration, or discharge of any security. SECTION 1406. Subordination Provisions for Benefit of Holders of Senior Indebtedness. The foregoing provisions are solely for the purpose of defining the relative rights of the holders of Senior Indebtedness on the one hand and the Holders of Debentures on the other hand, and such provisions shall be for the benefit of such Persons and may be enforced directly by them against the Holders of Debentures or the Trustee; provided, however, that the Trustee, shall not be deemed to owe any fiduciary duty to holders of Senior Indebtedness, and shall not be liable to any such Person if it shall mistakenly pay over or distribute to Holders of Debentures or the Company or any other Person moneys or assets to which any such holder of Senior Indebtedness shall be entitled by virtue of this Article or otherwise. SECTION 1407. Rights of Trustee as Holder of Senior Indebtedness. The Trustee shall be entitled to all of the rights set forth in this Article in respect of any Senior Indebtedness which may be at any time held by it to the same extent as any other holder of Senior Indebtedness and nothing in Section 613 or elsewhere in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. SECTION 1408. Obligation of the Company to Holders of Debentures Not Impaired. Nothing contained in this Article or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditors, other than holders of Senior Indebtedness, and the Holders of the Debentures, the obligation of the Company, which is absolute and unconditional to pay to the Holders of the Debentures the principal of (and premium if any) and interest on the Debentures as and when the same shall 99 90 become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Debentures and creditors of the Company, other than holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. SECTION 1409. Reliance Upon Court Order or Decree. Upon any distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Section 601, and the Holders of the Debentures shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding up, liquidation, rehabilitation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other Person making such distribution, delivered to the Trustee or to the Holders of the Debentures, for the purpose of ascertaining the Persons entitled to participate in such distribution, including the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon, and all other facts pertinent thereto or to this Article. SECTION 1410. Subordination Rights Not Impaired by Acts or Omissions of Company or Holders of Senior Indebtedness. No right of any present or future holder of Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such older may have or be otherwise charged with. 100 91 SECTION 1411. Trustee to Effectuate Subordination. Each Holder of the Debentures by his acceptance thereof authorizes and directs the Trustee in his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 1412. Trustee Not Charged With Knowledge of Senior Indebtedness. Subject to the provisions of Section 601, the Trustee shall not be charged with knowledge of the existence of any facts or conditions which would prohibit the making of any payment of moneys to or by the Trustee, unless and until the Trustee shall have received written notice thereof from the Company or from one or more holders of Senior Indebtedness, or from a representative for such holder, nor shall the Trustee be charged with knowledge of the curing of any such default or of the elimination of the fact or condition preventing any such payment unless and until the Trustee shall have received an Officers' Certificate to such effect, provided, that, if prior to the opening of business on the Business Day next prior to the date upon which by the terms hereof any such moneys may become payable for any purpose (including, without limitation, the payment of either the principal (or premium, if any) or interest on any Debenture) the Trustee shall not have received with respect to such moneys the notice provided for in this Section 1412, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such date. SECTION 1413. Events of Default Not Prevented. The provisions of this Article, and reference in the Debentures to the subordination provisions herein contained, shall not be construed as preventing the occurrence of any Event of Default under Section 501. * * * * This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 101 93 [OFFICIAL SEAL] State of California ) ) ss.: County of Los Angeles ) On the 24th day of April, 1985, before me personally came Merrill Lyons, to me known, who, being by me duly sworn, did depose and say that he is a Senior Vice President, Secretary and Chief Financial Officer of The Federated Group Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ DONNA M. SIEFERT ----------------------- Notary Public [OFFICIAL SEAL] State of California ) ) ss.: County of Los Angeles ) On the 25th day of April, 1985, before me personally came Cynthia Dillard, to me known, who, being by me duly sworn, did depose and say that she is Assistant Vice President of Security Pacific National Bank, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ SHARON L. JACOBSON ------------------------- Notary Public 102 92 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. THE FEDERATED GROUP, INC. By /s/ Merrill Lyons -------------------------------- Senior Vice President Finance Attest: SECURITY PACIFIC NATIONAL BANK AS TRUSTEE By /s/ Cynthia Dillard -------------------------------- Assistant Vice President EX-4.5 12 FEDERATED GROUP/SECURITY PACIFIC 1ST SUP INDENTURE 1 EXHIBIT 4.5 The Federated Group, Inc. and Security Pacific National Bank As Trustee -------------------- FIRST SUPPLEMENTAL INDENTURE Dated as of September 24, 1987 -------------------- Supplementing the Indenture, Dated as of April 15, 1985 between The Federated Group, Inc., and Security Pacific National Bank -------------------- 7-1/2% Convertible Subordinated Debentures Due April 15, 2010 2 FIRST SUPPLEMENTAL INDENTURE, dated as of September 24, 1987, between The Federated Group, Inc., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company"), and Security Pacific National Bank, a national banking association existing under the laws of the United States (hereinafter called the "Trustee"), as Trustee under the Indenture hereinafter referred to. WHEREAS, the Company has duly issued its 7-1/2% Convertible Subordinated Debentures Due April 15, 2010 (hereinafter called the "Debentures"), in the aggregate principal amount of $40,000,000 pursuant to an Indenture between the Company and the Trustee dated as of April 15, 1985 (herein called the "Indenture"); and WHEREAS, Atari Corporation, a corporation duly organized and existing under the laws of the State of Nevada (hereinafter called "Atari"), its wholly owned subsidiary, FAC Delaware Corporation, a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called "FAC"), and the Company have entered into an Agreement and Plan of Merger dated as of August 23, 1987 (hereinafter called the "Merger Agreement") pursuant to which, at the effective date of the Merger (as defined in the Merger Agreement), FAC will be merged with and into the Company (hereinafter called the "Merger") which shall be the Surviving Corporation (as so defined in the Agreement) as a wholly-owned subsidiary of Atari and each share of the Company's -2- 3 outstanding Common Stock par value $.10 per share (hereinafter called "Company Common Stock") shall be converted into the right to receive $6.25 in cash; and WHEREAS, Section 1311 of the Indenture provides that in case of any merger of another corporation into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), the Company shall execute with the Trustee a supplemental indenture providing that the holder of each Debenture then outstanding shall have the right to convert such Debenture into the kind and amount of property receivable upon such merger by a holder of the number of shares of Company Common Stock into which such Debenture might have been converted immediately prior to such merger; and WHEREAS, pursuant to Section 1311 of the Indenture, the Company agrees to pay all holders of Debentures duly surrendering Debentures to the Company for conversion after the effective date of the merger (as defined in the Merger Agreement) $6.25 in cash for every share of Company Common Stock for which such Debenture could have been converted into immediately prior to the effective date of the Merger, for all Debentures so surrendered; and WHEREAS, all acts and things prescribed by law and by the Certificate of Incorporation and the By-Laws (each as now in effect) of the Company necessary to make this First Supplemental Indenture a valid instrument legally binding the Company for the -3- 4 purposes herein expressed, in accordance with its terms, have been duly done and performed. NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH THAT THE PARTIES HERETO HAVE AGREED AS FOLLOWS; ARTICLE ONE Amendments To Indenture On the effective date of the Merger, the Indenture shall be amended as follows: Article Thirteen of the Indenture shall be amended to add the following Section 1313: SECTION 1313. Cash In Lieu of Common Stock. Notwithstanding any provision of this Indenture to the contrary, in the event holders of Debentures duly surrender Debentures to the Company for conversion after the effective date of the merger between FAC Delaware Corporation ("FAC") and the Company (as described in that certain Agreement and Plan of Merger between the Company, FAC and Atari Corporation dated August 23, 1987), in lieu of the shares of Common Stock issuable in connection with the conversion of any Debenture or portion thereof described above, such holders shall receive $6.25 in cash for every share of Common Stock which such Debenture could have been converted into immediately prior to the effective date of the merger. -4- 5 ARTICLE TWO Assumption of Covenants The Company, as the Surviving Corporation (as that term is described in the aforementioned merger Agreement), hereby confirms that it remains liable for the due and punctual payment of the principal of (and premium if any) on all the Debentures and the performance of every covenant of the Indenture on the part of the Company to be performed or observed, except as modified hereby. ARTICLE THREE Miscellaneous SECTION 3.01. All of the provisions of the Indenture with respect to the rights, privileges, immunities, powers and duties of the Trustee shall be applicable in respect hereof as fully and with like effect as if set forth herein in full. SECTION 3.02. All recitations or recitals contained in this First Supplemental Indenture are only made by and on behalf of the Company, and the Trustee is in no way responsible therefor. The Trustee makes no representations, as to the validity or sufficiency of this First Supplemental Indenture, except the due and valid execution hereof by the Trustee. -5- 6 SECTION 3.03. This First Supplemental Indenture and each and every provision hereof shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of such State. SECTION 3.04. This First Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, The Federated Group, Inc. has caused this First Supplemental Indenture to be signed and acknowledged by its Chairman of the Board, its President or one of its Vice Presidents, and its corporate seal to be affixed hereunto and the same to be attested by its Secretary or an Assistant Secretary; and Security Pacific National Bank has caused this First Supplemental Indenture to be signed and acknowledged by one of its duly -6- 7 authorized officers, and its corporate seal to be affixed hereunto, and the same to be attested by one of its Assistant Secretaries. Executed as of the day and year first above written. THE FEDERATED GROUP, INC. By /s/ KEITH L. POWELL ---------------------------------- Keith L. Powell, President ATTEST: /s/ MERRILL LYONS - ------------------------------------- Merrill Lyons, Secretary SECURITY PACIFIC NATIONAL BANK By [SIG] ---------------------------------- Title: Assistant Vice President ATTEST: By [SIG] ----------------------------------- Title: -7- 8 OFFICERS' CERTIFICATE The undersigned, Keith L. Powell, President and Chief Operating officer, and Merrill Lyons, Senior Vice President, Treasurer and Secretary of The Federated Group, Inc. (the "Company"), do hereby certify that, in connection with the Indenture, dated as of April 15, 1985, between the Company and Security Pacific National Bank, as Trustee, relating to the Company's 7 1/2% Convertible Subordinated Debentures due April 15, 2010 (the "Indenture"), and the First Supplemental Indenture, dated as of September 24, 1987, between the Company and the Trustee (the "Supplemental Indenture"), supplementing the Indenture, all conditions precedent provided for in the Indenture relating to the execution and delivery of the Supplemental Indenture by the Company have been complied with, and such execution and delivery complies with the requirements and conditions contained in Article Nine of the Indenture. The undersigned further certify that there is not now existing an Event of Default (as that term is defined in the Indenture) under the Indenture. As a basis for rendering this certificate, the undersigned have read the Indenture, including, without limitation, Article Nine therein and the definitions relating to terms contained in such Article Nine, and the Supplemental Indenture, and have examined such other documents and records of the Company as we have deemed necessary to enable us to express an informed opinion as to whether the conditions contained in Article Nine of the Indenture have been complied with in connection with the execution and delivery of the Supplemental Indenture. IN WITNESS WHEREOF, we have hereunto set our hands this 24th day of September 1987. /s/ KEITH L. POWELL ------------------------------------- Keith L. Powell, President and Chief Operating Officer /s/ MERRILL LYONS ------------------------------------- Merrill Lyons, Senior Vice President, Treasurer and Secretary EX-4.6 13 WARRANT TO PURCHASE COMMON STOCK/VENTURE LENDING 1 EXHIBIT 4.6 WARRANT TO PURCHASE SHARES OF COMMON STOCK OF JT STORAGE, INC. (Void after March 2, 2002) This certifies that VENTURE LENDING & LEASING, INC., a Maryland corporation, or assigns (the "Holder"), for value received, is entitled to purchase from JT STORAGE, INC., Delaware corporation (the "Company"), Four Hundred Fifty Thousand (450,000) fully paid and nonassessable shares of the Company's Common Stock ("Common Stock") for cash at a price of One Dollar ($1.00) per share (the "Stock Purchase Price") at any time or from time to time up to and including 5:00 p.m. (Pacific time) on March 2, 2002 (the "Expiration Date"), upon surrender to the company at its principal office at 1289 Anvilwood Avenue, Sunnyvale, California 94089 (or at such other location as the Company may advise Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and upon payment in cash or by check of the aggregate Stock Purchase Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Stock Purchase Price and the number of shares purchasable hereunder are subject to adjustment as provided in Section 4 of this Warrant. This Warrant is subject to the following terms and conditions: 1. Exercise; Issuance of Certificates; Payment for Shares. (a) Unless an election is made pursuant to clause (b) of this Section 1, this Warrant shall be exercisable at the option of the Holder, at any time or from time to time, on or before the Expiration Date for all or any portion of the shares of Common Stock (but not for a fraction of a share) which may be purchased hereunder for the Stock Purchase Price multiplied by the number of shares to be purchased. The Company agrees that the shares of Common Stock purchased under this Warrant shall be and are deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Subject to the provisions of Section 2, certificates for the shares of Common Stock so purchased, together with any other securities or property to which the Holder hereof is entitled upon such exercise, shall be delivered to the Holder hereof by the Company at the Company's expense within a reasonable time after the rights represented by this 2 warrant have been so exercised. Except as provided in clause (b) of this Section 1, in case of a purchase of less than all the shares which may be purchased under this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under the Warrant surrendered upon such purchase to the Holder hereof within a reasonable time. Each stock certificate so delivered shall be in such denominations of Common Stock as may be requested by the Holder hereof and shall be registered in the name of such Holder or such other name as shall be designated by such Holder, subject to the limitations contained in Section 2. (b) The Holder, in lieu of exercising this Warrant by the payment of the Stock Purchase Price pursuant to clause (a) of this Section 1, may elect, at any time on or before the Expiration Date, to receive, through conversion of this Warrant or any portion hereof into that number of shares of Common Stock equal to the quotient of: (i) the difference between (A) the Per Share Price (as hereinafter defined) of the Common Stock, less (B) the Stock Purchase Price then in effect, multiplied by the number of shares of Common Stock the Holder would otherwise have been entitled to purchase hereunder pursuant to clause (a) of this Section 1 (or such lesser number of shares as the Holder may designate in the case of a partial exercise of this Warrant); over (ii) the Per Share Price. (c) For purposes of clause (b) of this Section 1, "Per Share Price" means: (i) if the Company's Common Stock is then listed or admitted to trading on any national securities exchange or traded on any national market system, the average of the closing bid and asked prices of the Company's Common Stock as reported on such exchange or market system for the ten (10) consecutive trading days prior to the date of the Holder's election to convert hereunder; (ii) if this Warrant is being converted in conjunction with a public offering of stock, the price to the public per share pursuant to the offering; or (iii) if no shares of the Company's Common Stock are listed or admitted to trading on any national securities exchange or traded on any national market system, the price per share which the Company would obtain from a willing buyer for shares sold by the Company from authorized but unissued shares as such price shall be agreed upon by the Holder and the Company or, if agreement cannot be reached within ten (10) business days of the Holder's election hereunder, as such price shall be determined by a panel of three (3) appraisers, one (1) to be chosen by the Company, one (1) to be chosen by the Holder and the third to be chosen by the first two (2) appraisers. If the appraisers cannot reach agreement within 30 days of the Holder's election hereunder, then each appraiser shall deliver its appraisal and the appraisal which is neither the highest nor the lowest shall constitute the Per Share Price. In the event either party fails to choose an appraiser 2 3 within 30 days of the Holder's election hereunder, then the appraisal of the sole appraiser shall constitute the Per Share Price. Each party shall bear the cost of the appraiser selected by such party and the cost of the third appraiser shall be borne one-half by each party. In the event either party fails to choose an appraiser, the cost of the sole appraiser shall be borne one-half by each party. 2. Limitation on Transfer. (a) The Warrant and the Common Stock shall not be transferable except upon the conditions specified in this Section 2, which conditions are intended to insure compliance with the provisions of the Securities Act. Each holder of this Warrant or the Common Stock issuable hereunder will cause any proposed transferee of the Warrant or Common Stock to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 2. (b) Each certificate representing this Warrant or the Common Stock shall (unless otherwise permitted by the provisions of this Section 2 or unless such securities have been registered under the Securities Act or sold under Rule 144) be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. (c) The Holder of this Warrant and each person to whom this Warrant is subsequently transferred represents and warrants to the Company (by acceptance of such transfer) that it will not transfer the Warrant (or securities issuable upon exercise hereof unless a registration statement under the Securities Act was in effect with respect to such securities at the time of issuance thereof) except pursuant to (i) an effective registration statement under the Securities Act, (ii) Rule 144 under the Securities Act (or any similar rule under the Securities Act relating to the disposition of securities), or (iii) an opinion of counsel, reasonably satisfactory to counsel for the Company, that an exemption from such registration is available. 3. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly 3 4 issued, fully paid and nonassessable and free from all preemptive rights of any shareholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Common Stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed. The company will not take any action which would result in any adjustment of the Stock Purchase Price (as defined in Section 4 hereof) (i) if the total number of shares of Common Stock issuable after such action upon exercise of all outstanding warrants, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all options and upon the conversion of all convertible securities then outstanding, would exceed the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation. 4. Adjustment of Stock Purchase Price Number of Shares. The Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 4. Upon each adjustment of the Stock Purchase Price, the Holder of this Warrant shall thereafter be entitled to purchase, at the Stock Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Stock Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Stock Purchase Price resulting from such adjustment. 4.1 Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Stock Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Stock Purchase Price in effect immediately prior to such combination shall be proportionately increased. 4.2 Dividends in Preferred Stock, Other Stock, Property, Reclassification. If at any time or from time to time 4 5 the holders of Common Stock (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received or become entitled to receive, without payment therefor, (a) by way of dividend or other distribution, any shares of stock or other securities, whether or not such securities are at any time directly or indirectly convertible into or exchangeable for Common Stock, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing, or (b) any cash paid or payable otherwise than as a cash dividend, or (c) additional stock or other securities or property (including cash) by way of spinoff, split-up, reclassification, combination of shares or similar corporate rearrangement, (other than shares of Common Stock issued as a stock split, adjustments in respect of which shall be covered by the terms of Section 4.1 above), then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefore, the amount of stock and other securities and property (including cash in the cases referred to in clauses (b) and (c) above) which such Holder would hold on the date of such exercise had he been the holder of record of such Common Stock as of the date on which holders of Common Stock received or became entitled to receive such shares and/or all other additional stock and other securities and property. 4.3 Reorganization, Reclassification, Consolidation, Merger or Sale. In the event of an anticipated Acquisition or Dissolution (as such terms are defined below), the Company shall provide the holder of this Warrant with at least thirty (30) days' prior notice of such anticipated event and this Warrant shall be exercisable for such 30-day period ending upon such Acquisition or Dissolution, and shall, upon the expiration of such 30-day period, terminate if not exercised; provided, however, that if such Acquisition or Dissolution does not in fact occur, any purported exercise of this Warrant prior thereto shall be deemed automatically void and this Warrant shall remain in effect, unexercised and otherwise unaffected by the anticipation of such event. For purposes of this Section 4.3, (a) an "Acquisition" means the sale or transfer of all or substantially all of the Company's assets or the acquisition of the Company by another entity, including any merger or consolidation with or into any other corporation and any other transaction or series of related transactions resulting in the exchange of the outstanding 5 6 shares of the Company for securities or consideration issued or caused to be issued by the acquiring entity as a result of which stockholders of the Company immediately prior to the transaction or series of transactions own less than fifty (50%) of the equity securities of the surviving corporation immediately following the merger, consolidation, sale or transfer of assets or other transaction or series of transactions and (b) a "Liquidation" means the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. If any capital reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or other reorganization, other than an Acquisition as defined above, shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock of the Company immediately theretofore Purchasable and receivable upon the exercise of the rights represented hereby) such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby. In any such case, appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Stock Purchase Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be possible, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. 4.4 Notice of Adjustment. Upon any adjustment of the Stock Purchase Price, and/or any increase or decrease in the number of shares purchasable upon the exercise of this Warrant the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company. The notice shall be signed by the Company's chief financial officer and shall state the Stock Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 6 7 4.5 Other Notices. If at any time: (a) the Company shall declare any cash dividend upon any of its stock; (b) the Company shall declare any dividend upon its stock payable in stock, or make any special dividend or other distribution to the holders of its stock; (c) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (d) there shall be any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; (e) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (f) the Company shall take or propose to take any other action, notice of which is actually provided to holders of the Common Stock; then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of such holder as shown on the books of the Company, (i) at least 5 business day's prior written notice of the date on which the books of the Company shall close or a record shall be taken for establishing the right to receive such dividend, distribution or subscription rights and (ii) with respect to any other action, notice of which is given to holders of the Common Stock, such notice as is actually provided to such holders. The foregoing shall not apply with respect to an Acquisition or Dissolution, notice of which shall be given in accordance with Section 4.3 above. Any notice given in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of stock shall be entitled thereto. Any notice given in accordance with the foregoing clause (ii) shall, if applicable, also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon any reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, or other action as the case may be. Notwithstanding the foregoing, with respect to any matter as to which the consent of stockholders is solicited by the Company in lieu of a meeting in accordance with Section 228 of the Delaware Corporation Law, the obligation of the Company to 7 8 provide notice to the holder of this Warrant shall be solely as follows: (a) if the Company solicits the written consent of all stockholders, notice thereof shall be given to the holder of this Warrant at the same time that such written consent is solicited from all stockholders, and (b) if the Company does not solicit such written consent from all stockholders, then notice of the taking of the corporate action without a meeting shall be given to the holder of this Warrant no later than it is given to those stockholders who have not consented in writing. 5. Issue Tax. The issuance of certificates for shares of Preferred Stock upon the exercise of the Warrant shall be made without charge to the Holder of the Warrant for any issue tax in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Holder of the Warrant being exercised. 6. Closing of Books. The Company will at no time close its transfer books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the exercise of any warrant in any manner which interferes with the timely exercise of this Warrant. 7. No voting or Dividend Rights; Limitation of Liability. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent as a shareholder in respect of meetings of shareholders for the election of directors of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Stock Purchase Price or as a shareholder of the Company, whether such liability is asserted by the Company or by its creditors. 8. Registration Rights. The Company hereby grants to the holder hereof a single "demand" registration right equivalent to the demand registration rights of the "Purchasers" who are parties to that certain Registration Rights Agreement dated as of February 3, 1995 among the Company and the purchasers of its Series A Preferred Stock (the "Registration Rights Agreement"), 8 9 as provided in Section 2 thereof, such that the terms and conditions of the Registration Rights Agreement are incorporated herein by reference (for purposes of such single demand registration right) with the Holder of this warrant being deemed the sole "Holder" or "Initiating Holder" (as used in the Registration Rights Agreement) and with the shares of Common Stock issuable upon exercise of this Warrant being deemed to constitute all of the "Registrable Securities" (as used in the Registration Rights Agreement); provided however, that (1) it is the intention of the Company to hereby grant an independent demand registration right to the Holder of this Warrant pursuant to the foregoing references to certain provisions of the Registration Rights Agreement, and the Holder of this Warrant shall not be deemed a party to the Registration Rights Agreement pursuant to this paragraph, (2) there shall be no $5,000,000 minimum requirement or 15% minimum requirement with respect to the amount of securities registered pursuant to such demand registration, and (3) the Company shall not be required to effect more than one such registration at the demand of the holder hereof, nor shall it be required to effect such registration prior to six (6) months after the effective date of the Company's first registered public offering of its stock. In all other respects the terms and conditions of the Registration Rights Agreement applicable to the registration of shares pursuant to Section 2 thereof shall also be applicable to the Holder of this Warrant and the shares of Common Stock issued upon exercise hereof included in any registration pursuant to this paragraph. Notwithstanding the foregoing, the Company shall use its best efforts to cause the Registration Rights Agreement to be amended to permit the Holder of this Warrant to become a party thereto (and thus a "Holder" as defined therein) and to cause the shares of Common Stock issuable upon exercise of this Warrant to be included in the definition of "Registrable Securities" therein for the purpose of providing that the Holder of this Warrant shall have the piggyback registration rights afforded to "Holders" upon Section 3 of the Registration Rights Agreement on a parity with all other "Holders" as defined therein (as opposed to "Other Holders" as defined therein) and, effective upon such amendment of the Registration Rights Agreement, the Company and the Holder of this Warrant agree that the foregoing provisions of this Section 8 shall be deemed automatically terminated and superseded by the Registration Rights Agreement. 9. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Holder of this Warrant and of the holder of shares of Common Stock issued upon exercise of this Warrant, contained in Sections 6, 8 and 9 shall survive the exercise of this Warrant. 10. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated 9 10 only by an instrument in writing signed by the party against which enforcement of the same is sought. 11. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be deemed to have been given (i) upon receipt if delivered personally or by courier, (ii) upon confirmation of receipt if by telecopy, or (iii) three business days after deposit in the U.S. mail, with postage prepaid and certified or registered, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant. 12. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assign of the holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the Holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the Holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Common Stock) to which the holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the Holder hereof in respect of such rights. 13. Descriptive Headings and Governing Law. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 14. Lost Warrants or Stock Certificates. The Company represents and warrants to the Holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant or stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company at its expense will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 10 11 15. Fractional Shares. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then effective Stock Purchase Price. 17. Representations of Holder. With respect to this Warrant, Holder represents and warrants to the Company as follows: 17.1 Experience. It is experienced in evaluating and investing in companies engaged in businesses similar to that of the Company; it understands that investment in the Warrant involves substantial risks; it has made detailed inquiries concerning the Company, its business and services, its officers and its personnel; the officers of the Company have made available to Holder any and all written information it has requested; the officers of the Company have answered to Holder's satisfaction all inquiries made by it; in making this investment it has relied upon information made available to it by the Company; and it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Company and it is able to bear the economic risk of that investment. 17.2 Investment. It is acquiring the Warrant for investment for its own account and not with a view to, or for resale in connection with, any distribution thereof. It understands that the Warrant, the shares of Common Stock issuable upon exercise thereof, have not been registered under the Securities Act of 1933, as amended, nor qualified under applicable state securities Laws. 17.3 Rule 144. It acknowledges that the Warrant and the Common Stock must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. It has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act. 17.4 Access to Data. It has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and has had the opportunity to inspect the company's facilities. 18. Additional Representations and Covenants of the Company. The Company hereby represents, warrants and agrees as follows: 11 12 18.1 Corporate Power. The Company has all requisite corporate power and corporate authority to issue this Warrant and to carry out and perform its obligations hereunder. 18.2 Authorization. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance by the Company of this has been taken. This Warrant is a valid and binding obligation of the Company, enforceable in accordance with its terms. 18.3 Offering. Subject in part to the truth and accuracy of Holder's representations set forth in Section 17 hereof, the offer, issuance and sale of the Warrant is, and the issuance of Common Stock upon exercise of the Warrant will be exempt from the registration requirements of the Securities Act, and are exempt from the qualification requirements of any applicable state securities laws; and neither the Company nor anyone acting on its behalf will take any action hereafter that would cause the loss of such exemptions. 18.4 Stock Issuance. Upon exercise of the Warrant, the Company will use its best efforts to cause stock certificates representing the shares of Common Stock purchased pursuant to the exercise to be issued in the individual names of Holder, its nominees or assignees, as appropriate at the time of such exercise. 18.5 Articles and By-Laws. The Company has provided Holder with true and complete copies of the Company's Articles or Certificate of Incorporation, By-Laws, and each Certificate of Determination or other charter document setting, forth any rights, preferences and privileges of Company's capital stock, each as amended and in effect on the date of issuance of this Warrant. 18.6 Financial and Other Reports. From time to time up to the earlier of the Expiration Date or the complete exercise of this Warrant, the Company shall furnish to Holder (i) within 90 days after the close of each fiscal year of the Company an audited balance sheet and statement of changes in financial position at and as of the end of such fiscal year, together with an audited statement of income for such fiscal year; (ii) within 45 days after the close of each fiscal quarter of the Company, an unaudited balance sheet and statement of cash flows at and as of the end of such quarter, together with an unaudited statement of income for such quarter; and (iii) promptly after sending, copies of all reports, proxy statements,and financial statements that the Company sends to its shareholders. 12 13 IN WITNESS WHEREOF, the company has caused this Warrant to be duly executed by its officers, thereunto duly authorized this 24th of March, 1995. JT STORAGE, INC. By: David B. Pearce -------------------------------- DAVID B. PEARCE President 13 14 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: _____________________ The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _____________________ (__________) (1) shares of Common Stock of __________________________ and herewith makes payment of __________________ Dollars ($___________) therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, ________________________ whose address is ________________________________. The undersigned represents that it is acquiring such Common Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within its control. DATED: _______________________ _________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ----------------------------------------- ----------------------------------------- (Address) - ---------------- (1) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 14 15 ASSIGNMENT FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant, hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth hereinbelow, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated: ______________________ _________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) 15 EX-4.7 14 WARRANT TO PURCHASE STOCK/SILICON VALLEY BANK 1 EXHIBIT 4.7 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: JT Storage, Inc., a Delaware Corporation Number of Shares: 50,000 Class of Stock: Common Initial Exercise Price: $3.00 per share Issue Date: December 18, 1995 Expiration Date: December 18, 2000 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. ARTICLE 1. EXERCISE 1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant Section 1.4. 1.3 INTENTIONALLY OMITTED. 1.4 FAIR MARKET VALUE. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. if the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has 1 2 not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 Repurchase on Sale, Merger, or Consolidation of the Company 1.7.1. "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2. Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.7.3. Nonassumption. If upon the closing of any Acquisition the successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. 1.7.4. Purchase Right. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common 2 3 stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting issuances (as defined on Exhibit A). 2.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Shares. 2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3 4 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the Company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company (or if there are no such requirements [or if the subject loan(s) no longer are outstanding]), then within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B, if attached. ARTICLE 4. MISCELLANEOUS 4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's rights to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4 5 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon the exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c). Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the Securities and Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys' Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 5 6 APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase _______ shares of the Common/Series __________ Preferred [strike one] Stock of ________________ pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to ______________________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below; __________________________ (Name) __________________________ (Address) __________________________ 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. _______________________________ (Signature) ______________________ (Date) ___________________________________________ 7 7 APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE _________________________ (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear: This is to advise you that the Warrant issued to you described below will expire on ______________________, 19___. Issuer: Issue Date: Class of Security Issuable: Exercise Price per Share: Number of Shares Issuable: Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. __________________________ (Name of Issuer) By: ____________________________ Name: __________________________ ______________________________________ Title: _________________________ 8 8 EXHIBIT A Anti-Dilution Provisions In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the Warrant Price, or, if the Shares are common stock, less than the then conversion price of the Company's Series A Preferred Stock, then the number of shares of common stock issuable upon conversion of the Shares, or if the Shares are common stock, the number of Shares issuable upon exercise of the Warrant, shall be adjusted as a result of Diluting Issuances in accordance with the Holder's standard form of Anti-Dilution Agreement in effect on the Issue Date. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. 10 9 EXHIBIT B Registration Rights The Shares (if common stock), or the common stock issuable upon conversion of the Shares, shall be deemed "registrable securities" or otherwise entitled to "piggy back" registration rights in accordance with the terms of the following agreement (the "Agreement") between the Company and its investor(s): Registration Rights Agreement dated 2/3/95 and amended 8/7/95 ------------------------------------------------------------- Identify Agreement by date, title and parties. If no Agreement exists, indicate by "none". The Company agrees that no amendments will be made to the Agreement which would have an adverse impact on Holder's registration rights thereunder without the consent of Holder. By acceptance of the Warrant to which this Exhibit B is attached. Holder shall be deemed to be a party to the Agreement. If no Agreement exists, then the Company and the Holder shall enter into Holder's standard form of Registration Rights Agreement as in effect on the Issue Date of the Warrant. 11 EX-4.8 15 WARRANT TO PURCHSE COMMON STOCK/LUNENBURG S.A. 1 EXHIBIT 4.8 EXHIBIT A THE SECURITIES EVIDENCED BY THIS WARRANT OR ISSUABLE UPON EXERCISE HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED, ASSIGNED OR OTHERWISE ENCUMBERED OR DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Warrant No. 3 April 4, 1996 COMMON STOCK PURCHASE WARRANT THIS CERTIFIES THAT, for value received, Lunenburg S.A., a Panama corporation and permitted assigns, is entitled to purchase from JT Storage, Inc., a Delaware corporation (the "Company"), up to Seven Hundred Fifty Thousand (750,000) shares of the Company's Common Stock, par value $.000001 per share (the "Common Stock"), during the period, and at the price and upon the other terms and conditions, hereinafter set forth. 1. EXERCISABILITY OF WARRANT; PURCHASE PRICE. This Warrant has been issued in connection with the acquisition by the Company of an indirect ownership interest in 90% of the outstanding capital stock of Moduler Electronics (India) Pvt. Ltd., a corporation organized and existing under the laws of India ("Moduler"). This Warrant shall, upon issuance, be exercisable only as to Five Hundred Thousand (500,000) shares of Common Stock. This Warrant shall become exercisable as to an additional Two Hundred Fifty Thousand (250,000) shares of Common Stock only when, and only if such occurs by September 30, 1996, there becomes available to Moduler, on commercially reasonable and customary terms and conditions, borrowing and credit facilities from banks and/or other institutional lenders within India in the aggregate amount of U.S.$29,000,000, which borrowings are available unconditionally to Moduler subject only to formal request by Moduler and customary procedural draw-down conditions, but without further requirements with respect to either the creditworthiness of Moduler or the value or amount of collateral (except such as Moduler is in fact able to provide) available to the lenders (it being acknowledged and agreed that, although the Company shall use commercially reasonable efforts to assist Moduler in implementing such credit facilities, it shall be incumbent upon the holder of this Warrant to take such actions, or provide or cause to be provided to such lenders such assurances, guarantees or collateral, as such lenders may require to implement such credit facilities and thus cause this Warrant to become exercisable as to such additional 250,000 shares). Subject to the immediately preceding sentence (with respect to the contingency applicable to 250,000 shares covered by this Warrant), this Warrant may be 1. 2 exercised until the close of business on April 4, 2001. The exercise price to be paid upon exercise of this Warrant shall be U.S.$0.25 per share of Common Stock. 2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT; TRANSFER AND EXCHANGE. This Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant, properly endorsed, at the principal office of the Company and by (a) the payment to the Company of the then applicable Warrant Price of the Common Stock being purchased ("Warrant Price" shall mean the price specified in the first paragraph of this Warrant and such other prices as shall result from the adjustments specified in Section 5 hereof), and (b) delivery to the Company of a customary investment letter executed by the holder, confirming that the shares of Common Stock being purchased are being acquired for the holder's own account and acknowledging securities law restrictions applicable to such shares, and agreeing that certificates evidencing such shares shall bear a legend accordingly restricting the transfer of such shares. In addition, if this Warrant is exercised concurrent with the closing of an initial public offering ("IPO"), the holder, in lieu of exercising this Warrant by the payment of the Warrant Price pursuant to the preceding sentence of this Section 2, may elect to receive that number of shares of Common Stock equal to the quotient obtained by dividing (A) the difference between (i) the IPO Price (as hereinafter defined) of the Common Stock, less (ii) the Warrant Price then in effect, multiplied by the number of shares of Common Stock the holder would otherwise have been entitled to purchase hereunder (or such lesser number of shares as the holder may designate in the case of a partial exercise of this Warrant), by (B) the IPO Price. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of Common Stock so purchased shall be delivered to the holder hereof within a reasonable time after the rights represented by this Warrant shall have been so exercised, and unless this Warrant has expired, a new Warrant representing the number of shares of Common Stock, if any, with respect to which this Warrant shall not then have been exercised, shall also be issued to the holder hereof within such time. Notwithstanding the foregoing, in the event that escrow instructions are pending pursuant to that certain Escrow Agreement, of even date herewith, between Lunenburg S.A. and the Company (the "Escrow Agreement"), then the shares of Common Stock issued upon exercise of this Warrant shall be delivered to the party specified in the Escrow Agreement in accordance with the terms thereof. For purposes of this Section 2, "IPO Price" means the gross sales price of one share of the Company's Common Stock to the public in the IPO. 3. STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all liens. The Company further covenants and agrees that, at all times during the period within which the rights represented by this Warrant may be exercised, it will reserve for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, at least the maximum number of shares of Common Stock as are issuable at such time upon the exercise of the rights represented by this Warrant. 2. 3 4. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT. (a) RESTRICTIONS ON TRANSFERABILITY. This Warrant and the shares of Common Stock issuable hereunder shall not be transferable except upon the conditions specified in this Section, which conditions are intended to insure compliance with the provisions of the Securities Act of 1933, as amended (the "Securities Act"). Each holder of this Warrant or the Common Stock issuable hereunder will cause any proposed transferee of the Warrant or such Common Stock to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section. (b) RESTRICTIVE LEGEND. Each certificate representing (i) this Warrant, (ii) the shares of Common Stock issued upon exercise of the Warrant and (iii) any other securities issued in respect of such shares of Common Stock upon any stock split, stock dividend or similar event (collectively, the "Restricted Securities"), shall (unless otherwise permitted by the provisions of Section 4(c) below or unless such securities have been registered under the Securities Act) be imprinted with the following legend, in addition to any legend required under applicable state securities laws: THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Upon request of a holder of such a certificate, the Company shall remove the foregoing legend therefrom or issue to such holder a new certificate therefor free of any transfer legend, if, with such request, the Company shall have received either the opinion referred to in Section 4(c)(i) or the "no-action" letter referred to in Section 4(c)(ii) to the effect that any transfer by such holder of the securities evidenced by such certificate will be exempt from the registration and/or qualification requirements of, and that such legend is not required in order to establish compliance with the Securities Act, and if applicable, any state securities laws under which transfer restrictions on such securities had been previously imposed. (c) NOTICE OF PROPOSED TRANSFERS. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 4(c). Prior to any proposed transfer of any Restricted Securities occurring prior to such time as the Company's Common Stock becomes listed on a national securities exchange or quoted in the National Association of Securities Dealers' Automated Quotation System, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and, except for transfers to any trustee appointed in a pending bankruptcy 3. 4 case or any distributing agent or trustee appointed pursuant to a plan of reorganization in any bankruptcy case, shall be accompanied by either (i) an unqualified written legal opinion addressed to the Company from counsel who shall be reasonably satisfactory to the Company, which opinion shall be reasonably satisfactory in form and substance to the Company's legal counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act and any applicable state securities laws, or (ii) a "no-action" letter from the Securities and Exchange Commission (and any necessary state securities administrator) to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the Commission (or such administrators) that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 4(b) above. 5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON STOCK. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: (a) CONSOLIDATION, MERGER, REORGANIZATION, ETC. If the Company at any time while this Warrant remains outstanding and unexpired shall consolidate with or merge into any other corporation, reorganize, or reclassify, or in any manner change the securities then purchasable upon the exercise of this Warrant, then upon consummation thereof this Warrant shall thereafter represent the right of the holder to receive, to the extent this Warrant is exercisable as provided above in Section 1, in lieu of shares of Common Stock, the cash or securities to which such holder would have been entitled upon consummation thereof if such holder had exercised this Warrant immediately prior thereto. The Company agrees that the rights set forth herein shall be preserved in any such merger or consolidation. Upon any such event, an appropriate adjustment shall be made to the Warrant Price, if necessary in the good faith judgment of the Board of Directors of the Company, to preserve the economic benefit intended to be conferred upon the holder of this Warrant hereunder in accordance with its terms. (b) SUBDIVISION OR COMBINATION OF SHARES; DIVIDENDS AND DISTRIBUTION OF COMMON STOCK. If the Company at any time shall subdivide or combine its Common Stock, or take a record of the holders of its Common Stock for the purpose of entitling them to receive without payment a dividend payable in, or other distribution of, Common Stock or other securities, then the number of shares of Common Stock purchasable hereunder shall be adjusted to that number determined by multiplying the number of shares purchasable upon the exercise of this Warrant immediately prior to such adjustment by a fraction (i) the numerator of which shall 4. 5 be the total number of shares of Common Stock outstanding immediately after such subdivision, combination, dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately prior to such subdivision, combination, dividend or distribution. Additionally, the Warrant Price shall be adjusted to that price determined by multiplying the Warrant Price in effect immediately prior to such subdivision, combination, dividend or distribution by a fraction (x) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such subdivision, combination, dividend or distribution, and (y) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such subdivision, combination, dividend or distribution. 6. FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any exercise hereunder but in lieu of such fractional shares, the Company shall make a cash payment therefor upon the basis of the fair market value of the Common Stock. 7. GOVERNING LAW. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 5. 6 IN WITNESS WHEREOF, this Warrant has been executed and issued by the officer or officers thereunto duly authorized as of the day and year first written above. JT STORAGE, INC. By:_____________________________________ David T. Mitchell, President and Chief Executive Officer ACCEPTED AND AGREED TO: LUNENBURG S.A. By:________________________________________ Its:_______________________________________ 6. 7 FORM OF EXERCISE (To be signed only upon exercise of Warrant) To JT Storage, Inc.: The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _____________________ (______) of the number of shares of Common Stock purchasable under this Warrant and herewith makes payment of ____________ _____________ Dollars ($_________) therefor, and requests that a certificate(s) for such shares be issued in the name of, and delivered to, ____ ________________________________, whose address is_____________________________ ______________________________. The undersigned represents that he is acquiring such shares of Common Stock for its own account for investment purposes only and not with a view to or for sale in connection with any distribution thereof. Dated:____________________________ _______________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _______________________________________ _______________________________________ (Address) 7. EX-5.1 16 OPINION OF COOLEY GODWARD ET. AL. 1 EXHIBIT 5.1 [COOLEY GODWARD CASTRO HUDDLESON & TATUM LETTERHEAD] June 20, 1996 JTS Corporation 166 Baypoint Parkway San Jose, CA 95134 Ladies and Gentlemen: You have requested our opinion with respect to certain matters in connection with the filing on June 20, 1996 by JTS Corporation (the "Company") of a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission, with respect to the offer and sale of 63,727,318 shares of the Company's Common Stock, $.001 par value (the "Common Stock") in connection with the merger of Atari Corporation ("Atari") with and into the Company as set forth in the Agreement and Plan of Reorganization, by and among the Company and Atari, dated as of April 8, 1996 (the "Merger Agreement"). In connection with this opinion, we have examined and relied upon the Registration Statement; the Company's Certificate of Incorporation, as amended, and Bylaws, the Merger Agreement and the originals or copies certified to our satisfaction of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the shares of Common Stock, when sold and issued in accordance with the terms of the Registration Statement and Related Prospectus (including the filing by the Company of its Restated Certificate of Incorporation) will be validly issued, fully paid and nonassessable. We consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, COOLEY GODWARD CASTRO HUDDLESON & TATUM By: /s/ Andrei M. Manoliu _____________________ Andrei M. Manoliu EX-8.1 17 FORM OF COOLEY GODWARD TAX OPINION 1 Exhibit 8.1 [Form of Cooley Godward Tax Opinion] June 20, 1996 [WEBB B. MORROW LETTERHEAD] JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 Ladies and Gentlemen: This opinion is being delivered to you in accordance with Section 6.1(f) of the Amended and Restated Agreement and Plan of Reorganization dated April 8, 1996 (the "Reorganization Agreement") by and between JT Storage, Inc., a Delaware corporation ("JTS") and Atari Corporation, a Nevada corporation (the "Company"). Atari will merge into JTS (the "Merger") pursuant to the Reorganization Agreement and related Certificate of Merger to be filed by JTS and Atari with the Secretaries of State of Delaware and Nevada on the Closing Date (collectively, including the exhibits to each, the "Agreements"). Except as otherwise provided, capitalized terms not defined herein have the meanings set forth in the Reorganization Agreement or in certificates dated June 14, 1996 delivered to us by JTS and Atari containing certain representations of JTS and Atari (the "Certificates of Representations"). All section references, unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the "Code"). We have acted as counsel to JTS in connection with the Merger. As such, and for the purpose of rendering this opinion, we have examined originals, certified copies or copies otherwise identified to our satisfaction as being true copies of the original of the following documents (including all exhibits and schedules attached thereto): (a) the Agreements; (b) the Certificates of Representations; (c) Continuity of Interest Certificates executed and delivered by certain shareholders of Atari (the "Continuity of Interest Certificates"); and (d) such other instruments and documents related to the formation, organization and operation of JTS and Atari and related to the consummation of the Merger and the transactions contemplated thereby as we have deemed necessary or appropriate. 2 Page 2 In connection with rendering this opinion, we have assumed (without any independent investigation or review thereof): 1. Original documents (including signatures) are authentic, documents submitted to us as copies conform to the original documents, and there is (or will be prior to the Closing) due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof; 2. The truth and accuracy at all relevant times, of all representations, warranties and statements made or agreed to by JTS and Atari, their managements, employees, officers, directors and shareholders in connection with the Merger, including but not limited to those set forth in the Agreements (including the exhibits) and in the Certificates of Representations and in the Continuity of Interest Certificates; and that all covenants contained in such agreements are performed without waiver or breach of any material provision thereof; 3. There is no plan or intention on the part of Atari's shareholders to engage in a sale, exchange, transfer, distribution, pledge or other disposition (including a distribution by a corporation to its shareholders) or any transaction which would result in a reduction of risk of ownership, or a direct or indirect disposition (a "Sale") of shares of JTS Common Stock to be received in the Merger that would reduce Atari shareholders' ownership of JTS Common Stock to a number of shares having an aggregate fair market value, as of the Effective Time, of less than fifty percent (50%) of the aggregate fair market value of all of the capital stock of Atari outstanding immediately prior to the consummation of the Merger. Shares of Atari capital stock (a) with respect to which dissenters' rights are exercised in the Merger (b) which are exchanged for cash in lieu of fractional shares of JTS Common Stock or (c) which are sold, redeemed or disposed of in a transaction that is in contemplation of or related to the Merger, shall be considered shares of capital stock of Atari which are exchanged in the Merger for shares of JTS Common Stock which are then disposed of pursuant to a plan. Based on our examination of the foregoing items and subject to the limitations, qualifications, assumptions and caveats set forth herein, we are of the opinion that for federal income tax purposes: 1. The merger of Atari into JTS will be a reorganization within the meaning of Section 368(a)(1)(A) of the Code. In addition, we have reviewed the discussion contained in the Prospectus/Proxy Statement included in the Registration Statement on the Form S-4 under "THE MERGER - Certain Federal 3 Page 3 Income Tax Matters (the "Tax Discussion") and we believe that, subject to the qualifications and limitations contained in the Tax Discussion, the matters stated in the Tax Discussion, to the extent they represent matters of law or legal conclusions, are fairly presented. This opinion does not address the various state, local or foreign tax consequences that may result from the Merger. In addition, no opinion is expressed as to any federal income tax consequence of the Merger except as specifically set forth herein and this opinion may not be relied upon except with respect to the consequences specifically discussed herein. No opinion is expressed as to any transaction other than the Merger as described in the Agreements or to any other transaction whatsoever including the Merger if all the transactions described in the Agreements are not consummated in accordance with the terms of the Agreements and without waiver of any material provision thereof. To the extent any of the representations, warranties, statements and assumptions material to our opinion and upon which we have relied are not complete, correct, true and accurate in all material respects at all relevant times, our opinion would be adversely affected and should not be relied upon. This opinion only represents our best judgment as to the federal income tax consequences of the Merger and is not binding on the Internal Revenue Service or the courts. The conclusions are based on the Code, existing judicial decisions, administration regulations and published rulings. No assurance can be given that future legislative, judicial or administrative changes would not adversely affect the accuracy of the conclusions stated herein. Nevertheless, by rendering this opinion, we undertake no responsibility to advise you of any new developments in the application or interpretation of the federal income tax laws. This opinion has been delivered to you solely for the purposes set forth in Section 7.1(f) of the Reorganization Agreement and may not be relied upon or utilized for any other purpose or by any other person or entity, and may not be distributed or otherwise made available to any other person or entity without our prior written consent, except for the filing of this opinion as an Exhibit to the Form S-4 and the references to this firm in the Tax Discussion. Sincerely, COOLEY GODWARD CASTRO HUDDLESON & TATUM - ------------------------- Webb B. Morrow III EX-8.2 18 FORM OF WILSON SONSINI ET. AL TAX OPINION 1 Exhibit 8.2 Atari Corporation June , 1996 Page 1 [Form of Wilson Sonsini Goodrich & Rosati Tax Opinion] June 20, 1996 Atari Corporation 455 South Mathilda Avenue Sunnyvale, California 94086 Ladies and Gentlemen: We have acted as counsel for Atari Corporation, a Nevada corporation ("Atari") in connection with the preparation and execution of the Amended and Restated Agreement and Plan of Merger dated as of April 8, 1996 and related Certificate of Merger (the "Merger Agreement") among JT Storage, Inc., a Delaware corporation ("JTS") and Atari. Pursuant to the Merger Agreement, Atari will merge with and into JTS (the "Merger"). Unless otherwise defined, capitalized terms referred to herein have the meanings set forth in the Merger Agreement. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the "Code"). You have requested our opinion regarding certain United States federal income tax consequences of the Merger. In delivering this opinion, we have reviewed and relied upon the facts, statements, descriptions and representations set forth in the Registration Statement on Form S-4 filed by Atari and JTS with the Securities and Exchange Commission (which contains a joint proxy statement/prospectus) (the "Registration Statement"), the Merger Agreement (including Exhibits) and such other documents pertaining to the Merger as we have deemed necessary or appropriate. We have also relied upon certificates of officers of Atari and JTS respectively (the "Officers' Certificates") as well as continuity of interest certificates executed and delivered by certain shareholders of Atari (the "Continuity of Interest Certificates"). In connection with rendering this opinion, we have also assumed (without any independent investigation) that: Original documents (including signatures) are authentic, documents submitted to 2 us as copies conform to the original documents, and there has been (or will be by the Effective Time) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof; Any statement made in any of the documents referred to herein, "to the best of the knowledge" of any person or party is correct without such qualification; 1 All statements, descriptions and representations contained in any of the documents referred to herein or otherwise made to us are true and correct in all material respects and no actions have been (or will be) taken which are inconsistent with such representations; and 1 The Merger will be reported by Atari and JTS on their respective federal income tax returns in a manner consistent with the opinion set forth below. Based on our examination of the foregoing items and subject to the assumptions, exceptions, limitations and qualifications set forth herein, we are of the opinion that, if the Merger is consummated in accordance with the Merger Agreement (and without any waiver, breach or amendment of any of the provisions thereof) and the statements set forth in the Officers' Certificates and the Continuity of Interest Certificates are true and correct as of the date hereof, on the Effective Date of the Registration Statement and at the Effective Time, then: (a) For federal income tax purposes, the Merger will qualify as a "reorganization" as defined in Section 368(a) of the Code; and (b) The discussion entitled "THE PROPOSED MERGER AND RELATED TRANSACTIONS - Certain Federal Income Tax Considerations" in the Registration Statement insofar as it relates to the statements of law or legal conclusions is correct in all material respects. This opinion represents and is based upon our best judgment regarding the application of federal income tax laws arising under the Code, existing judicial decisions, administrative regulations and published rulings and procedures. Our opinion is not binding upon the Internal Revenue Service or the courts, and there is no assurance that the Internal Revenue Service will not successfully assert a contrary position. Furthermore, no assurance can be given that future legislative, judicial or administrative changes, on either a prospective or retroactive basis, would not adversely affect the accuracy of the conclusions stated herein. Nevertheless, we undertake no responsibility to advise you of any new developments in the application or interpretation of the federal income tax laws. This opinion addresses only the classification of the Merger as a reorganization under Section 368(a) of the Code, and does not address any other federal, state, local or foreign tax consequences that may result from the Merger or any other transaction (including any transaction undertaken in connection with the Merger). Furthermore, this opinion relates only to the holders of JTS stock who hold such stock as a capital asset. No opinion is expressed as to the Federal income tax treatment that may be relevant to a particular investor in light of personal circumstances or to certain types of investors subject to special treatment under the Federal income tax laws (for example, life insurance companies, dealers in securities, taxpayers subject 3 to the alternative minimum tax banks, tax-exempt organizations, non-United States persons, and stockholders who acquired their shares of Atari stock pursuant to the exercise of options or otherwise as compensation). No opinion is expressed as to any transaction other than the Merger as described in the Merger Agreement or to any transaction whatsoever, including the Merger, if all the transactions described in the Merger Agreement are not consummated in accordance with the terms of such Merger Agreement and without waiver or breach of any material provision thereof or if all of the representations, warranties, statements and assumptions upon which we relied are not true and accurate at all relevant times. In the event any one of the statements, representations, warranties or assumptions upon which we have relied to issue this opinion is incorrect, our opinion might be adversely affected and may not be relied upon. This opinion has been delivered to you for the purposes of being included as an exhibit to the Registration Statement and satisfying the requirements of Section 6.1(f) of the Merger Agreement. It may not be relied upon for any other purpose or by any other person or entity, and may not be made available to any other person or entity without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Certain Federal Income Tax Matters" in the Registration Statement. Very truly yours, ---------------------------------------- WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-9.1 19 ATARI CORP. AMENDED & RESTATED VOTING AGREEMENT 1 EXHIBIT 9.1 ATARI CORPORATION AMENDED AND RESTATED VOTING AGREEMENT This AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement") is made and entered into as of April ___, 1996, by and among JT STORAGE, INC., a Delaware corporation ("JTS"), and the undersigned stockholder ("Stockholder") of ATARI CORPORATION, a Nevada corporation ("Atari"). RECITALS A. Whereas JTS and the Stockholder desire to amend that certain Voting Agreement, dated as of February ___, 1996, and related Irrevocable Proxy to Vote Stock of Atari Corporation dated as of February ___, 1996. B. Pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated as of April ___, 1996 (the "Reorganization Agreement") by and among JTS and Atari, Atari is merging with and into JTS (the "Merger"); C. The Reorganization Agreement amends and restates that certain Agreement and Plan of Reorganization dated as of February 12, 1996, by and among JTS, Atari and JT Acquisition Corporation ("Newco"); D. Pursuant to Section ___ of the Reorganization Agreement, in order to induce JTS to enter into the Reorganization Agreement, Atari has agreed to solicit the proxy of certain significant stockholders of Atari on behalf of JTS and to cause certain significant stockholders of Atari to execute and delivery Voting Agreements to JTS; E. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number of shares of the outstanding Common Stock, $0.01 par value per share, of Atari as is indicated on the signature page of this Agreement (the "Shares"); and F. In consideration of the execution of the Reorganization Agreement by JTS, Stockholder agrees not to transfer or otherwise dispose of any of the Shares, or any other shares of capital stock of Atari acquired by Stockholder hereafter and prior to the Expiration Date (as defined in Section 1.1 below), and agrees to vote the Shares and any other such shares of capital stock of Atari so as to facilitate consummation of the Merger. NOW, THEREFORE, the parties agree as follows: 1. AGREEMENT TO RETAIN SHARES. 1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer (except as may be specifically required by court order), sell, exchange, pledge (except in connection with a bona fide loan transaction, provided that any pledgee agrees not to transfer, sell, exchange, pledge or otherwise dispose of or encumber the Shares or any New Shares (as defined in Section 1.2) prior to the Expiration Date and to be subject to the Proxy (as defined in Section 3)) or otherwise dispose of or encumber the Shares or any New Shares, or to make any offer or agreement relating thereto, at any time prior to the Expiration Date. As used herein, the term ("Expiration Date") shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. 1.2 NEW SHARES. Stockholder agrees that any shares of capital stock of Atari that Stockholder purchases or with respect to which Stockholder otherwise acquires beneficial ownership after the date of this 1. 2 Agreement and prior to the Expiration Date ("New Shares") shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Shares. 2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of Atari called with respect to any of the following, and at every adjournment thereof, and on every action or approval by written consent of the stockholders of Atari with respect to any of the following, Stockholder shall vote the Shares and any New Shares in favor of approval of the Reorganization Agreement and the Merger and any matter that could reasonably be expected to facilitate the Merger. This Agreement is intended to bind Stockholder as a stockholder of Atari only with respect to the specific matters set forth herein and shall not prohibit Stockholder from acting in accordance with his or her fiduciary duties, if applicable, as an officer or director of Atari. 3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement, Stockholder agrees to deliver to JTS a proxy in the form attached hereto as Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in Section 78.355 of the Nevada General Corporation Law, covering the total number of Shares and New Shares beneficially owed or as to which beneficial ownership is acquired (as such term is defined in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder hereby represents, warrants and covenants to JTS that Stockholder (i) is the beneficial owner of the Shares, which at the date of this Agreement are and at all times up until the Expiration Date will be free and clear of any liens, claims, options, charges or other encumbrances; (ii) does not beneficially own any shares of capital stock of Atari other than the Shares (excluding shares as to which Stockholder currently disclaims beneficial ownership in accordance with applicable law); and (iii) has full power and authority to make, enter into and carry out the terms of this Agreement and the Proxy. Certain of the Stockholder's Shares are pledged to secure a loan payable to Jack Tramiel. 5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to execute and deliver any additional documents necessary or desirable, in the reasonable opinion of JTS, to carry out the purpose and intent of this Agreement. 6. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers that are reasonably required for the consummation of the Merger under the terms of any agreement to which Stockholder is a party or pursuant to any rights Stockholder may have. 7. TERMINATION. This Agreement and the Proxy delivered in connection herewith shall terminate and shall have no further force or effect as of the Expiration Date. 8. MISCELLANEOUS. 8.1 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by either of the parties without the prior written consent of the other. 8.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified, amended, altered or supplemented except by the execution and delivery of a written agreement executed by the parties hereto. 8.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto acknowledge that JTS will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or 2. 3 agreements of Stockholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to JTS upon any such violation, JTS shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to JTS at law or in equity. 8.5 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to JTS, to: JTS Corporation 166 Baypointe Parkway San Jose, California 95134 Attention: David T. Mitchell Facsimile No.: (408) 468-1619 Telephone No.: (408) 468-1800 With a copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square 3000 El Camino Real Palo Alto, California 94306 Attention: Andrei M. Manoliu, Esq. Facsimile No.: (415) 857-0663 Telephone No.: (415) 843-5000 (b) if to Stockholder, to the address set forth below. 8.6 GOVERNING LAW. This Agreement and the Proxy shall be governed by, construed and enforced in accordance with the internal laws of the State of Nevada. 8.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire understanding of the parties in respect of the subject matter hereof and supersede all prior negotiations and understandings between the parties with respect to such subject matters. 8.8 COUNTERPART. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 8.9 EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. 3. 4 IN WITNESS WHEREOF,the parties have caused this Agreement to be duly executed on the day and year first above written. JT STORAGE, INC. By:_________________________________ Title:______________________________ STOCKHOLDER By:_________________________________ Title:______________________________ Stockholder's Address for Notice: ____________________________________ ____________________________________ Shares beneficially owned: _______ shares of Atari Common Stock 4. 5 EXHIBIT A IRREVOCABLE PROXY TO VOTE STOCK OF ATARI CORPORATION The undersigned stockholder of Atari Corporation, a Nevada corporation ("Atari"), hereby irrevocably (to the full extent permitted by Section 78.355 of the Nevada General Corporation Law) appoints the members of the Board of Directors of JT Storage, Inc., a Delaware corporation ("JTS"), and each of them, as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the full extent that the undersigned is entitled to do so) with respect to all of the shares of capital stock of Atari that now are or hereafter may be beneficially owned by the undersigned, and any and all other shares or securities of Atari issued or issuable in respect thereof on or after the date hereof (collectively, the "Shares") in accordance with the terms of this Proxy. The Shares beneficially owned by the undersigned stockholder of Atari as of the date of this Proxy are listed below. Upon the undersigned's execution of this Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby revoked and the undersigned agrees not to grant any subsequent proxies with respect to the Shares until after the Expiration Date (as defined below). This Proxy is irrevocable (to the extent provided in Section 78.355 of the Nevada General Corporation Law), is granted pursuant to that certain Amended and Restated Voting Agreement dated as of the date hereof, by and among JTS and the undersigned stockholder (the "Voting Agreement") which amends and restates that certain Voting Agreement, dated as of February ___, 1996, by and among JTS and the undersigned stockholder, and is granted in consideration of JTS entering into that certain Amended and Restated Agreement and Plan of Reorganization by and among JTS and Atari (the "Reorganization Agreement") which amends and restates that certain Agreement and Plan of Reorganization by and among JTS, Atari and JTS Acquisition Corporation dated as of February 12, 1996. The Reorganization Agreement provides for the merger of Atari with and into JTS. As used herein, the term "Expiration Date" shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. The attorneys and proxies named above, and each of them are hereby authorized and empowered by the undersigned, at any time prior to the Expiration Date, to act as the undersigned's attorney and proxy to vote the Shares, and to exercise all voting and other rights of the undersigned with respect to the Shares (including, without limitation, the power to execute and deliver written consents pursuant to Section 78.320 of the Nevada General Corporation Law), at every annual, special or adjourned meeting of the stockholders of Atari and in every written consent in lieu of such meeting in favor of approval of the Merger and the Reorganization Agreement and in favor of any matter that could reasonably be expected to facilitate the Merger. The attorneys and proxies named above may not exercise this Proxy on any other matter except as provided above. The undersigned stockholder may vote the Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the undersigned. This Proxy is irrevocable to the extent provided in Section 78.355 of the Nevada General Corporation Law. Dated: April ___, 1996 _______________________________________ (Signature of Stockholder) _______________________________________ Shares beneficially owned: (Print Name of Stockholder) _________ shares of Atari Common Stock 1. EX-9.2 20 JT STORAGE AMENDED & RESTATED VOTING AGREEMENT 1 EXHIBIT 9.2 JT STORAGE, INC. AMENDED AND RESTATED VOTING AGREEMENT This AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement") is made and entered into as of April ___, 1996, by and among ATARI CORPORATION, a Nevada corporation ("Atari"), and the undersigned stockholder ("Stockholder") of JT STORAGE, INC., a Delaware corporation ("JTS"). RECITALS A. Whereas Atari and the Stockholder desire to amend that certain Voting Agreement, dated as of February ___, 1996, and related Irrevocable Proxy to Vote Stock of JT Storage, Inc., dated as of February ___, 1996. B. Pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated as of April ___, 1996 (the "Reorganization Agreement") by and among JTS and Atari, Atari is merging with and into JTS (the "Merger"); C. The Reorganization Agreement amends and restates that certain Agreement and Plan of Reorganization dated as of February 12, 1996, by and among JTS, Atari and JT Acquisition Corporation; D. Pursuant to Section ___ of the Reorganization Agreement, in order to induce Atari to enter into the Reorganization Agreement, JTS has agreed to solicit the proxy of certain significant stockholders of JTS on behalf of Atari and to cause certain significant stockholders of JTS to execute and delivery Voting Agreements to Atari; E. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number of shares of the outstanding Common Stock, $0.000001 par value per share, of JTS as is indicated on the signature page of this Agreement (the "Shares"); and F. In consideration of the execution of the Reorganization Agreement by Atari, Stockholder agrees not to transfer or otherwise dispose of any of the Shares, or any other shares of capital stock of JTS acquired by Stockholder hereafter and prior to the Expiration Date (as defined in Section 1.1 below), and agrees to vote the Shares and any other such shares of capital stock of JTS so as to facilitate consummation of the Merger. NOW, THEREFORE, the parties agree as follows: 1. AGREEMENT TO RETAIN SHARES. 1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer (except as may be specifically required by court order), sell, exchange, pledge (except in connection with a bona fide loan transaction, provided that any pledgee agrees not to transfer, sell, exchange, pledge or otherwise dispose of or encumber the Shares or any New Shares (as defined in Section 1.2) prior to the Expiration Date and to be subject to the Proxy (as defined in Section 3)) or otherwise dispose of or encumber the Shares or any New Shares, or to make any offer or agreement relating thereto, at any time prior to the Expiration Date. As used herein, the term ("Expiration Date") shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. 1.2 NEW SHARES. Stockholder agrees that any shares of capital stock of JTS that Stockholder purchases or with respect to which Stockholder otherwise acquires beneficial ownership after the date of this Agreement and 1. 2 prior to the Expiration Date ("New Shares") shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Shares. 2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of JTS called with respect to any of the following, and at every adjournment thereof, and on every action or approval by written consent of the stockholders of JTS with respect to any of the following, Stockholder shall vote the Shares and any New Shares in favor of approval of the Reorganization Agreement and the Merger and any matter that could reasonably be expected to facilitate the Merger. This Agreement is intended to bind Stockholder as a stockholder of JTS only with respect to the specific matters set forth herein and shall not prohibit Stockholder from acting in accordance with his or her fiduciary duties, if applicable, as an officer or director of Atari. 3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement, Stockholder agrees to deliver to Atari a proxy in the form attached hereto as Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in Section 212 of the Delaware General Corporation Law, covering the total number of Shares and New Shares beneficially owed or as to which beneficial ownership is acquired (as such term is defined in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder hereby represents, warrants and covenants to Atari that Stockholder (i) is the beneficial owner of the Shares, which at the date of this Agreement are and at all times up until the Expiration Date will be free and clear of any liens, claims, options, charges or other encumbrances; (ii) does not beneficially own any shares of capital stock of JTS other than the Shares (excluding shares as to which Stockholder currently disclaims beneficial ownership in accordance with applicable law); and (iii) has full power and authority to make, enter into and carry out the terms of this Agreement and the Proxy. 5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to execute and deliver any additional documents necessary or desirable, in the reasonable opinion of Atari, to carry out the purpose and intent of this Agreement. 6. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers that are reasonably required for the consummation of the Merger under the terms of any agreement to which Stockholder is a party or pursuant to any rights Stockholder may have. 7. TERMINATION. This Agreement and the Proxy delivered in connection herewith shall terminate and shall have no further force or effect as of the Expiration Date. 8. MISCELLANEOUS. 8.1 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by either of the parties without the prior written consent of the other. 8.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified, amended, altered or supplemented except by the execution and delivery of a written agreement executed by the parties hereto. 8.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto acknowledge that Atari will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or 2. 3 agreements of Stockholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to Atari upon any such violation, Atari shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to Atari at law or in equity. 8.5 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Atari, to: Atari Corporation 455 South Mathilda Avenue Sunnyvale, California 94086 Attention: Jack Tramiel Facsimile No.: (408) 328-0909 Telephone No.: (408) 328-0900 With a copy to: Wilson, Sonsini, Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Jeffrey D. Saper, Esq. Facsimile No.: (415) 493-6811 Telephone No.: (415) 493-9300 (b) if to Stockholder, to the address set forth below. 8.6 GOVERNING LAW. This Agreement and the Proxy shall be governed by, construed and enforced in accordance with the internal laws of the State of Delaware. 8.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire understanding of the parties in respect of the subject matter hereof and supersede all prior negotiations and understandings between the parties with respect to such subject matters. 8.8 COUNTERPART. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 8.9 EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. 3. 4 IN WITNESS WHEREOF,the parties have caused this Agreement to be duly executed on the day and year first above written. ATARI CORPORATION By:___________________________________ ________________________________ STOCKHOLDER By:___________________________________ Title:________________________________ Stockholder's Address for Notice: _____________________________________ _____________________________________ Shares beneficially owned: ______________ shares of JTS Common Stock ______________ shares of JTS Series A Preferred Stock 4. 5 EXHIBIT A IRREVOCABLE PROXY TO VOTE STOCK OF JT STORAGE, INC. The undersigned stockholder of JT Storage, Inc. a Delaware corporation ("JTS"), hereby irrevocably (to the full extent permitted by Section 212 of the Delaware General Corporation Law) appoints the members of the Board of Directors of Atari Corporation, a Nevada corporation ("Atari"), and each of them, as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the full extent that the undersigned is entitled to do so) with respect to all of the shares of capital stock of JTS that now are or hereafter may be beneficially owned by the undersigned, and any and all other shares or securities of JTS issued or issuable in respect thereof on or after the date hereof (collectively, the "Shares") in accordance with the terms of this Proxy. The Shares beneficially owned by the undersigned stockholder of JTS as of the date of this Proxy are listed below. Upon the undersigned's execution of this Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby revoked and the undersigned agrees not to grant any subsequent proxies with respect to the Shares until after the Expiration Date (as defined below). This Proxy is irrevocable (to the extent provided in Section 212 of the Delaware General Corporation Law), is granted pursuant to that certain Amended and Restated Voting Agreement dated as of the date hereof, by and among Atari and the undersigned stockholder (the "Voting Agreement") which amends and restates that certain Voting Agreement, dated as of February ___, 1996, by and among Atari and the undersigned stockholder, and is granted in consideration of Atari entering into that certain Amended and Restated Agreement and Plan of Reorganization by and among JTS and Atari (the "Reorganization Agreement") which amends and restates that certain Agreement and Plan of Reorganization by and among JTS, Atari and JTS Acquisition Corporation dated as of February 12, 1996. The Reorganization Agreement provides for the merger of Atari with and into JTS. As used herein, the term "Expiration Date" shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, (ii) the close of business on December 31, 1996 and (iii) the date of termination of the Reorganization Agreement. The attorneys and proxies named above, and each of them are hereby authorized and empowered by the undersigned, at any time prior to the Expiration Date, to act as the undersigned's attorney and proxy to vote the Shares, and to exercise all voting and other rights of the undersigned with respect to the Shares (including, without limitation, the power to execute and deliver written consents pursuant to Section 228 of the Delaware General Corporation Law), at every annual, special or adjourned meeting of the stockholders of JTS and in every written consent in lieu of such meeting in favor of approval of the Merger and the Reorganization Agreement and in favor of any matter that could reasonably be expected to facilitate the Merger. The attorneys and proxies named above may not exercise this Proxy on any other matter except as provided above. The undersigned stockholder may vote the Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the undersigned. This Proxy is irrevocable to the extent provided in Section 212 of the Delaware General Corporation Law. Dated: April ___, 1996 _______________________________________ (Signature of Stockholder) _______________________________________ Shares beneficially owned: (Print Name of Stockholder) _________ shares of JTS Common Stock _________ shares of JTS Series A Preferred Stock 1. EX-10.1 21 JT STORAGE 1995 SOP AMENDED & RESTATED 3/19/96 1 EXHIBIT 10.1 JT STORAGE, INC. 1995 STOCK OPTION PLAN AMENDED AND RESTATED ON MARCH 19, 1996 APPROVED BY STOCKHOLDERS ON ____________, 1996 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to purchase common stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either Incentive Stock Options or Nonstatutory Stock Options. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. 1. 2 (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means JT Storage, Inc., a Delaware corporation. (f) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means that the service of an individual to the Company, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors. (h) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (i) "DIRECTOR" means a member of the Board. (j) "DISINTERESTED PERSON" means a Director who either (i) was not during the one (1)-year period prior to service as an administrator of the Plan granted or awarded equity 2. 3 securities pursuant to the Plan or any other plan of the Company or any affiliate entitling the participants therein to acquire equity securities of the Company or any affiliate except as permitted by Rule 16b-3(c)(2)(i); or (ii) is otherwise considered to be a "disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows: (1) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market of The Nasdaq Stock Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (2) If the common stock is quoted on The Nasdaq Stock Market (but not on the National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to 3. 4 the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (3) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. For Options granted prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, Fair Market Value shall also be determined in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (p) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "OPTION" means a stock option granted pursuant to the Plan. (r) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (s) "OPTIONEE" means a person who holds an outstanding Option. (t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or 4. 5 an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director; or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (u) "PLAN" means this JT Storage, Inc. 1995 Stock Option Plan. (v) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; whether an Option will be an Incentive Stock Option or a Nonstatutory Stock Option; the provisions of each Option granted (which need not be identical), including the time or times such Option may be exercised in whole or in part; and the number of shares for which an Option shall be granted to each such person. (2) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any 5. 6 Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or an Option as provided in Section 11. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee shall be Disinterested Persons and may also be, in the discretion of the Board, Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Additionally, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, and notwithstanding anything to the contrary contained herein, the Board may delegate administration of the Plan to any person or persons and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Options to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Option, or (ii) 6. 7 not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code. (d) Any requirement that an administrator of the Plan be a Disinterested Person shall not apply (i) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (ii) if the Board or the Committee expressly declares that such requirement shall not apply. Any Disinterested Person shall otherwise comply with the requirements of Rule 16b-3. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to Options shall not exceed in the aggregate nine million (9,000,000) shares of the Company's common stock. Such share reserve is comprised of (i) the four million (4,000,000) shares in the aggregate reserved for issuance under the Plan prior to this March 1996 amendment and restatement plus (ii) an additional five million (5,000,000) shares reserved pursuant to this March 1996 amendment and restatement of the Plan. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not purchased under such Option shall revert to and again become available for issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted only to Employees, Directors or Consultants. 7. 8 (b) A Director shall in no event be eligible for the benefits of the Plan unless at the time discretion is exercised in the selection of the Director as a person to whom Options may be granted, or in the determination of the number of shares which may be covered by Options granted to the Director: (i) the Board has delegated its discretionary authority over the Plan to a Committee which consists solely of Disinterested Persons; or (ii) the Plan otherwise complies with the requirements of Rule 16b-3. The Board shall otherwise comply with the requirements of Rule 16b-3. This subsection 5(b) shall not apply (i) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (ii) if the Board or Committee expressly declares that it shall not apply. (c) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. Prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, the provisions of this subsection 5(c) shall also apply to the grant of a Nonstatutory Stock Option made to a ten percent (10%) stockholder as described in the preceding sentence. (d) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options covering more than one million (1,000,000) shares of the Company's common stock in any calendar year. 8. 9 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised; or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment arrangement, except that payment of the common stock's "par value" (as defined in the Delaware General Corporation Law) shall not be made by deferred payment, or other arrangement (which may include, without limiting the generality of 9. 10 the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and the rules thereunder (a "QDRO"), and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person or any transferee pursuant to a QDRO. The person to whom the Option is granted may, by delivering written notice to the Company in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The 10. 11 Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary; provided, however, that Options granted prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act will in each case provide for vesting of at least twenty percent (20%) per year of the total number of shares subject to the Option. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or any person to whom an Option is transferred under subsection 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently-effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may 11. 12 require the Optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities and other laws as a condition of granting an Option to such Optionee or permitting the Optionee to exercise such Option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement, which period shall be no less than thirty (30) days for Options granted prior to the date of the first registration statement of an equity security of the Company under Section 12 of the Exchange Act), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise 12. 13 it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement, which period shall be no less than six (6) months for Options granted prior to the date of the first registration statement of an equity security of the Company under Section 12 of the Exchange Act), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option Agreement after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement, which period shall be no less than six (6) months for Options granted prior to the date of the first registration statement of an equity security of the Company under Section 12 of the Exchange Act for Options granted prior to the date of the first registration statement of an equity security of the Company under Section 12 of the Exchange Act), or (ii) the expiration of the term of such 13. 14 Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (j) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased shall be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. With respect to Options granted prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, the right of the Company under this subsection 6(i) to repurchase at the original purchase price shall lapse at a minimum rate of twenty percent (20%) per year over five (5) years from the date the Option was granted, and (ii) such right shall be exercisable only within (A) the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the Optionee (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding "qualified small business stock")), and (iii) such right shall be exercisable only for cash or cancellation of purchase money indebtedness for the shares. Should the right of repurchase be assigned by the Company, the assignee shall pay the Company cash equal to the difference between the original purchase price and the stock's Fair Market Value if the original purchase price is less than the stock's Fair Market Value. 14. 15 (k) WITHHOLDING. To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the Optionee as a result of the exercise of the Option; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 7. COVENANTS OF THE COMPANY. (a) During the terms of the Options, the Company shall keep available at all times the number of shares of stock required to satisfy such Options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 15. 16 9. MISCELLANEOUS. (a) From and after the first registration of an equity security of the Company under Section 12 of the Exchange Act, the Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Optionee nor any person to whom an Option is transferred under subsection 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. (c) Throughout the term of any Option, the Company shall deliver to the holder of such Option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the Option term, a balance sheet and an income statement. This section shall not apply (i) when issuance is limited to key employees whose duties in connection with the Company assure them access to equivalent information; or (ii) after first registration of an equity security of the Company under Section 12 of the Exchange Act. (d) Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Employee, Director, Consultant or Optionee any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee, with or without cause, to remove any Director as provided in the Company's By-Laws and the provisions of the Delaware General Corporation Law or to terminate the 16. 17 relationship of any Consultant in accordance with the terms of that Consultant's agreement with the Company or Affiliate to which such Consultant is providing services. (e) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (f) (1) The Board or the Committee shall have the authority to effect, at any time and from time to time (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of common stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of an Incentive Stock Option granted to a ten percent (10%) stockholder (as defined in subsection 5(c)), not less than one hundred and ten percent (110%) of the Fair Market Value) per share of common stock on the new grant date. Prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, a new Nonstatutory Stock Option granted to a ten percent (10%) stockholder (as defined in subsection 5(c)) in substitution for the cancellation of an outstanding option pursuant to the provisions of this subsection 9(f) shall have an exercise price per share not less than one hundred and ten percent (110%) of the Fair Market Value per share of common stock on the new grant date. 17. 18 (2) Shares subject to an Option canceled under this subsection 9(f) shall continue to be counted against the maximum number of shares that may be covered by Options granted to a person pursuant to subsection 5(d) of the Plan. The repricing of an Option under this subsection 9(f), resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and the grant of a substitute Option; in the event of such repricing, both the original Option and the substituted Option shall be counted in the applicable year against the maximum specified in subsection 5(d) of the Plan. The provisions of this subsection 9(f) shall be applicable only to the extent required by Section 162(m) of the Code. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection 5(d), and the outstanding Options will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Options. Such adjustments shall be made by the Board or Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) Upon the occurrence of certain corporate events, Options then outstanding under the Plan shall be subject to the following provisions: 18. 19 (i) In the event, after the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, to the extent permitted by applicable law: (i) any surviving corporation shall assume any Options outstanding under the Plan or shall substitute similar Options for those outstanding under the Plan, or (ii) such Options shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue such Options, or to substitute similar options for such Options outstanding under the Plan, then, with respect to Options held by persons then performing services as Employees, Directors or Consultants, the time during which such Options may be exercised shall be accelerated and the Options terminated if not exercised prior to such event. (ii) In the event, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, of: (1) a merger or consolidation in which the Company is not the surviving corporation or (2) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, to the extent permitted by applicable law: (i) any surviving corporation or an Affiliate of such surviving corporation shall assume any Options outstanding under the Plan or shall substitute similar Options for such Options outstanding under the Plan, or (ii) such Options shall continue in full force and effect. 19. 20 In the event any surviving corporation and its Affiliates refuse to assume or continue such Options, or to substitute similar Options for such Options outstanding under the Plan, then such Options shall be terminated if not exercised prior to such event. In the event of a dissolution or liquidation of the Company, any such Options outstanding under the Plan shall terminate if not exercised prior to such event. 11. AMENDMENT OF THE PLAN AND OPTIONS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (1) Increase the number of shares reserved for Options under the Plan; (2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (3) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. 20. 21 (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights and obligations under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the last business day of February, 2006. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Option was granted. 13. EFFECTIVE DATE OF PLAN. The Plan was adopted in March 1995. In March 1996 the Board adopted this amendment and restatement of the Plan (the "1996 Amendment"). The 1996 Amendment became effective upon adoption by the Board, but no Options granted from and after the 1996 Amendment shall 21. 22 be exercised unless and until the 1996 Amendment has been approved by the stockholders of the Company. Such approval shall be within twelve (12) months before or after the date of the 1996 Amendment was adopted by the Board, and, if required, an appropriate permit has been issued by the Commissioner of Corporations of the State of California. 22. 23 IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. INCENTIVE STOCK OPTION _________________________, Optionee: JT Storage, Inc. (the "Company"), pursuant to its 1995 Stock Option Plan (the "Plan"), has granted to you, the optionee named above, an option to purchase shares of the Company's common stock ("Common Stock"). This option is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees (including officers), directors or consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "1933 Act"). Defined terms not explicitly defined in this agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of shares of Common Stock subject to this option is ____________________ (______). 2. VESTING. Subject to the limitations contained herein, ___ of the shares will vest (become exercisable) on ____________, 19__ and the remaining shares will then vest equally over the next _______________ ( ) months thereafter until either (i) you cease to provide services to the Company for any reason, or (ii) this option becomes fully vested. 3. EXERCISE PRICE AND METHOD OF PAYMENT. (a) EXERCISE PRICE. The exercise price of this option is ___________________ ($______) per share, being not less than the Fair Market Value of the Common Stock on the date of grant of this option. (b) METHOD OF PAYMENT. Payment of the exercise price per share is due in full upon exercise of all or any part of each installment which has accrued to you. You may 1. 24 elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash (including check) at the time of exercise; (ii) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; or (iii) Payment by a combination of the methods of payment permitted by subparagraph 3(b)(i) and 3(b)(ii) above. 4. WHOLE SHARES. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the 1933 Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the 1933 Act. 6. TERM. The term of this option commences on _______________, 19__, the date of grant, and expires on ______________________ (the "Expiration Date"), which date shall be no more than ten (10) years from date this option is granted, unless this option expires sooner as set forth below or in the Plan. In no event may this option be exercised on or after the Expiration Date. This option shall terminate prior to the Expiration Date as follows: three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company unless one of the following circumstances exists: (a) Your termination of Continuous Status as an Employee, Director or Consultant is due to your disability. This option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination of Continuous Status as an Employee, Director or Consultant. You should be aware that if your disability is not considered a permanent and total disability within the meaning of Section 422(c)(6) of the Code, and you exercise this option more than three (3) months following the date of your termination of employment, your exercise will be treated for tax purposes as the exercise of a "nonstatutory stock option" instead of an "incentive stock option" under the federal tax laws. (b) Your termination of Continuous Status as an Employee, Director or Consultant is due to your death or your death occurs within three (3) months following your termination of Continuous Status as an Employee, Director or Consultant for any other reason. 2. 25 This option will then expire on the earlier of the Expiration Date set forth above or eighteen (18) months after your death. (c) If during any part of such three (3) month period you paragraph 5 above, then your option will not expire until the earlier of the Expiration Date set forth above or until this option shall have been exercisable for an aggregate period of three (3) months after your termination of Continuous Status as an Employee, Director or Consultant. (d) If your exercise of the option within three (3) months after termination of your Continuous Status as an Employee, Director or Consultant with the Company or with an Affiliate of the Company would result in liability under Section 16(b) of the Securities Exchange Act of 1934, as amended, then your option will expire on the earlier of (i) the Expiration Date set forth above, (ii) the tenth (10th) day after the last date upon which exercise would result in such liability or (iii) six (6) months and ten (10) days after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company. However, this option may be exercised following termination of Continuous Status as an Employee, Director or Consultant only as to that number of shares as to which it was exercisable on the date of termination of Continuous Status as an Employee, Director or Consultant under the provisions of paragraph 2 of this option. In order to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of the option and ending on the day three (3) months before the date of the option's exercise, you must be an employee of the Company or an Affiliate of the Company, except in the event of your death or permanent and total disability. The Company has provided for continued vesting or extended exercisability of your option under certain circumstances for your benefit, but cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you provide services to the Company or an Affiliate of the Company as a consultant or exercise your option more than three (3) months after the date your employment with the Company and all Affiliates of the Company terminates. 7. EXERCISE. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to subsection 6(f) of the Plan. (b) By exercising this option you agree that: 3. 26 (i) as a precondition to the completion of any exercise of this option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise; (ii) you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of this option that occurs within two (2) years after the date of this option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of this option; and (iii) the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the 1933 Act, require that you not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the 1933 Act as may be requested by the Company or the representative of the underwriters. You further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 8. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this option. 9. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company or any Affiliate of the Company, or their respective shareholders, Board of Directors, officers or employees to continue any relationship which you might have as a Director or Consultant for the Company or Affiliate of the Company. 10. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 11. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which 4. 27 may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the ____ day of __________________, 19__. Very truly yours, _______________________________________ By_____________________________________ Duly authorized on behalf of the Board of Directors ATTACHMENTS: JT Storage, Inc. 1995 Stock Option Plan Regulation 260.141.11 Notice of Exercise 5. 28 The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the options previously granted and delivered to the undersigned under stock option plans of the Company, and (ii) the following agreements only: NONE _________________ (Initial) OTHER ___________________________________________________ ___________________________________________________ ___________________________________________________ (c) Acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Code of Regulations. ___________________________________________ OPTIONEE Address: __________________________________ __________________________________ 6. 29 IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. NONSTATUTORY STOCK OPTION _________________________, Optionee: JT Storage, Inc. (the "Company"), pursuant to its 1995 Stock Option Plan (the "Plan"), has granted to you, the optionee named above, an option to purchase shares of the Company's common stock ("Common Stock"). This option is not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees (including officers), directors or consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "1933 Act"). Defined terms not explicitly defined in this agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of shares of Common Stock subject to this option is ____________________ (______). 2. VESTING. Subject to the limitations contained herein, ___ of the shares will vest (become exercisable) on ____________, 19__ and the remaining shares will then vest equally over the next _______________ ( ) months thereafter until either (i) you cease to provide services to the Company for any reason, or (ii) this option becomes fully vested. 3. EXERCISE PRICE AND METHOD OF PAYMENT. (a) EXERCISE PRICE. The exercise price of this option is ___________________ ($______) per share, being not less than 85% of the Fair Market Value of the Common Stock on the date of grant of this option. (b) METHOD OF PAYMENT. Payment of the exercise price per share is due in full upon exercise of all or any part of each installment which has accrued to you. You may 1. 30 elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash (including check) at the time of exercise; (ii) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; or (iii) Payment by a combination of the methods of payment permitted by subparagraph 3(b)(i) and 3(b)(ii) above. 4. WHOLE SHARES. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. 5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the 1933 Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the 1933 Act. 6. TERM. The term of this option commences on ____________, 19__, the date of grant, and expires on _________________ (the "Expiration Date"), which date shall be no more than ten (10) years from date this option is granted, unless this option expires sooner as set forth below or in the Plan. In no event may this option be exercised on or after the Expiration Date. This option shall terminate prior to the Expiration Date as follows: three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company unless one of the following circumstances exists: (a) Your termination of Continuous Status as an Employee, Director or Consultant is due to your disability. This option will then expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination of Continuous Status as an Employee, Director or Consultant. (b) Your termination of Continuous Status as an Employee, Director or Consultant is due to your death or your death occurs within three (3) months following your termination of Continuous Status as an Employee, Director or Consultant for any other reason. This option will then expire on the earlier of the Expiration Date set forth above or eighteen (18) months after your death. (c) If during any part of such three (3) month period you may not exercise your option solely because of the condition set forth in paragraph 5 above, then your option will 2. 31 not expire until the earlier of the Expiration Date set forth above or until this option shall have been exercisable for an aggregate period of three (3) months after your termination of Continuous Status as an Employee, Director or Consultant. (d) If your exercise of the option within three (3) months after termination of your Continuous Status as an Employee, Director or Consultant with the Company or with an Affiliate of the Company would result in liability under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then your option will expire on the earlier of (i) the Expiration Date set forth above, (ii) the tenth (10th) day after the last date upon which exercise would result in such liability or (iii) six (6) months and ten (10) days after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company. However, this option may be exercised following termination of Continuous Status as an Employee, Director or Consultant only as to that number of shares as to which it was exercisable on the date of termination of Continuous Status as an Employee, Director or Consultant under the provisions of paragraph 2 of this option. 7. EXERCISE. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to subsection 6(f) of the Plan. (b) By exercising this option you agree that: (i) as a precondition to the completion of any exercise of this option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise. You also agree that any exercise of this option has not been completed and that the Company is under no obligation to issue any Common Stock to you until such an arrangement is established or the Company's tax withholding obligations are satisfied, as determined by the Company; and (ii) the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the 1933 Act, require that you not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the 1933 Act as may be requested by the Company or the representative of the underwriters. You further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 3. 32 8. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 of the Exchange Act (a "QDRO"), and is exercisable during your life only by you or a transferee pursuant to a QDRO. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this option. 9. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company or any Affiliate of the Company, or their respective shareholders, Board of Directors, officers or employees to continue any relationship which you might have as a Director or Consultant for the Company or Affiliate of the Company. 10. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 11. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the ____ day of __________________, 19__. Very truly yours, _______________________________________ By_____________________________________ Duly authorized on behalf of the Board of Directors ATTACHMENTS: JT Storage, Inc. 1995 Stock Option Plan Regulation 260.141.11 Notice of Exercise 4. 33 The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the options previously granted and delivered to the undersigned under stock option plans of the Company, and (ii) the following agreements only: NONE _________________ (Initial) OTHER ___________________________________________________ ___________________________________________________ ___________________________________________________ (c) Acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Code of Regulations. ______________________________________ OPTIONEE Address: _____________________________ _____________________________ 5. EX-10.2 22 JT STORAGE 1996 NON-EMPLOYEE DIRECTORS SOP 3/19/96 1 EXHIBIT 10.2 JT STORAGE, INC. 1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ADOPTED ON MARCH 19, 1996 APPROVED BY STOCKHOLDERS ON ______________, 1996 1. PURPOSE. (a) The purpose of the 1996 Non-Employee Directors' Stock Option Plan (the "Plan") is to provide a means by which each director of JT Storage, Inc. (the "Company") who is not otherwise at the time of grant an employee of or consultant to the Company or of any Affiliate of the Company (each such person being hereafter referred to as a "Non-Employee Director") will be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in subparagraph 2(b). (b) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated 1. 2 to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan shall not exceed in the aggregate five hundred thousand (500,000) shares of the Company's common stock. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. ELIGIBILITY. Options shall be granted only to Non-Employee Directors of the Company. 5. NON-DISCRETIONARY GRANTS. (a) Each person who, after the date of adoption of the Plan by the Board (the "Adoption Date"), is elected by the Board or the stockholders of the Company for the first time to be a Non-Employee Director (other than (i) a compensated Chairman of the Board) or (ii) any person appointed to the Board in connection with the merger of Atari Corporation ("Atari") and the Company pursuant to the Amended and Restated Agreement and Plan of Reorganization dated April 8, 1996 between the Company and Atari (the "Merger 2. 3 Agreement")) shall automatically be granted, on the date of such initial election, an option to purchase fifty thousand (50,000) shares of common stock of the Company on the terms and conditions set forth herein. (b) Each person who, is either (i) a Non-Employee Director (other than a compensated Chairman of the Board) on the Adoption Date or (ii) first appointed to the Board in connection with the merger of Atari and the Company pursuant to the Merger Agreement, and who is re-elected as a Non-Employee Director at or after the 1998 annual meeting of stockholders shall automatically be granted, on the date of such re-election, an option to purchase fifty thousand (50,000) shares of common stock of the Company on the terms and conditions set forth herein. No more than one grant shall be made under this subparagraph 5(b) to any individual Non-Employee Director. (c) Each person who, after the date of his or her initial election or re-election to the Board as described in subparagraph 5(a) or 5(b), is a Non-Employee Director (other than a compensated Chairman of the Board) on the date any and all previously granted Company options, Company stock purchases or other similar rights to acquire stock of the Company, pursuant to the Plan or otherwise, have become fully vested shall automatically be granted, on the date of such full vesting, an option to purchase fifty thousand (50,000) shares of common stock of the Company on the terms and conditions set forth herein. The persons receiving grants under this subparagraph 5(c) shall include a Non- Employee Director who was a compensated Chairman of the Board at the time of his or her initial election or re-election as described above but is not serving as such on the applicable date of full vesting. 6. OPTION PROVISIONS. Each option shall be subject to the following terms and conditions: (a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ("Expiration Date") ten (10) years from the date of grant. If the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate terminates for any reason or for no reason, the option shall terminate on the earlier of the Expiration Date or the date twelve (12) months following 3. 4 the date of termination of all such service; provided, however, that if such termination of service is due to the optionee's death, the option shall terminate on the earlier of the Expiration Date or eighteen (18) months following the date of the optionee's death. In any and all circumstances, an option may be exercised following termination of the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate only as to that number of shares as to which it was exercisable as of the date of termination of all such service under the provisions of subparagraph 6(e). (b) The exercise price of each option shall be equal to one hundred percent (100%) of the Fair Market Value of the stock (as such term is defined in subsection 9(e)) subject to such option on the date such option is granted. (c) The optionee may elect to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash at the time of exercise; or (ii) Provided that at the time of the exercise the Company's common stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of shares of common stock of the Company already owned by the optionee, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which common stock shall be valued at its Fair Market Value on the date preceding the date of exercise; or (iii) Payment by a combination of the methods of payment specified in subparagraph 6(c)(i) and 6(c)(ii) above. 4. 5 Notwithstanding the foregoing, this option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company either prior to the issuance of shares of the Company's common stock or pursuant to the terms of irrevocable instructions issued by the optionee prior to the issuance of shares of the Company's common stock. (d) An option shall not be transferable except by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 ("Rule 16b-3") and shall be exercisable during the lifetime of the person to whom the option is granted only by such person (or by his guardian or legal representative) or transferee pursuant to such an order. Notwithstanding the foregoing, the optionee may, by delivering written notice to the Company in a form satisfactory to the Company, designate a third party who, in the event of the death of the optionee, shall thereafter be entitled to exercise the option. (e) The option shall become exercisable over a period of two (2) years from the date of grant in equal annual installments, commencing on the date one (1) year after the date of grant of the option, provided that the optionee has, during the entire period prior to such vesting installment date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate of the Company, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. (f) The Company may require any optionee, or any person to whom an option is transferred under subparagraph 6(d), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience 5. 6 in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then currently-effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require any optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities laws as a condition of granting an option to the optionee or permitting the optionee to exercise the option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 6. 7 7. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; provided however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) Neither an optionee nor any person to whom an option is transferred under subparagraph 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate in any capacity or shall affect any right of the Company, its Board or stockholders or 7. 8 any Affiliate, to remove any Non-Employee Director pursuant to the Company's Bylaws and the provisions of the Delaware General Corporation Law. (c) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as shall have been reserved for him pursuant to an option granted to him. (d) In connection with each option made pursuant to the Plan, it shall be a condition precedent to the Company's obligation to issue or transfer shares to a Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal, state or local withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. (e) As used in this Plan, "Fair Market Value" means, as of any date, the value of the common stock of the Company determined as follows: (i) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market of the Nasdaq Stock Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) If the common stock is quoted on Nasdaq Stock Market (but not on the National Market thereof) or is regularly quoted by a recognized securities dealer but 8. 9 selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding options. Such adjustments shall be made by the Board, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 9. 10 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent not prohibited by applicable law, the time during which options outstanding under the Plan may be exercised shall be accelerated prior to such event and the options terminated if not exercised after such acceleration and at or prior to such event. 11. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan and/or some or all outstanding options granted under the Plan, provided, however, that the Board shall not amend the Plan more than once every six (6) months, with respect to the provisions of the Plan which relate to the amount, price and timing of grants, other than to comport with changes in the Code or the regulations thereunder. Except as provided in paragraph 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares which may be issued under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3); or 10. 11 (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3. (b) Rights and obligations under any option granted before any amendment of the Plan shall not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on March 18, 2006. No options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted. (c) The Plan shall terminate upon the occurrence of any of the events described in Section 10(b) above. 13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE. (a) The Plan shall become effective upon adoption by the Board of Directors of the Company. (b) No option granted under the Plan shall be exercised or become exercisable unless and until the Plan is approved by the stockholders of the Company. 11. 12 JT STORAGE, INC. 1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN NONSTATUTORY STOCK OPTION ___________________________________________, Optionee: On __________________, 19___, an option was automatically granted to you (the "optionee") pursuant to the JT Storage, Inc. (the "Company") 1996 Non-Employee Directors' Stock Option Plan (the "Plan") to purchase shares of the Company's common stock ("Common Stock"). This option is not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for Non-Employee Directors (as defined in the Plan). The details of your option are as follows: 1. The total number of shares of Common Stock subject to this option is fifty thousand (50,000). 2. The exercise price of this option is ______________________________ ($________) per share, such amount being equal to the Fair Market Value (as defined in the Plan) of the Common Stock on the date of grant of this option. 3. Subject to the limitations contained herein, this option shall become exercisable (i.e., vest) in two (2) equal annual installments with the first installment becoming exercisable one (1) year after the grant date; provided however, that you have, during the period from the grant date to such vesting date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate (as defined in the Plan), whereupon this option shall become fully exercisable with respect to that portion of the shares represented by that installment. Notwithstanding the foregoing, this option shall not be exercisable in whole or in part unless and until the Plan has been approved by the Company's stockholders. 4. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to Section 6 of the Plan. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. (b) You may elect to pay the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash at the time of exercise; 1. 13 (ii) Provided that at the time of the exercise the Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of shares of Common Stock already owned by you, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which Common Stock shall be valued at its Fair Market Value on the date preceding the date of exercise; or (iii) Payment by a combination of the methods of payment specified in subparagraphs (i) and (ii) above. Notwithstanding the foregoing, this option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company either prior to the issuance of shares of the Common Stock or pursuant to the terms of irrevocable instructions issued by you prior to the issuance of shares of the Common Stock. (c) By exercising this option you agree that the Company may require you to enter an arrangement providing for the cash payment by you to the Company of any tax withholding obligation of the Company arising by reason of the exercise of this option. 5. The term of this option is ten (10) years measured from the grant date, subject, however, to earlier termination upon your termination of service, as set forth in Section 6 of the Plan. 6. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 7. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the _______ day of __________________________________, 19__. Very truly yours, JT Storage, Inc. By:____________________________________ Duly authorized on behalf of the Board of Directors ATTACHMENTS: 1996 Non-Employee Directors' Stock Option Plan 2. 14 The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of Common Stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the options and any other stock awards previously granted and delivered to the undersigned under stock award plans of the Company, and (ii) the following agreements only: NONE: ____________________________________________ (Initial) OTHER: ____________________________________________ ____________________________________________ ____________________________________________ ______________________________________________ Optionee ______________________________________________ Address ______________________________________________ ______________________________________________ 3. EX-10.3 23 PUTNAM STREAMLINED STANDARD 401(K) & PROFIT SHAR 1 Exhibit 10.3 PUTNAM STREAMLINED STANDARD 401(k) AND PROFIT SHARING PLAN PLAN AGREEMENT #001 By executing this Plan Agreement, the Employer establishes a 401(k) and profit sharing plan and trust upon the terms and conditions of Putnam Basic Plan Document #06, as supplemented and modified by the provisions elected by the Employer in this Plan Agreement. Please consult a tax or legal advisor and review this entire form before you sign it. If you fail to fill out this Putnam Plan Agreement properly, the Plan may be disqualified. THIS PLAN AGREEMENT MUST BE ACCEPTED BY PUTNAM IN ORDER FOR THE EMPLOYER TO RECEIVE FUTURE AMENDMENTS TO THE PUTNAM STREAMLINED STANDARD 401(k) AND PROFIT SHARING PLAN. * * * * * 1. Employer Information. The Employer adopting this Plan is: A. Employer Name: JT STORAGE, INC. B. Employer Identification Number: 77-0364572 C. Employer Address: 166 BAYPOINTE PARKWAY SAN JOSE, CA 95134 D. SIC Code: _______ E. Employer Contact: Name: MARGARET CAREY Title: MGR/HR Phone #: 408-468-1701 F. Fiscal Year: February 1st through January 31st ------------ ------------ (month/day) (month/day) G. Type of Entity (check one): X Corporation Partnership Subchapter S Corporation --- --- --- Sole proprietorship Other --- --- --------------------------- H. Plan Name: JTS CORPORATION EMPLOYEE 401(k) SAVINGS PLAN I. Plan Number: 001 -1- 2 2. Plan Information A. Plan Year. Check one: X (1) The Calendar Year ----- (2) The Plan Year will be the same as the Fiscal Year ----- of the Employer shown in 1.F. above. If the Fiscal Year of the Employer changes, the Plan Year will change accordingly. (3) The Plan Year will be the period of 12 months ----- beginning on the first day of ________ (month) and ending on the last day of ________________ (month). B. Effective Date of Adoption of Plan. (1) Are you adopting this Plan to replace an existing plan? a. Yes X b. No ----- ----- (2) If you answered Yes in 2.B.(1) above, please complete the following: a. Effective Date of Existing Plan: ______________. b. Effective Date of Replacement Plan: _____ (i) The first day of the Plan Year in which this Replacement Plan is adopted. _____ (ii) The day as of which this Replacement Plan is adopted. If you answered No in 2.B.(1) above, the Effective Date of your adoption of this Plan will be the first day of the current Plan Year. 3. Eligibility for Plan Participation (Plan Section 3.1). Employees will be eligible to participate in the Plan when they complete the requirements you select in A, B, C and D below. A. Classes of Eligible Employees. The Plan shall cover all employees who have met the age and service requirements with the following exclusions: X (1) No exclusions. All job classifications will be ----- eligible. X (2) The Plan shall exclude employees in a unit of ----- Employees covered by a collective bargaining agreement with respect to which retirement benefits were the subject of good faith bargaining, with the exception of the following collective bargaining units, which shall be included: _________________. X (3) The Plan shall exclude employees who are ----- non-resident aliens without U.S. source income. 2 3 B. Age Requirement (check and complete (1) or (2) below): X (1) No minimum age required for participation ----- (2) Employees must reach age 21 (not over 21) to ----- participate C. Service Requirements. To become eligible, an employee must complete (choose one): (1) No minimum service required. Skip to 4.A below. ----- (2) One 6-month Eligibility Period ----- (3) One 12-month Eligibility Period ----- X (4) One 3-month Eligibility Period (must be less than ----- 12) D. (For New Plans Only) Will all eligible Employees be required to meet the age and service requirements specified in B and C above? X (1) Yes ----- (2) No; all Employees who meet the age requirement on ----- the Effective Date will be eligible as of the Effective Date, even if they have not met the service requirements. 4. Contributions A. Elective Deferrals (Plan Section 4.2). Your Plan will allow employees to elect pre-tax contributions under Section 401(k) of the Code. Indicate below the maximum percentage of Earnings that a Participant may elect as Elective Deferrals for each year: 15% of Earnings 3 4 B. Employer Matching Contributions (Plan Section 4.8). Will you make matching contributions to the Plan? (1) No ----- X (2) Yes (if Yes, check a or b) ----- X a. discretionary matching contributions ----- b. fixed matching contributions (check and ----- complete i, ii or iii) (i) ___% of Elective Deferrals ----- (ii) ___% of Elective Deferrals that ----- do not exceed ___% of Earnings (iii) ___% of Elective Deferrals that ----- do not exceed $________ C. Employer Profit Sharing Contributions (Plan Section 5.1). Will you make Employer Profit Sharing Contributions to the Plan? X (1) Yes (2) No ----- ----- 5. Top-Heavy Minimum Contributions (Plan Section 14.3). Skip paragraphs A and B below if you do not maintain any other qualified plan that is not being replaced by this Plan. A. For any Plan Year in which the Plan is Top-Heavy, the Top-Heavy minimum contribution (or benefit) for Non-Key Employees participating both in this Plan and another qualified plan maintained by the Employer will be provided in (check (1) or (2)): (1) This Plan (2) The other qualified plan ----- ----- B. If you maintain a defined benefit plan in addition to this Plan, and the Top-Heavy Ratio (as defined in Plan Section 14.2(c)) for the combined plans is between 60% and 90%, you may elect to provide an increased minimum allocation or benefit pursuant to Plan Section 14.4. Specify your election by completing the statement below: The employer will provide and increased (specify contribution or benefit) __________________________________________in its (specify defined contribution or defined benefit ____________ plan as permitted under Plan Section 14.4. 4 5 6. Other Plans. You must complete this section if you maintain or ever maintained a defined benefit plan in which any Participant in this Plan is (or was) a participant or could become a participant. If a Participant in the Plan is or has ever been a participant in a defined benefit plan maintained by you, the plans will meet the limits of Article 6 in the manner you describe below: --------------------------------------------------------------- --------------------------------------------------------------- If you have ever maintained a defined benefit plan, state below the interest rate and mortality table to be used in establishing the present value of any benefit under the defined benefit plan for purposes of computing the top-heavy ratio: Interest rate: %___________________ Mortality Table: ___________________ 7. Compensation (Plan Section 2.7). Compensation for purposes of the Plan will be the amount of the following that is actually paid by your Business to an employee during the Plan Year (check (1) or (2)): (1) Form W-2 earnings as defined in Section 2.7 of the Plan. ----- X (2) Form W-2 earnings as defined in Section 2.7 of the Plan, plus ----- any amounts withheld from the employee under a 401(k) plan, cafeteria plan, SARSEP, tax sheltered 403(b) arrangement, or Code Section 457 deferred compensation plan, and contributions described in Code Section 414(h)(2) that are picked up by a governmental employer. 8. Distributions and Withdrawals. A. Retirement Distributions. 1. Normal Retirement Age (Plan Section 7.1). Normal retirement age will be 65 (not over age 65). 2. Early Retirement (Plan Section 7.1). Select one: X a. No Early Retirement will be permitted. ----- b. Early Retirement will be permitted at age 55. ----- c. Early Retirement will be permitted at age ----- ___ with at least ________ Years of Service. 5 6 3. Annuities (Plan Section 9.3). This Plan will permit distributions in the form of a life annuity only if this Plan replaces or serves as a transferee plan for an existing Plan that permits distributions in a life annuity form. Did your prior plan offer a life annuity form of distribution? a. Yes b. No ---- ---- B. Hardship Distributions (Plan Section 12.2). Will your Plan permit hardship distributions? (1) No ---- X (2) Yes. Indicate below from which Accounts hardship ---- withdrawals will be permitted: X a. Elective Deferral Account ----- X b. Rollover Account ----- c. Employer Matching Account ----- d. Employer Profit Sharing Account ----- C. Loans. (Plan Section 12.4). Will your Plan permit loans to employees from the vested portion of all their Accounts? X (1) Yes (2) No ----- ----- 9. Vesting (Plan Article 8). A. Time of Vesting (select (1) or (2) below and complete vesting schedule). X (1) Single Vesting Schedule: ---- The vesting schedule selected below will apply to both Employer Matching Contributions and Employer Profit Sharing Contributions. (2) Dual Vesting Schedules: ---- The vesting schedule marked with an "MC" below will apply to Employer Matching Contributions and the vesting schedule marked with a "PS" below will apply to Employer Profit Sharing Contributions. 6 7 (3) Vesting Schedules: X a. 100% vesting immediately upon participation ----- in the Plan. b. Five-Year Graded Schedule: ----- Vested Percentage 20% 40% 60% 80% 100% --- --- --- --- ---- Years of Service 1 2 3 4 5 c. Six-Year Graded Schedule: ----- Vested Percentage 20% 40% 60% 80% 100% --- --- --- --- ---- Years of Service 2 3 4 5 6 d. Seven-Year Graded Schedule: ----- Vested Percentage 20% 40% 60% 80% 100% --- --- --- --- ---- Years of Service 3 4 5 6 7 e. Three-Year Cliff Schedule: ----- Vested Percentage 0% 100% --- ---- Years of Service 0-2 3 f. Five-Year Cliff Schedule: ----- Vested Percentage 0% 100% --- ---- Years of Service 0-4 5 g. Other Schedule (must be at least as favorable ----- as Seven-Year Graded Schedule or Five-Year Cliff Schedule): (i) Vested Percentage __% __% __% __% __% (ii) Years of Service --- --- --- --- --- 7 8 (4) Top Heavy Schedule: If you selected above an "Other Schedule," specify in the space below the schedule that will apply after the Plan is top-heavy. The schedule you specify must be at least as favorable to employees, at all years of service, as either the Six-Year Graded Schedule or the Three-Year Cliff Schedule. The top-heavy vesting schedule will be: (i) the same "Other Schedule" selected above ---- (ii) the following schedule. ---- (i) Vested Percentage __% __% __% __% __% (ii) Years of Service --- --- --- --- --- (iii) Six-Year Graded Schedule ---- (iv) Three-Year Cliff Schedule ---- B. Service for Vesting (select (1) or (2)). X (1) All of an employee's service will be used to determine his ---- Years of Service for purposes of vesting (2) An employee's Years of Service for vesting will include ---- all years except: --- a. (New plan) service before the effective date of the plan --- b. (Existing plan) service before the effective date of the existing plan 10. Investments (Plan Sections 12.2 and 13.3). A. Available Investment Products (Plan Section 13.2). The investment options available under the Plan are identified in the Service Agreement or such other written instructions between the Employer and Putnam, as the case may be. All Investment Products must be sponsored, underwritten, managed or expressly agreed to in writing by Putnam. If there is any amount in the Trust Fund for which no instructions or unclear instructions are delivered, it will be invested in the default option selected by the Employer in its Service Agreement with Putnam until instructions are received in good order, and the Employer will be deemed to have selected the option indicated in its Service Agreement, or such other written instruction as the case may be, as an available Investment Product for that purpose. 8 9 B. Employer Stock. (Skip this paragraph if you did not designate Employer Stock as an investment under the Service Agreement.) 1. Voting. Employer Stock will be voted as follows: a. In accordance with the Employer's ------- instructions. b. In accordance with the Participant's ------- instructions. Participants are hereby appointed named fiduciaries for the purpose of the voting of Employer Stock in accordance with Section 13.8. 2. Tendering. Employer stock will be tendered as follows: a. In accordance with the Employer's ------- instructions. b. In accordance with the Participant's ------- instructions. Participants are hereby appointed named fiduciaries for the purpose of the tendering of Employer Stock in accordance with Section 13.8. 11. Administration. Plan Administrator (Plan Section 15.1). You may appoint a person or a committee to serve as Plan Administrator. If you do not appoint a Plan Administrator, the Plan provides that the Employer will be the Plan Administrator. The initial Plan Administrator will be (check one): X (1) This person: JT STORAGE, INC. ------- (2) A committee composed of these people: ------- ----------------------------------------- ----------------------------------------- ----------------------------------------- 12. Reliance on Opinion Letter. If you ever maintained or you later adopt any plan in addition to this Plan (including a welfare benefit fund, as defined in Section 419(e) of the Code, which provides post-retirement medical benefits allocated to separate accounts for key employees, as defined in Section 419A(d)(3) of the Code; or an individual medical account, as defined in Section 415(1)(2) of the Code), you may not rely on an opinion letter issued to Putnam by the National Office of the Internal Revenue Service as evidence that the Plan is qualified under Section 401 of the Internal Revenue Code. If you maintain or adopt multiple plans, in order to obtain reliance with respect to plan qualification of the Plan, you must receive a determination letter from the appropriate Key District Office of Internal Revenue. Putnam will prepare an application for such a letter upon your request at a fee agreed upon by the parties. It is the responsibility of the Employer to ascertain whether a determination letter is required with respect to qualification of the Plan and to request Putnam to prepare the application for such determination letter if such service is desired. Putnam will inform you of all amendments it makes to the prototype plan. Putnam will also inform you if it discontinues or abandons the prototype plan. This Plan Agreement #001 may be used only in conjunction with Putnam's Basic Plan Document #06. 9 10 * * * * * If you have any questions regarding this Plan Agreement, contact Putnam at: Putnam Defined Contribution Plans One Putnam Place B2B 859 Willard Street Quincy, MA 02269 Phone: 1-800-752-5766 10 11 * * * * * EMPLOYER'S ADOPTION OF PUTNAM STREAMLINED STANDARD 401(k) AND PROFIT SHARING PLAN The Employer named below hereby adopts a PUTNAM STREAMLINED STANDARD 401(k) AND PROFIT SHARING PLAN, and appoints PUTNAM FIDUCIARY TRUST COMPANY to serve as Trustee of the Plan. The Employer acknowledges that it has received copies of the current prospectus for each Investment Product available under the Plan, and represents that it will deliver copies of the then current prospectus for each such Investment Product to each Participant before each occasion on which the Participant makes an investment instruction as to his Account. The Employer further acknowledges that the Plan will be recognized by Putnam as a Putnam Streamlined Standard 401(k) and Profit Sharing Plan only upon Putnam's acceptance of this Plan Agreement. Investment Options The Employer hereby elects the following as the investment options available under the Plan: PUTNAM MONEY MARKET FUND PUTNAM NEW OPPORTUNITIES FUND PUTNAM DIVERSIFIED INCOME TRUST PUTNAM OVERSEAS GROWTH FUND PUTNAM GROWTH AND INCOME FUND II PUTNAM VISTA FUND The following investment option shall be the default option: PUTNAM MONEY MARKET FUND (select the default option from among the investment options listed above). Employer Signature Employer signature(s) to adopt Plan: Date of signature: /s/ W. VIRGINIA WALKER 1/22/96 - ------------------------------------------- --------------------- - ------------------------------------------- --------------------- Please print name(s) of authorized person(s) signing above: W. Virginia Walker - ------------------------------------------- - ------------------------------------------- A new Plan Agreement must be signed by the last day of the Plan Year in which the Plan is to be effective. 11 12 * * * * * ACCEPTANCE OF PUTNAM FIDUCIARY TRUST COMPANY AS TRUSTEE The Trustee accepts appointment in accordance with the terms and conditions of the Plan, effective as of the date of execution by the Employer set forth above. Putnam Fiduciary Trust Company, Trustee By: ---------------------------------------------------------------------------- 12 13 * * * * * ACCEPTANCE BY PUTNAM Putnam hereby accepts this Employer's Plan as a prototype established under Putnam Basic Plan Document #06. Putnam Mutual Funds Corp. By: ----------------------------------- 13 14 * * * * * ACCEPTANCE OF OTHER TRUSTEE Complete this part only if you have appointed a Trustee other than Putnam Fiduciary Trust Company. (Note: You may appoint a trustee other than Putnam Fiduciary Trust Company only with Putnam's express permission.) Note: Putnam may impose an annual maintenance fee as a condition of its acceptance of this plan as a Putnam Streamlined Standard 401(k) and Profit Sharing Plan. , Trustee - ---------------------------- By: Trustee's Tax I.D. Number --------------------------- ---------------- (Trustee) - -------------------------------------------------------------------------- Address of Trustee Person for Putnam to Contact: Telephone: ------------------ ---------------- 14 15 PUTNAM BASIC PLAN DOCUMENT #06 16 PUTNAM BASIC PLAN DOCUMENT #06 TABLE OF CONTENTS
PAGE ARTICLE 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1. Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2. Affiliated Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3. Authorized Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4. Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.5. CODA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.6. Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.7. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.8. Date of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.9. Deductible Employee Contribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.10. Deferral Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.11. Disabled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.12. Earned Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.13. Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.14. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.15. Elective Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.16. Elective Deferral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.17. Eligibility Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.18. Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.19. Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.20. Employer Matching Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.21. Employer Matching Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.22. Employer Profit Sharing Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.23. Employer Profit Sharing Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.24. Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.25. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.26. Forfeiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.27. Highly Compensated Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.28. Hour of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.29. Investment Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.30. Investment Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.31. Investment Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.32. Leased Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.33. Non-Highly Compensated Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.34. One-Year Eligibility Break . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
-i- 17 2.35. One-Year Vesting Break . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.36. Owner-Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.37. Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.38. Participant Contribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.39. Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.40. Plan Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.41. Plan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.42. Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.43. Putnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.44. Qualified Domestic Relations Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.45. Qualified Matching Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.46. Qualified Matching Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.47. Qualified Nonelective Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.48. Qualified Nonelective Contribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.49. Qualified Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.50. Recordkeeper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.51. Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.52. Rollover Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.53. Self-Employed Individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.54. Service Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.55. Shareholder-Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.56. Trust and Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.57. Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.58. Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.59. Year of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 3. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3. 1. Initial Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.2. Resumed Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.3. Benefits for Owner-Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.4. Changes in Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 4. CASH OR DEFERRED ARRANGEMENT UNDER SECTION 401(k) (CODA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.1. General Provisions Applicable to Contributions Under Both Articles 4 and 5 . . . . . . . . . . . 17 4.2. CODA Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.3. Annual Limit on Elective Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.4. Distribution of Certain Elective Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.5. Satisfaction of ADP and ACP Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.6. Actual Deferral Percentage Test Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.7. Distribution of Excess Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.8. Employer Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
-ii- 18 4.9. Average Contribution Percentage Test Limit and Aggregate Limit . . . . . . . . . . . . . . . . . 23 4.10. Distribution of Excess Aggregate Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.11. Qualified Nonelective Contributions; Qualified Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.12. Restriction on Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.13. Forfeitures of Employer Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.14. Special Effective Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE 5. OTHER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5. 1. Employer Profit Sharing Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.2. Forfeitures of Employer Profit Sharing Contributions . . . . . . . . . . . . . . . . . . . . . . 28 5.3. Rollover Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.4. No After-Tax Participant Contributions or Deductible Employee Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 6. LIMITATIONS ON ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6. 1. No Additional Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.2. Additional Master or Prototype Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.3. Additional Non-Master- or Non-Prototype Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.4. Additional Defined Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.5. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE 7. ELIGIBILITY FOR DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7. 1. Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.2. Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.3. Other Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE 8. VESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.1. Vested Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.2. Vesting of Accounts of Returned Former Employees . . . . . . . . . . . . . . . . . . . . . . . . 37 8.3. Forfeiture of Non-Vested Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 8.4. Special Rule in the Event of a Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 8.5. Vesting Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE 9. PAYMENT OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.1. Distribution of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.2. Restriction on Immediate Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.3. Optional Forms of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 9.4. Distribution Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 9.5. Lost Distributee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 9.6. Direct Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 9.7. Distributions Required by a Qualified Domestic Relations Order . . . . . . . . . . . . . . . . . 43
-iii- 19 ARTICLE 10. JOINT AND SURVIVOR ANNUITY REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 10.1. Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 10.2. Qualified Joint and Survivor Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 10.3. Qualified Preretirement Survivor Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 10.4. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 10.5. Notice Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 10.6. Transitional Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE 11. MINIMUM DISTRIBUTION REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 11.1. General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 11.2. Required Beginning Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 11.3. Limits on Distribution Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 11.4. Determination of Amount to Be Distributed Each Year . . . . . . . . . . . . . . . . . . . . . . 53 11.5. Death Distribution Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 11.6. Transitional Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ARTICLE 12. WITHDRAWALS AND LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 12.1. Withdrawals from Participant Contribution Accounts . . . . . . . . . . . . . . . . . . . . . . . 57 12.2. Withdrawals on Account of Hardship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 12.3. Withdrawals After Reaching Age 59 1/2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 12.4. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 12.5. Procedure; Amount Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.6. Protected Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.7. Restrictions Concerning Transferred Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 ARTICLE 13. TRUST FUND AND INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 13.1. Establishment of Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 13.2. Management of Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 13.3. Investment Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 13.4. Valuation of the Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 13.5. Distributions on Investment Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.6. Registration and Voting of Investment Company Shares . . . . . . . . . . . . . . . . . . . . . . 65 13.7. Investment Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.8. Employer Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.9. Insurance Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 13.10. Registration and Voting of Non-Putnam Investment Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 ARTICLE 14. TOP-HEAVY PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 14.1. Superseding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 14.2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 14.3. Minimum Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 14.4. Adjustment of Fractions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
-iv- 20 14.5. Minimum Vesting Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 ARTICLE 15. ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 15.1. Plan Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 15.2. Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 15.3. Employer's Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 15.4. Recordkeeper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 15.5. Prototype Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 ARTICLE 16. TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 16.1. Powers and Duties of the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 16-2. Limitation of Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 16.3. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 16.4. Reliance on Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 16.5. Action Without Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 16.6. Advice of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 16.7. Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 16.8. Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 16.9. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 16.10. Persons Dealing with Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 16.11. Resignation and Removal; Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 16.12. Action of Trustee Following Resignation or Removal . . . . . . . . . . . . . . . . . . . . . . . 82 16.13. Effect of Resignation or Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 16.14. Fiscal Year of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 16.15. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 16.16. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 ARTICLE 17. AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 17.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 17.2. Delegation of Amendment Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 ARTICLE 18. TERMINATION OF THE PLAN AND TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 18.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 18.2. Events of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 18.3. Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 18.4. Approval of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 ARTICLE 19. TRANSFERS TO OR FROM OTHER QUALIFIED PLANS; MERGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 19.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 19.2. Amounts Transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 19.3. Merger or Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
-v- 21 ARTICLE 20. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.1. Notice of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.2. No Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.3. Distributions Exclusively From Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.4. No Alienation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.5. Provision of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.6. No Prohibited Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.7. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 20.8. Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
-vi- 22 PUTNAM BASIC PLAN DOCUMENT #06 ARTICLE 1. INTRODUCTION By executing the Plan Agreement, the Employer has established a retirement plan (the "Plan") according to the terms and conditions of the Plan Agreement and this Putnam Basic Plan Document #06, for the purpose of providing a retirement fund for the benefit of Participants and Beneficiaries. A Plan established hereunder pursuant to a Plan Agreement is intended to qualify under section 401 (a) and section 401(k) of the Code. -1- 23 ARTICLE 2. DEFINITIONS The terms defined in Sections 2.1 through 2.59 appear generally throughout the document. Article 4 contain additional definitions of terms related to the cash or deferred arrangement (CODA) contained in this Plan and Section 10.4 contains additional definitions related to distributions from the Plan. Articles 6 and 11 contain additional definitions of terms used only in those Articles. 2.1. Account means any of, and Accounts means all of, a Participant's Elective Deferral Account, Employer Matching Account, Qualified Nonelective Contribution Account, Qualified Matching Account, Employer Profit Sharing Account, Participant Contribution Account, Rollover Account, and Deductible Employee Contribution Account. 2.2. Affiliated Employer for purposes of the Plan other than Article 6, means the Employer and a trade or business, whether or not incorporated, which is any of the following: (a) A member of a group of controlled corporations (within the meaning of Section 414(b) of the Code) which includes the Employer; or (b) A trade or business under common control (within the meaning of Section 414(c) of the Code) with the Employer; or (c) A member of an affiliated service group (within the meaning of Section 414(m) of the Code) which includes the Employer; or (d) An entity otherwise required to be aggregated with the Employer pursuant to Section 414(o) of the Code. In determining an Employee's service for vesting and for eligibility to participate in the Plan, all employment with Affiliated Employers will be treated as employment by the Employer. For purposes of Article 6 only, the definitions in paragraphs (a) and (b) of this Section 2.2 shall be modified by adding at the conclusion of the parenthetical phrase in each such paragraph the words "as modified by Section 415(h) of the Code." 2.3. Authorized Leave of Absence means a leave of absence from employment granted in writing by an Affiliated Employer. Authorized Leave of Absence shall be granted on account of military service for any period during which an Employee's right to re-employment is guaranteed by law, and for such other reasons and periods as an Affiliated Employer shall consider proper, provided that Employees in similar situations shall be similarly treated. -2- 24 2.4. Beneficiary means a person entitled to receive benefits under the Plan upon the death of a Participant, in accordance with Section 7.2 and Articles 10 and 11 2.5. CODA means the cash or deferred arrangement that meets the requirements of Section 401(k) of the Code, as described in Article 4. 2.6. Code means the Internal Revenue Code of 1986, as amended. 2.7. Compensation means all of an Employee's compensation determined in accordance with the definition elected by the Employer in the Plan Agreement. For purposes of that election, 'Form W-2 earnings" means "wages" as defined in Section 3401 (a) of the Code in connection with income tax withholding at the source, and all other compensation paid to the Employee by the Employer in the course of its trade or business, for which the Employer is required to furnish the Employee with a written statement under Sections 6041 (d), 6051(a)(3) and 6052 of the Code, determined without regard to exclusions based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). Compensation shall include only amounts actually paid to the Employee during the Plan Year. In addition, if the Employer so elects in the Plan Agreement, Compensation shall include any amount which is contributed to an employee benefit plan for the Employee by the Employer pursuant to a salary reduction agreement, and which is not includible in the gross income of the Employee under Section 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. (For a self-employed person, the relevant term is Earned Income, as defined in Section 2.12.) 2.8. Date of Employment means the first date on which an Employee performs an Hour of Service; or, in the case of an Employee who has incurred one or more One-Year Eligibility Breaks and who is treated as a new Employee under the rules of Section 3.2, the first date on which he performs an Hour of Service after his return to employment. 2.9. Deductible Employee Contribution Account means an account maintained on the books of the Plan on behalf of a Participant, in which are recorded amounts contributed by him to the Plan on a tax-deductible basis under prior law, and the income, expenses, gains and losses thereon. 2.10. Deferral Agreement means an Employee's agreement to make one or more Elective Deferrals in accordance with Section 4.2. 2.11. Disabled means unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less am 12 months. The permanence and degree of such impairment shall be supported by medical evidence. -3- 25 2.12. Earned Income means a Self-Employed Individual's net earnings from self-employment in the trade or business with respect to which the Plan is established, excluding items not included in gross income and the deductions allocable to such items, and reduced by (i) contributions by the Employer to qualified plans, to the extent deductible under Section 404 of the Code, and (ii) the deduction allowed to the taxpayer under Section 164(f) of the Code for taxable years beginning after December 31, 1989. 2.13. Earnings, for determining all benefits provided under the Plan for all Plan Years beginning after December 31, 1988, means the first $200,000 (as adjusted by the Secretary of the Treasury at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase effective on any January 1 is effective for ALL Plan Years beginning in the calendar year in which that January 1 occurs, and the first such dollar increase is effective on January 1, 1990) of the sum of the Compensation and the Earned Income received by an Employee during a Plan Year. Notwithstanding the foregoing, for Plan Years beginning after December 31, 1993, Earnings means the first $150,000 (as adjusted periodically by the Secretary of the Treasury for inflation) of the sum of the Compensation and Earned Income received by an Employee during a Plan Year. To calculate an allocation to a Participant's Account for any Plan Year shorter than 12 months, the dollar limit on Earnings must be multiplied by a fraction of which the denominator is 12 and the numerator is the number of months in the Plan Year. In determining the Earnings of a Participant, the rules of Section 414(q)(6) of the Code shall apply, except that in applying those rules the term "family" shall include only the Participant's spouse and the Participant's lineal descendants who have not reached age 19 by the last day of the Plan Year. If, as a result of the application of such rules, the applicable Earnings limitation described above is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Earnings as determined under this Section prior to the application of this limitation. 2.14. Effective Date means the first day of the Plan Year in which the Plan is adopted, provided that, if the Employer is adopting the Plan as an amendment to an existing plan, the Effective Date will be the date elected by the Employer in the Plan Agreement, which date shall be no earlier than the first day of the Plan Year in which the Plan is adopted. If the Plan Agreement indicates that the Employer is adopting the Plan as an amendment of an existing plan, the provisions of the existing plan apply to all events preceding the Effective Date, except as to specific provisions of the Plan which set forth a retroactive effective date in accordance with Section 1140 of the Tax Reform Act of 1986. 2.15. Elective Deferral means any contribution made to the Plan by the Employer at the election of a Participant, in lieu of cash compensation, including contributions made pursuant to a Deferral Agreement or other deferral mechanism. 2.16. Elective Deferral Account means an account maintained on the books of the Plan, in which are recorded a Participant's Elective Deferrals and the income, expenses, gains and losses incurred thereon. -4- 26 2.17. Eligibility Period means a period of service with the Employer which an Employee is required to complete in order to commence participation in the Plan. A 12-month Eligibility Period is a period of 12 consecutive months beginning on an Employee's most recent Date of Employment or any anniversary thereof, in which he is credited with at least 1,000 Hours of Service. A 6-month Eligibility Period is a period of 6 consecutive months beginning on an Employee's most recent Date of Employment or any anniversary thereof, or on the 6-month anniversary of such Date of Employment or any anniversary thereof, in which he is credited with at least 500 Hours of Service. If the Employer has selected another period of service as the Eligibility Period under the Plan, Eligibility Period means the period so designated in the Plan Agreement in which the Employee is credited with a number of Hours of Service equal to the product of 1,000 multiplied by a fraction having a numerator equal to the number of months in the Eligibility Period designated in the Plan Agreement and a denominator of 12. Notwithstanding the foregoing, if an Employee is credited with 1,000 Hours of Service during a 12-consecutive-month period following his Date of Employment or any anniversary thereof, he shall be credited with an Eligibility Period. In the case of an Employee in a seasonal industry (as defined under regulations prescribed by the Secretary of Labor) in which the customary extent of employment during a calendar year is fewer than 1,000 Hours of Service in the case of a 12-month Eligibility Period, the number specified in any regulations prescribed by the Secretary of Labor dealing with years of service shall be substituted for 1,000. 2.18. Employee means a common law Employee of an Affiliated Employer; in the case of an Affiliated Employer which is a sole proprietorship, the sole proprietor thereof, in the case of an Affiliated Employer which is a partnership, a partner thereof, and a Leased Employee of an Affiliated Employer. The term "Employee" includes an individual on Authorized Leave of Absence, a Self-Employed Individual and an Owner-Employee. 2.19. Employer means the Employer named in the Plan Agreement and any successor to all or the major portion of its assets or business which assumes the obligations of the Employer under the Plan Agreement. 2.20. Employer Matching Account means an account maintained on the books of the Plan, in which are recorded the Employer Matching Contributions made on behalf of a Participant and the income, expenses, gains and losses incurred thereon. 2.21. Employer Matching Contribution means a contribution made by the Employer (i) to the Plan pursuant to Section 4.8, or (ii) to another defined contribution plan on account of a Participant's "elective deferrals" or "employee contributions," as those terms are used in Section 401(m)(4) of the Code 2.22. Employer Profit Sharing Account means an account maintained on the books of the Plan on behalf of a Participant, in which are recorded the amounts allocated for his benefit -5- 27 from contributions by the Employer under Section 5.1 and the income, expenses, gains and losses incurred thereon. 2.23. Employer Profit Sharing Contribution means a contribution made for the benefit of a Participant by the Employer pursuant to Section 5.1. 2.24. Employer Stock means securities constituting "qualifying employer securities" of an Employer within the meaning of Section 407(d)(5) of ERISA. 2.25. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 2.26. Forfeiture means a nonvested amount forfeited by a former Participant, pursuant to Section 8.3, or an amount forfeited by a former Participant or Beneficiary who cannot be located, pursuant to Section 9.5. 2.27. Highly Compensated Employee means an Employee if (i) the Employee is a 5 % owner during the Plan Year; (ii) the Employee's compensation for the Plan Year exceeds $75,000 (as adjusted pursuant to Section 415(d) of the Code); (iii) the Employee's compensation for the Plan Year exceeds $50,000 (as adjusted pursuant to Section 415(d) of the Code) and the Employee is in the top-paid group of Employees; or (iv) the Employee is an officer of the Employer and received compensation during the Plan Year that is greater than 50% of the dollar limitation under Code Section 415(b)(1)(A). The lookback provisions of Code Section 414(q) do not apply to determining Highly Compensated Employees. An Employer may choose to apply this test on the basis of the Employer's workforce as of a single day during the Plan Year ("snapshot day"). In applying this test on a snapshot basis, the Employer shall determine who is a Highly Compensated Employee on the basis of the data as of the snapshot day. If the determination of who is a Highly Compensated Employee is made earlier than the last day of the Plan Year, the Employee's compensation that is used to determine an Employee's status must be projected for the Plan Year under a reasonable method established by the Employer. Notwithstanding the foregoing, in addition to those Employees who are determined to be highly compensated on the Plan's snapshot day, as described above, where there are Employees who are not employed on the snapshot day but who are taken into account for purposes of testing under Section 4.6 or 4.9, the Employer must treat as a Highly Compensated Employee any Eligible Employee for the Plan Year who: (a) terminated prior to the snapshot day and was a Highly Compensated Employee in the prior year; -6- 28 (b) terminated prior to the snapshot day and was a 5 % owner, (ii) had compensation for the Plan Year greater than or equal to the projected compensation of any Employee who is treated as a Highly Compensated Employee on the snapshot day (except for Employees who are Highly Compensated Employees solely because they are 5 % owners or officers), or (iii) was an officer and had compensation greater than or equal to the projected compensation of any other officer who is a Highly Compensated Employee on the snapshot day solely because that person is an officer; or (c) becomes employed subsequent to the snapshot day and (i) is a 5 % owner, (ii) has compensation for the Plan Year greater than or equal to the projected compensation of any Employee who is treated as a Highly Compensated Employee on the snapshot day (except for Employees who are Highly Compensated Employees solely because they are 5 % owners or officers), or (iii) is an officer and has compensation greater than or equal to the projected compensation of any other officer who is a Highly Compensated Employee on the snapshot day solely because that person is an officer. If during a Plan Year an Employee is a family member of either a 5 % owner who is an Employee, or a Highly Compensated Employee who is one of the ten most highly paid Highly Compensated Employees ranked on the basis of compensation paid by the Employees during the year, then the family member and the 5 % owner or top-ten-Highly-Compensated-Employee shall be treated as a single Employee receiving compensation and Plan contributions or benefits equal to the sum of the compensation and contributions or benefits of the family member and the 5 % owner or top-ten-Highly-Compensated-Employee. For purposes of this Section 2.27, family members include the spouse, lineal ascendants and descendants of the Employee and the spouses of such lineal ascendants and descendants. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the number of Employees treated as officers and the compensation that is considered, will be made in accordance with Section 414(q) of the Code and the regulations thereunder. The Plan Administrator is responsible for identifying the Highly Compensated Employees and reporting such data to the Recordkeeper. 2.28. Hour of Service means each hour described in paragraphs (a), (b), (c), (d) or (e) below, subject to paragraphs (f) and (g) below. (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for an Affiliated Employer. These hours shall be credited to the Employee for the computation period or periods in which the duties are performed. (b) Each hour for which an Employee is paid, or entitled to payment, by an Affiliated Employer on account of a period of time during which no duties are -7- 29 performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period of absence (whether or not such period occurs in a single computation period) unless the Employee's absence is not an Authorized Leave of Absence. Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations, which are incorporated herein by this reference. (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Affiliated Employer. The same Hours of Service shall not be credited under both paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c); and no more than 501 Hours of Service shall be credited under this paragraph (c) with respect to payments of back pay, to the extent that such pay is agreed to or awarded for a period of time described in paragraph (b) during which the Employee did not perform or would not have performed any duties. These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. (d) Each hour during an Authorized Leave of Absence. Such hours shall be credited at the rate of a customary full work week for an Employee. (e) Solely for purposes of determining whether a One-Year Vesting Break or a One-Year Eligibility Break has occurred, each hour which otherwise would have been credited to an Employee but for an absence from work by reason of: the pregnancy of the Employee, the birth of a child of the Employee, the placement of a child with the Employee in connection with the adoption of the child by the Employee, or caring for a child for a period beginning immediately after its birth or placement. If the Plan Administrator cannot determine the hours which would normally have been credited during such an absence, the Employee shall be credited with eight Hours of Service for each day of absence. No more than 501 Hours of Service shall be credited under this paragraph by reason of any pregnancy or placement. Hours credited under this paragraph shall be treated as Hours of Service only in the Plan Year or Eligibility Period or both, as the case may be, in which the absence from work begins, if necessary to prevent the Participant's incurring a One-Year Vesting Break or One-Year Eligibility Break in that period, or, if not, in the period immediately following that in which the absence begins. The Employee must timely furnish to the Employer information reasonably required to establish (i) that an absence from work is for a reason specified above, and (ii) the number of days for which the absence continued. (f) Hours of Service shall be determined on the basis of actual hours for which an Employee is paid or entitled to payment. -8- 30 (g) If the Employer maintains the plan of a predecessor Employer, service for the predecessor Employer shall be treated as service for the Employer. If the Employer does not maintain the plan of a predecessor Employer, service for the predecessor Employer shall not be treated as service for the Employer. (h) Hours of Service shall be credited to a Leased Employee as though he were an Employee. 2.29. Investment Company means an open-end registered investment company for which Putnam Mutual Funds Corp., or its affiliate acts as principal underwriter, or for which Putnam Investment Management, Inc. or its affiliate serves as an investment adviser; provided that its prospectus offers its shares under the Plan. 2.30. Investment Company Shares means shares issued by an Investment Company. 2.31. Investment Products means any of the investment products specified by the Employer in accordance with Section 13.2, from the group of those products sponsored, underwritten or managed by Putnam as shall be made available by Putnam under the Plan, and such other products as shall be expressly agreed to in writing by Putnam for availability under the Plan. 2.32. Leased Employee means any person (other than an Employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by Employees in the business field of the recipient Employer. The compensation of a Leased Employee for purposes of the Plan means the Compensation (as defined in Section 2-7) of the Leased Employee attributable to services performed for the recipient Employer. Contributions or benefits provided to a leased Employee by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. Provided that leased Employees do not constitute more than 20% of the recipient's nonhighly compensated workforce, a leased Employee shall not be considered an Employee of the recipient if he is covered by a money purchase pension plan providing: (1) a nonintegrated Employer contribution rate of at least 10% of compensation (as defined in Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(e)(3), Section 402(h)(1)(B) or Section 403(b) of the Code), (2) immediate participation, and (3) full and immediate vesting. 2.33. Non-Highly Employee means an Employee who is not a Highly Compensated Employee. -9- 31 2.34. One-year Eligibility Break means a 12-month Eligibility Period during which an individual is not credited with more than 500 Hours of Service; provided, however, that in the case of an Employee in a seasonal industry, there shall be substituted for 500 the number of Hours of Service specified in any regulations of the Secretary of Labor dealing with breaks in service. 2.35. One-Year Vesting Break means a Plan Year during which an individual is not credited with more than 500 Hours of Service; provided, however, that in the case of an Employee in a seasonal industry, there shall be substituted for 500 the number of Hours of Service specified in any regulations of the Secretary of Labor dealing with breaks in service. 2.36. Owner-Employee means the sole proprietor of an Affiliated Employer that is a sole proprietorship, or a partner owning more than 1O % of either the capital or profits interest of an Affiliated Employer that is a partnership. The Plan Administrator shall be responsible for identifying Owner-Employees to the Recordkeeper. 2.37. Participation means each Employee who has met the requirement for participation in Article 3. An Employee is not a Participant for any period before the entry date applicable to him. 2.38. Participant Contribution Account means an account maintained on the books of the Plan, in which are recorded after-tax contributions made by a Participant under a predecessor plan to which this Plan serves as an amendment or successor and any income, expenses, gains or losses incurred on such Contributions. No additional after-tax contributions may be made under the Plan or credited to this Account. All Participant Contribution Accounts will be fully vested at all times. 2.39. Plan means the form of defined contribution retirement plan and trust agreement adopted by the Employer, consisting of the Plan Agreement and the Putnam Basic Plan Document #06 as set forth herein, together with any and all amendments and supplements thereto. 2.40. Plan Administrator means the Employer or its appointee pursuant to Section 15.1. 2.41. Plan Agreement means the separate agreement entered into between the Employer and the Trustee and accepted by Putnam, under which the Employer adopts the Plan and selects among its optional provisions. 2.42. Plan Year means the period of 12 consecutive months specified by the Employer in the Plan Agreement, as well as any initial short plan year period specified by the Employer in the Plan Agreement. -10- 32 2.43. Putnam means (i) Putnam Mutual Funds Corp., or a company affiliated with it which Putnam Mutual Funds Corp. has designated as its agent, performing specified actions or procedures in its capacity as sponsor of this prototype Plan, and (ii) Putnam Fiduciary Trust Company when performing in the capacity as Recordkeeper or Trustee. 2.44. Qualified Domestic Relations Order means any judgment, decree or order (including approval of a property settlement agreement) which constitutes a "qualified domestic relations order" within the meaning of Code Section 414(p). A judgment, decree or order shall not fail to be a Qualified Domestic Relations Order merely because it requires a distribution to an alternate payee (or the segregation of accounts pending distribution to an alternate payee) before the Participant is otherwise entitled to a distribution under the Plan. 2.45. Qualified Matching Account means an account maintained on the books of the Plan, in which are recorded the Qualified Matching Contributions made on behalf of a Participant and the income, expense, gain and loss attributable thereto. 2.46. Qualified Matching Contribution means a contribution made by the Employer that: (i) is allocated with respect to Elective Deferrals of a Participant who is a Non-Highly Compensated Employee, (ii) is fully vested at all times and (iii) is distributable only in accordance with Section 4.12. 2.47. Qualified Nonelective Contribution means a contribution (other than an Employer Matching Contribution or Qualified Matching Contribution) made by the Employer on behalf of a Participant who is a Non-Highly Compensated Employee, that: (i) a Participant may not elect to receive in cash until, it is distributed from the Plan; (ii) is fully vested at all times; and (iii) is distributable only in accordance with Section 4.12. 2.48. Qualified Nonelective Contribution Account means an account maintained on the books of the Plan, in which are recorded the Qualified Nonelective Contributions made on behalf of a Participant and the income, expense, gain and loss attributable thereto. 2.49. Qualified Participant means any Participant who is an active Employee on the last day of the Plan Year in question or who is credited with more than 500 Hours of Service during the Plan Year in question or whose Retirement, death or disability occurred during the Plan Year in question. 2.50. Recordkeeper means Putnam and any successor thereto designated by the Employer to perform the duties described in Section 15.4. The terms and conditions of Putnam's service in the capacity as Recordkeeper will be as specified in the Service Agreement. 2.51. Retirement means ceasing to be an Employee in accordance with Section 7. 1. -11- 33 2.52. Rollover Account means an account established for an Employee who makes a rollover contribution to the Plan pursuant to Section 5.3. 2.53. Self-Employed Individual means an individual whose personal services are a material income-producing factor in the trade or business for which the Plan is established, and who has Earned Income for the taxable year from that trade or business, or would have Earned Income but for the fact that the trade or business had no net profits for the taxable year. 2.54. Service Agreement means the service agreement entered into between the Employer and Putnam or its successor as Recordkeeper. 2.55. Shareholder-Employee means any officer or Employee of an electing small business corporation, within the meaning of Section 1362 of the Code, who on any day during a taxable year of the Employer owns (or is considered as owning under Section 318(a)(1) of the Code) more than 5 % of the outstanding stock of the Employer. The Plan Administrator shall be responsible for identifying Shareholder-Employees to the Recordkeeper. 2.56. Trust and Trust Fund mean the trust fund established under Section 13. 1. 2.57. Trustee means the person, or the entity with trustee powers, named in the Plan Agreement as trustee, and any successor thereto. 2.58. Valuation Date means each day when the New York Stock Exchange is open, or such other date or dates as the Employer may designate by written agreement with the Recordkeeper. 2.59. Year of Service means a Plan Year in which an Employee is credited with at least 1,000 Hours of Service; provided, however, that in the case of an Employee in a seasonal industry (as defined under regulations prescribed by the Secretary of Labor) in which the customary extent of employment during a calendar year is fewer than 1,000 Hours of Service, the number specified in any regulations prescribed by the Secretary of Labor dealing with years of service shall be substituted for 1,000. An Employee's Years of Service shall include service credited prior to the Effective Date under any predecessor plan. If the initial Plan Year is shorter than 12 months, each Employee who is credited with at least 1,000 Hours of Service in the 12-month period ending on the last day of the initial Plan Year shall be credited with a Year of Service with respect to the initial Plan Year. If the Employer has so elected in the Plan Agreement, Years of Service for vesting shall not include service completed during a period in which the Employer did not maintain the' Plan or any predecessor plan (as defined under regulations prescribed by the Secretary of the Treasury). -12- 34 Years of Service for vesting shall include service in any plan Year (or comparable period prior to the Effective Date) completed before the Employee reached age 18. Years of Service for eligibility and vesting shall not include service for an employer that is not an Affiliated Employer, provided, however, Years of Service for eligibility and vesting shall include employment by a business acquired by the Employer, before the date of the acquisition, if the Plan is the amendment of a predecessor plan maintained by such acquired business. -13- 35 ARTICLE 3. PARTICIPATION 3.1. Initial Participation. Upon completion of the eligibility for Plan participation requirements specified in the Plan Agreement, an Employee shall begin participation in the Plan as of the later of (i) the first day of the first, fourth, seventh or tenth month of the Plan Year, whichever next follows or coincides with the date of completion of such eligibility requirements, or (ii) the Effective Date; provided, however, that: (a) if the Plan is adopted as an amendment of a predecessor plan of the Employer, every Employee who was participating under the predecessor plan when it was so amended shall become a Participant in the Plan as of the Effective Date, whether or not he has satisfied the age and service requirements specified in the Plan Agreement; and (b) if the Employer so specifies in the Plan Agreement, any individual who is (i) a nonresident alien receiving no earned income from an Affiliated Employer which constitutes income from sources within the United States, or (ii) included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee representatives (excluding from the term "Employee representatives" any organization of which more than half of the members are Employees who are owners, officers, or executives of an Affiliated Employer), if retirement benefits were the subject of good faith bargaining and no more than 2 % of the Employees covered by the collective bargaining agreement are professionals as defined in Section 1.410(b)-9 of the Income Tax Regulations, shall not participate in the Plan until the later of the date on which he ceases to be described in clause (i) or (ii), whichever is applicable, or the entry date specified by the Employer in the Plan Agreement; and (c) if the Plan is not adopted as an amendment of a predecessor plan of the Employer, all Employees on the Effective Date who have satisfied the age requirement (versus the service requirement) designated in the Plan Agreement shall begin participation on the Effective Date, if the Employer so elects in the Plan Agreement; and (d) a Participant shall cease to participate in the Plan when he becomes a member of a class of Employees ineligible to participate in the Plan, and shall resume participation immediately upon his return to a class of Employees eligible to participate in the Plan. 3.2. Resumed Participation. A former Employee who incurs a One-Year Eligibility Break after having become a Participant shall participate in the Plan as of the date on which he again becomes an Employee, if (i) his Accounts had become partially or fully vested before he incurred a One-Year Vesting Break, or (ii) he incurred fewer than five consecutive One-Year -14- 36 Eligibility Breaks. In any other case, when he again becomes an Employee he shall be treated as a new Employee under Section 3. 1. 3.3. Benefits for Owner-Employees. If the Plan provides contributions or benefits for one or more Owner-Employees who control both the trade or business with respect to which the Plan is established and one or more other trades or businesses, the Plan and plans established with respect to such other trades or businesses must, when looked at as a single plan, satisfy Sections 401(a) and (d) of the Code with respect to the Employees of this and all such other trades or businesses. If the Plan provides contributions or benefits for one or more Owner- Employees who control one or more other trades or businesses, the Employees of each such other trade or business must be included in a plan which satisfies Sections 401(a) and (d) of the Code and which provides contributions and benefits not less favorable than those provided for such Owner-Employees under the Plan. If an individual is covered as an Owner-Employee under the PH-INS of two or more trades or businesses which he does not control and such individual controls a trade or business, then the contributions or benefits of the Employees under the plan of the trade or business which he does control must be as favorable as those provided for him under the most favorable plan of the trade or business which he does not control. For purposes of this Section 3.3, an Owner-Employee, or two or more Owner-Employees, shall be considered to control a trade or business if such Owner-Employee, or such two or more Owner-Employees together: (a) own the entire interest in an unincorporated trade or business, or (b) in the case of a partnership, own more than 50% of either the capital interest or the profits interest in such partnership. For purposes of the preceding sentence, an Owner-Employee or two or more Owner-Employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such Owner-Employee or such two or more Owner-Employees are considered to control within the meaning of the preceding sentence. 3.4. Changes in Classification. If a Participant ceases to be a member of a classification of Employees eligible to participate in the Plan, but does not incur a One-Year Eligibility Break, he will continue to be credited with Years of Service for vesting while he remains an Employee, and he will resume participation as of the date on which he again becomes a member of a classification of Employees eligible to participate in the Plan. If such a Participant incurs a One-Year Eligibility Break, Section 3.2 will apply. If a Participant who ceases to be a member of a classification of Employees eligible to participate in the Plan becomes a member of a classification of Employees eligible to participate in another plan of the Employer, his Account, if any, under the Plan shall, upon the Administrator's direction, be transferred to the plan in which he has become eligible to participate, if such plan permits receipt of such Account. -15- 37 If an Employee who is not a member of a classification of Employees eligible to participate in the Plan satisfies the age and service requirements specified in the Plan Agreement, he will begin to participate immediately upon becoming a member of an eligible classification. If such an Employee has account balances under another plan of the Employer, such account balances shall be transferred to the Plan upon the Employee's commencement of participation in the Plan, if such other plan permits such transfer. -16- 38 ARTICLE 4. CASH OR DEFERRED ARRANGEMENT UNDER SECTION 401 (k) (CODA) 4.1. General Provisions A Contributions Under Both Articles 4 and 5. (a) Payment and Crediting of Contributions. The Employer may specify that contributions will be made to the Plan only under the CODA, or that Employer Profit Sharing Contributions described in Section 5.1 may also be made. The Employer shall pay to the order of the Trustee the aggregate contributions to the Trust Fund for each Plan Year. Each contribution shall be accompanied by instructions from the Employer, in the manner prescribed by Putnam. Neither the Trustee nor Putnam shall be under any duty to inquire into the correctness of the amount or the timing of any contribution, or to collect any amount if the Employer fails to make a contribution as provided in the Plan. (b) Time for Payment. Elective Deferrals will be transferred to the Trustee as soon as such contributions can reasonably be segregated from the general assets of the Employer, but in any event within 90 days after the date on which the Compensation to which such contributions relate is paid. The aggregate of all other contributions with respect to a Plan Year shall be transferred to the Trustee no later than the due date (including extensions) for filing the Employer's federal income tax return for that Plan Year. (c) Allocations under CODA. Allocations to Participants' Accounts of contributions made pursuant to this Article 4 shall be made as soon as administratively feasible after their receipt by the Trustee, but in any case shall not be allocated as of a day later than the last day of the Plan Year for which the contributions were made. (d) Limitations on Allocations. All allocations shall be subject to the limitations in Article 6. (e) Establishment of Accounts. The Employer will establish and maintain (or cause to be established and maintained) for each Participant individual accounts adequate to disclose his interest in the Trust Fund, including such of the following separate accounts as shall apply to the Participant: Elective Deferral Account, Employer Matching Account, Qualified Nonelective Account, Qualified Matching Account, Employer Profit Sharing Account, Participant Contribution Account, Deductible Employee Contribution Account, and Rollover Account. The maintenance of such accounts shall be only for recordkeeping purposes, and the assets of separate accounts shall not be required to be segregated for purposes of investment. For purposes of the Plan, a Participant is treated as benefiting under the Plan for any Plan Year during which the Participant received or is deemed to receive an allocation to an Account in accordance with Treasury Regulation Section 1.410(b)-3(a). -17- 39 (f) Restoration of Accounts. Notwithstanding any other provision of the Plan, for any Plan Year in which it is necessary to restore any portion of a Participant's Account pursuant to Section 8.3(b) or 9.5, to the extent that the amount of Forfeitures available is insufficient to accomplish such restoration, the Employer shall contribute the amount necessary to eliminate the insufficiency, regardless of whether the contribution is currently deductible by the Employer under Section 404 of the Code. 4.2. CODA Participation. Each Employee who has met the eligibility requirements of Article 3 may make Elective Deferrals to the Plan by completing and returning to the Plan Administrator a Deferral Agreement which provides that the Participant's cash compensation from the Employer will be reduced by the amount indicated in the Deferral Agreement, and that the Employer will contribute an equivalent amount to the Trust on behalf of the Participant. The following rules will govern Elective Deferrals: (a) Subject to the limits specified in the Plan Agreement and set forth in Section 4.3, a Deferral Agreement may apply to any amount or percentage of the Earnings payable to a Participant in each year, including any bonuses payable to a Participant from TIME to TIME. (b) In accordance with such reasonable rules as the Plan Administrator shall specify, a Deferral Agreement will become effective as soon as is administratively feasible after the Deferral Agreement is returned to the Plan Administrator, and will remain effective until it is modified or terminated. No Deferral Agreement may become effective retroactively. (c) A Participant may modify his Deferral Agreement by completing and returning to the Plan Administrator a new Deferral Agreement as of the first business day of any of the first, fourth, seventh and tenth months of the Plan Year, and any such modification will become effective as described in paragraph (b). (d) A Participant may terminate his Deferral Agreement at any time upon advance written notice to the Plan Administrator, and any such termination will become effective as described in paragraph (b). 4.3. Annual Limit on Elective Deferrals. During any taxable year of a Participant, his Elective Deferrals under the Plan and any other qualified plan of an Affiliated Employer shall not exceed the dollar limit contained in Section 402(g) of the Code in effect at the beginning of the taxable year. With respect to any taxable year, a Participant's Elective Deferrals for purposes of this Section 4.3 include all Employer contributions made on his behalf pursuant to an election to defer under any qualified CODA as described in Section 401(k) of the Code, any simplified employee pension cash or deferred arrangement (SARSEP) as described in Section 402(h)(1)(B) of the Code, any eligible deferred compensation plan under Section 457 of the -18- 40 Code, any plan described under Section 501(c)(18) of the Code, and any Employer contributions made on behalf of the Participant for the purchase of an annuity contract under Section 403(b) of the Code pursuant to a salary reduction agreement. The limit under Section 402(g) of the Code on the amount of Elective Deferrals of a Participant who receives a hardship withdrawal pursuant to Section 12.2 shall be reduced, for the taxable year next following the withdrawal, by the amount of Elective Deferrals made in the taxable year of the hardship withdrawal. 4.4. Distribution of Certain Elective Deferrals. "Excess Elective Deferrals" means those Elective Deferrals described in Section 4.3 that are includible in a Participant's gross income under Section 402(g) of the Code, to the extent that the Participant's aggregate elective deferrals for a taxable year exceed the dollar limitation under that Code Section. Excess Elective Deferrals shall be treated as Annual Additions under the Plan, whether or not they are distributed under this Section 4.4. A Participant may designate to the Plan any Excess Elective Deferrals made during his taxable year by notifying the Employer on or before the following March 15 of the amount of the Excess Elective Deferrals to be so designated. A Participant who has Excess Elective Deferrals for a taxable year, taking into account only his Elective Deferrals under the Plan and any other plans of the Affiliated Employers, shall be deemed to have designated the entire amount of such Excess Elective Deferrals. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to any Participant to whose Account Excess Elective Deferrals were so designated or deemed designated for the preceding year. The income or loss allocable to Excess Elective Deferrals is the income or loss allocable to the Participant's Elective Deferral Account for the taxable year multiplied by a fraction, the numerator of which is the Participant's Excess Elective Deferrals for the year and the denominator of which is the Participant's Account balance attributable to Elective Deferrals without regard to any income or loss occurring during the year. To the extent that the return to a Participant of his Elective Deferrals would reduce an Excess Amount (as defined in Section 6.5(f)), such Excess Deferrals shall be distributed to the Participant in accordance with Article 6. 4.5. Satisfaction of ADP and ACP Tests. In each Plan Year, the Plan must satisfy the ADP test described in Section 4.6 and the ACP test described in Section 4.9. The Employer may cause the Plan to satisfy the ADP or ACP test or both tests for a Plan Year by any of the following methods or by any combination of them: (a) By the distribution of Excess Contributions in accordance with Section 4.7, or the distribution of Excess Aggregate Contributions in accordance with Section 4.10, or both; or -19- 41 (b) By making Qualified Nonelective Contributions or Qualified Matching Contributions or both, in accordance with Section 4.11. 4.6. Actual Deferral Percentage Test Limit. The Actual Deferral Percentage (hereinafter "ADP") for Participants who are Highly Compensated Employees for each Plan Year and the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (a) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (b) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by 2.0, provided that the ADP for Participants who are Highly Compensated Employees does not exceed the ADP for Participants who are Non-Highly Compensated Employees by more than two percentage points. The following special rules shall apply to the computation of the ADP: (c) "Actual Deferral Percentage" means, for a specified group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in the group) of (1) the amount of Employer contributions actually paid over to the Trust on behalf of the Participant for the Plan Year to (2) the Participant's Earnings for the Plan Year. Employer contributions on behalf of any Participant shall include: (i) his Elective Deferrals, including Excess Elective Deferrals of Highly Compensated Employees, but excluding (A) Excess Elective Deferrals of Non-Highly Compensated Employees that arise solely from Elective Deferrals made under the Plan or another plan maintained by an Affiliated Employer, and (B) Elective Deferrals that are taken into account in the Average Contribution Percentage test described in Section 4.9 (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals), and excluding Elective Deferrals returned to a Participant to reduce an Excess Amount as defined in Section 6.5(f); (ii) such amount of Qualified Nonelective Contributions, if any, as shall be necessary to enable the Plan to satisfy the ADP test and not used to satisfy the ACP test; and (iii) such amount of Qualified Matching Contributions, if any, as shall be necessary to enable the Plan to satisfy the ADP test and not used to satisfy the ACP test. For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for his failure to make Elective Deferrals shall be treated as a Participant on whose behalf no Elective Deferrals are made. -20- 42 (d) In the event that the Plan satisfies the requirements of Sections 401 (k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with the Plan, then this Section 4.6 shall be applied by determining the ADP of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. (e) The ADP for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals allocated to his Accounts under two or more CODAs described in Section 401(k) of the Code that are maintained by the Affiliated Employers shall be determined as if such Elective Deferrals were made under a single CODA. If a Highly Compensated Employee participates in two or more CODAs that have different Plan Years, all CODAs ending with or within the same calendar year shall be treated as a single CODA, except that CODAs to which mandatory disaggregation applies in accordance with regulations issued under Section 401(k) of the Code shall be treated as separate CODAs. (f) For purposes of determining the ADP of a Participant who is a 5 % owner or one of the ten most highly-paid Highly Compensated Employees, the Elective Deferrals and the Earnings of such a Participant shall include the Elective Deferrals and Earnings for the Plan Year of his Family Members (as defined in Section 414(q)(6) of the Code). Family Members of such Highly Compensated Employees shall be disregarded as separate employees in determining the ADP both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (g) For purposes of the ADP test, Elective Deferrals, Qualified Nonelective Contributions and Qualified Matching Contributions must be made before the last day of the 12-month period immediately following the Plan Year to which those contributions relate. (h) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in satisfying the test. (i) The determination and treatment of the ADP amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 4.7. Distribution of Excess Contributions. "Excess Contributions" means, with respect to any Plan Year, the excess of: -21- 43 (a) The aggregate amount Of Employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for the Plan Year, over (b) The maximum amount of Employer contributions permitted by the ADP test, determined by reducing contributions made on behalf of Highly Compensated Employees in order of their ADPs, beginning with the highest of such percentages. Notwithstanding any other provision of the Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts Excess Contributions were allocated for the preceding Plan Year. The income or loss allocable to Excess Contributions is the income or loss allocable to the Participant's Elective Deferral Account for the Plan Year multiplied by a fraction, the numerator of which is the Participant's Excess Contributions for the year and the denominator is the Participant's account balance attributable to Elective Deferrals without regard to any income or loss occurring during the Plan Year. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year in which the excess amounts arose, an excise tax equal to 10% of the excess amounts will be imposed on the Employer maintaining the Plan. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of them. Excess Contributions shall be allocated to a Participant who is a family member subject to the family member aggregation rules of Section 414(q)(6) of the Code in the proportion that the Participant's Elective Deferrals bear to the combined Elective Deferrals (and other amounts treated as Elective Deferrals) of all of the Participants aggregated to determine his family members' combined ADP. Excess Contributions shall be treated as Annual Additions under the Plan. 4.8. Employer Matching Contributions. If so specified in the Plan Agreement, the Employer will make Employer Matching Contributions to the Plan in accordance with the Plan Agreement, but no Employer Matching Contribution shall be made with respect to an Elective Deferral that is returned to a Participant because it represents an Excess Elective Deferral, an Excess Contribution, an Excess Aggregate Contribution or an Excess Amount (as defined in Section 6.5(f)); and if an Employer Matching Contribution has nevertheless been made with respect to such an Elective Deferral, the Employer Matching Contribution shall be forfeited, notwithstanding any other provision of the Plan. Employer Matching Contributions will be allocated among the Employer Matching Accounts of Participants in proportion to their Elective Deferrals as specified by the Employer in the Plan Agreement. Employer Matching Accounts shall become vested according to the vesting schedule specified in the Plan Agreement, but regardless of that schedule shall be fully vested upon the Participant's Retirement, or, if earlier, attainment of the normal retirement age specified in the Plan Agreement, his death during employment with an Affiliated Employer, and in accordance with Section 18.3. -22- 44 4.9. Average Contribution Percentage Test Limit and Aggregate Limit. The Average Contribution Percentage (hereinafter "ACP") for Participants who are Highly Compensated Employees for each Plan Year and the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (a) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (b) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the ACP for Participants who are Highly Compensated Employees does not exceed the ACP for Participants who are Non-Highly Compensated Employees by more than two percentage points. The following rules shall apply to the computation of the ACP: (c) "Average Contribution Percentage" means the average of the Contribution Percentages of the Eligible Participants in a group. (d) "Contribution Percentage" means the ratio (expressed as a percentage) of a Participant's Contribution Percentage Amounts to the Participant's Earnings for the Plan Year. (e) "Contribution Percentage Amounts" means the sum of the Participant Contributions, Employer Matching Contributions, and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall include Forfeitures of Excess Aggregate Contributions or Employer Matching Contributions allocated to the Participant's Account, taken into account in the year in which the allocation is made. Qualified Nonelective Contributions, if any, necessary to enable the Plan to satisfy the ACP test and not used to satisfy the ADP test shall be included in the Contribution Percentage Amounts. Elective Deferrals shall also be included in the Contribution Percentage Amounts to the extent, if any, needed to enable the Plan to satisfy the ACP test, so long as the ADP test is met before the Elective Deferrals are used in the ACP test, and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. (f) "Eligible Participant" means any Employee who is eligible to make an Elective Deferral, if Elective Deferrals are taken into account in the calculation of the -23- 45 Contribution Percentage, or to receive an Employer Matching Contribution (or a Forfeiture thereof) or a Qualified Matching Contribution. (g) "Aggregate Limit" means the sum of (i) 125% of the greater of the ADP of the Non-Highly Compensated Employees for the Plan Year, or the ACP of Non-Highly Compensated Employees under the Plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the CODA, and (ii) the lesser of 200% of, or two plus, the lesser of the ADP or ACP. "Lesser" is substituted for 'greater" in clause (i) of the preceding sentence, and "greater" is substituted for "lesser" after the phrase "two plus the" in clause (ii) of the preceding sentence, if that formulation will result in a larger Aggregate Limit. (h) If one or more Highly Compensated Employees participate in both a CODA and a plan subject to the ACP test maintained by an Affiliated Employer, and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly Compensated Employees who also participate in a CODA will be reduced (beginning with the Highly Compensated Employee whose ACP is the highest) so that the Aggregate Limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amount is reduced shall be treated as an Excess Aggregate Contribution. In determining the Aggregate Limit, the ADP and ACP of Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. The Aggregate Limit will be considered satisfied if both the ADP and ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-Highly Compensated Employees. (i) For purposes of this section, the Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his account under two or more plans described in Section 401 (a) of the Code, or CODAs described in Section 401(k) of the Code, that are maintained by an Affiliated Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more CODAs that have different plan years, all CODAs ending with or within the same calendar year shall be treated as a single CODA, except that CODAs to which mandatory disaggregation applies in accordance with regulations issued under Section 401(k) of the Code shall be treated as separate CODAs. (j) In the event that the Plan satisfies the requirements of Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with the Plan, then this Section 4.9 shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. For Plan -24- 46 Years beginning after December 31, 1989, plans may BE aggregated in order to satisfy Section 401(m) of the Code only if they have the same Plan Year. (k) For purposes of determining the Contribution Percentage of a Participant who is a 5 % owner or one of the ten most highly-paid Highly Compensated Employers, the Contribution Percentage Amounts and Earnings of the Participant shall include the Contribution Percentage Amounts and Earnings for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members of such Highly Compensated Employees shall be disregarded as separate employees in determining the Contribution Percentage both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (l) For purposes of the ACP test, Matching Contributions, Qualified Matching Contributions and Qualified Nonelective Contributions will be considered made for a Plan Year if made no later than the end of the 12-month period beginning on the day after the close of the Plan Year. (m) The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in the ACP test. (n) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 4.10. Distribution of Excess AGGREGATE Contributions. Notwithstanding any other provision of the Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited if forfeitable, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. The income or loss allocable to Excess Aggregate Contributions is the income or loss allocable to the Participant's Employer Matching Account, QUALIFIED Matching Account (IF any, and IF all amounts therein are not used in the ADP test), and, if applicable, Qualified Nonelective Contribution Account, Participant Contribution Account and Elective Deferral Account for the Plan Year, multiplied by a fraction, the numerator of which is the Participant's Excess Aggregate Contributions for the year and the denominator of which is the Participant's account balance(s) attributable to Contribution Percentage Amounts without regard to any income or loss occurring during the Plan Year. Excess Aggregate Contributions shall be allocated to a Participant who is subject to the family member aggregation rules of Section 414(q)(6) of the Code in the proportion that the Participant's Employer Matching Contributions (and other amounts treated as his Employer Matching Contributions) bear to the combined Employer Matching Contributions (and other amounts treated as Employer Matching Contributions) of all of the Participants aggregated to determine its family members' combined ACP. If excess amounts attributable to Excess, -25- 47 Aggregate contributions are distributed more than 21/2 months after the last day of the Plan Year in which such excess amounts arose, an excise tax equal to 10% of the excess amounts will be imposed on the Employer maintaining the Plan. Excess Aggregate Contributions shall be treated as Annual Additions under the Plan. Excess Aggregate Contributions shall be forfeited if forfeitable, or distributed on a pro-rata basis from the Participant's Participant Contribution Account, Employer Matching Account, and Qualified Matching Account (and, if applicable, the Participant's Qualified Nonelective Account or Elective Deferral Account, or both). Excess Aggregate Contributions means, with respect to any Plan Year, the excess of: (a) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage and actually made on behalf of Highly Compensated Employees for the Plan Year, over (b) The maximum Contribution Percentage Amounts permitted by the ACP test and the Aggregate Limit (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages, beginning with the highest of such percentages). Such determination shall be made after first determining Excess Elective Deferrals pursuant to Section 4.4, and then determining Excess Contributions pursuant to Section 4.7. 4.11. Qualified Nonelective Contributions - Qualified Matching Contributions. The Employer may make Qualified Nonelective Contributions for a Plan Year which, if made, shall be allocated to the Qualified Nonelective Contribution Accounts of Qualified Participants who are Non-Highly Compensated Employees, in proportion to the Earnings of such Qualified Participants for the Plan Year. The Employer may make Qualified Matching Contributions for a Plan Year which, if made shall be allocated to the Qualified Matching Accounts of Participants who are Non-Highly Compensated Employees, in proportion to the Elective Deferrals of such Participants for the Plan Year. 4.12. Restriction on Distributions. Except as provided in Sections 4.4, 4.7 and 4.10, no distribution may be made from a Participant's Elective Deferral Account, Qualified Nonelective Account or Qualified Matching Account until the occurrence of one of the following events: (a) The Participant's Disability, death or termination of employment with the Affiliated Employers; (b) Termination of the Plan without the establishment of another defined contribution plan other than an employee stock ownership plan as defined in Section -26- 48 4975(e) or Section 409 of the Code, or a simplified employee pension plan as defined in Section 408(k) of the Code; (c) The Participant's attainment of age 59 1/2; or (d) In the case of an Employer that is a corporation, the disposition by the Employer to an unrelated entity of (i) substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in a trade or business of the Employer, if the Employer continues to maintain the Plan after the disposition, but only with respect to Employees who continue employment with the entity acquiring such assets; or (ii) the Employer's interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code), if the Employer continues to maintain the Plan after the disposition, but only with respect to Employees who continue employment with such subsidiary. In addition, if the Employer has elected in the Plan Agreement to permit such distributions, a distribution may be made from a Participant's Elective Deferral Account in the event of his financial hardship as described in Section 12.2. All distributions upon any of the events listed above are subject to the conditions of Article 10, Joint and Survivor Annuity Requirements. In addition, distributions made after March 31, 1988, on account of an event described in subsection (b) or (d) above must be made in a lump sum. 4.13. Forfeitures of Employer Matching Contributions. Forfeitures of Employer Matching Contributions, other than Excess Aggregate Contributions, shall be made in accordance with Section 8.3. Forfeitures of Employer Matching Contributions in a Plan Year shall be applied to reduce other contributions required of the Employer. 4.14. Special Effective Dates. If the Plan is adopted as an amendment of an existing plan, the provisions of Sections 4.3 and Section 4.7 through 4. 1 1 are effective as of the first day of the first Plan Year beginning after December 31, 1986. -27- 49 ARTICLE 5. OTHER CONTRIBUTIONS 5.1. Employer Profit Sharing Contributions. (a) Amount of Annual Contribution. If the Employer so elects in the Plan Agreement, the Employer may in each Plan Year contribute an amount to the Trust Fund determined in the Employer's own discretion, which contribution plus any amount reapplied for the Plan Year under Section 6. 1 (d) shall not exceed the amount deductible under Section 404 of the Code. Employer Profit Sharing Contributions may be made in any Plan Year whether or not the Employer has current or accumulated profits for that Plan Year. (b) Allocation of Employer Profit Sharing Contributions. The Employer Profit Sharing Contribution (and any amounts reapplied under Section 6. 1 (d)) for the Plan Year shall be allocated as of the last day of each Plan Year to the Employer Profit Sharing Accounts of each Qualified Participant in proportion to the Earnings of each such Qualified Participant for the Plan Year. 5.2. Forfeitures of Employer Profit Sharing Contributions. Forfeitures of Employer Profit Sharing Contributions shall be made in accordance with Section 8.3. Forfeitures of Employer Profit Sharing Contributions shall be applied to reduce other contributions required of the Employer. 5.3. Rollover Contributions. An Employee in an eligible class may contribute at any time cash or other property (which is not a collectible within the meaning of Section 408(m) of the Code) acceptable to the Trustee representing qualified rollover amounts under Sections 402, 403, or 408 of the Code. Amounts so contributed shall be credited to a Rollover Account for the Participant. 5.4. No After-Tax Participant Contributions or Deductible Employee Contributions. The Plan Administrator shall not accept either after-tax Participant Contributions or deductible employee contributions, other than those held in a Participant Contribution Account or a Deductible Employee Contribution Account transferred from a predecessor plan of the Employer. -28- 50 ARTICLE 6. LIMITATIONS ON ALLOCATIONS 6.1. No Additional Plan. If the Participant does not participate in and has never participated in another qualified plan, or a welfare benefit fund (as defined in Section 419(e) of the Code), or an individual medical account (as defined in Section 415(l)(2) of the Code) which provides an Annual Addition as defined in Section 6.5(a), maintained by an Affiliated Employer: (a) The amount of Annual Additions (as defined in Section 6.5(a)) which may be credited to the Participant's Accounts for any Limitation Year will not exceed the lesser of the Maximum Annual Additions or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Annual Additions, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Annual Additions. (b) Before determining a Participant's actual Section 415 Compensation for a Limitation Year, the Employer may determine the Maximum Annual Additions for the Participant on the basis of a reasonable estimation of the Participant's Section 415 Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. (c) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Annual Additions for the Limitation Year will be determined on the basis of the Participant's actual Section 415 Compensation for the Limitation Year. (d) If pursuant to paragraph (c), or as a result of a reasonable error in determining the amount of Elective Deferrals that may be made by a Participant, the Annual Additions exceed the Maximum Annual Additions, the Excess Amount will be disposed of as follows: (1) Elective Deferrals, to the extent they would reduce the Excess Amount, will be returned to the Participant. (2) If after the application of (1) above an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's Accounts will be used to reduce Employer contributions (including any allocation of Forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary. (3) If after the application of (1) above an Excess Amount still exists, and the Participant is not covered by the Plan at the end of a Limitation Year, -29- 51 the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any Forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary. (4) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section 6.l(d), it will participate in the allocation of the Trust's investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer or any Employee contributions may be made to the Plan for that Limitation Year. Excess amounts may not be distributed to Participants or former Participants. 6.2. Additional Master or Prototype Plan. If in addition to this Plan a Participant is covered under another qualified Master or Prototype defined contribution plan or a welfare benefit fund (as defined in Section 419(e) of the Code), or an individual medical account (as defined in Section 415(l)(2) of the Code) which provides an Annual Addition as defined in Section 6.5(a), maintained by an Affiliated Employer during any Limitation Year: (a) The Annual Additions which may be credited to a Participant's Accounts under this Plan for any such Limitation Year will not exceed the Maximum Annual Additions reduced by the Annual Additions credited to a Participant's accounts under the other plans and welfare benefit funds for the same Limitation Year. If the Annual Additions with respect to the Participant under other defined contribution plans and welfare benefit funds maintained by an Affiliated Employer are less than the Maximum Annual Additions, and the Employer contribution that would otherwise be contributed or allocated to the Participant's Accounts under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated to this Plan will be reduced so that the Annual Additions under all such plans and funds for the Plan Year will equal the MAXIMUM Annual Additions. If the Annual Additions with respect to the Participant under such other defined contribution plans and welfare benefit funds in the aggregate are equal to or greater than the Maximum Annual Additions, no amount will be contributed or allocated to the Participant's Accounts under this Plan for the Limitation Year. (b) Before determining a Participant's actual Section 415 Compensation for a Limitation Year, the Employer may determine the Maximum Annual Additions for the Participant in the manner described in Section 6. 1 (b) (c) As soon as is administratively feasible after the end of the Plan Year, the Maximum Annual Additions for the Plan Year will be determined on the basis of the Participant's actual Section 415 Compensation for the Plan Year. -30- 52 (d) If, pursuant to Section 6.2(c) or as a result of the allocation of Forfeitures, or of a reasonable error in determining the amount of Elective Deferrals that may be made by him, a Participant's Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated under any qualified Master or Prototype defined contribution plan, except that Annual Additions to any welfare benefit fund or individual medical account will be deemed to have been allocated first regardless of the actual allocation date. (e) If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of X and Y, where (X) is the total Excess Amount allocated as of such date, and (Y) is the ratio of: (1) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (2) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified Master or Prototype defined contribution plans. (f) Any Excess Amount attributed to this Plan will be disposed of in the manner described in Section 6.1(d) 6.3. Additional Non-Master or Non-Prototype Plan. If the Participant is covered under another qualified defined contribution plan maintained by an Affiliated Employer which is not a Master or Prototype plan, Annual Additions which may be credited to the Participant's Accounts under this Plan for any Limitation Year will be limited in accordance with Section 6.2 as though the other plan were a Master or Prototype plan. 6.4. Additional Defined Benefit Plan. If an Affiliated Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which may be credited to the Participant's Accounts under this Plan for any Limitation Year will be limited in accordance with the Plan Agreement. 6.5. Definitions. (a) Annual Additions means the sum of the following amounts credited to a, Participant's Accounts for the Limitation Year: (1) Employer contributions; -31- 53 (2) For any Limitation Year beginning after December 31, 1986, Participant Contributions; (3) Forfeitures; (4) Amounts allocated after March 31, 1984, to any individual medical account, as defined in Section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by an Affiliated Employer; (5) Amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to postretirement medical benefits allocated to the separate account of a key Employee, as defined in Section 419A(d)(3) of the Code, under a welfare benefit fund as defined in Section 419(e) of the Code, maintained by an Affiliated Employer; and (6) Excess Elective Deferrals, Excess Contributions (including recharacterized Elective Deferrals) and Excess Aggregate Contributions. For this purpose, any Excess Amount applied under Sections 6. 1 (d) or 6.2(e) in the Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year. Any rollover contribution will not be considered an Annual Addition. (b) Section 415 Compensation means, for a Self-Employed Individual, his Earned Income; and for any other Participant, his "Form W-2 earnings" as defined in Section 2.7. For purposes of applying the limitations of this Article 6, Section 415 Compensation for a Limitation Year is the Section 415 Compensation actually paid or made available during such Limitation Year. (c) Defined Benefit Fraction means a fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all the defined benefit plans (whether or not terminated) maintained by the Affiliated Employers, and the denominator of which is the lesser of 125 % of the dollar limitation in effect for the Limitation Year under Sections 415(b) and (d) of the Code, or 140% of the Participant's Highest Average Compensation including any adjustments under Section 415(b) of the Code. Notwithstanding the foregoing, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by an Affiliated Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 % of the sum of the annual benefits under such plans which the Participant had accrued as -32- 54 of the close of the last Limitation Year beginning before January 1, 1987, disregarding any change in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 of the Code for all Limitation Years beginning before January 1, 1987. (d) Defined Contribution Dollar Limitation means $30,000 or if greater, one-fourth of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code as in effect for the Limitation Year. (e) Defined Contribution Fraction means a fraction, the numerator of which is the sum of the Annual Additions to the Participant's accounts under all the defined contribution plans (whether or not terminated) maintained by Affiliated Employers for the current and all prior Limitation Years (including the Annual Additions attributable. to the Participant's nondeductible Employee contributions to all defined benefit plans, whether or not terminated, maintained by the Affiliated Employers, and the Annual Additions attributable to all welfare benefit funds, as defined in Section 419(e) of the Code, and individual medical accounts, as defined in Section 415(l)(2) of the Code), and the denominator of which is the sum of the Maximum Annual Additions for the current and all prior Limitation Years of service with the Affiliated Employers (regardless of whether a defined contribution plan was maintained by any Affiliated Employer). The Maximum Annual Additions in any Plan Year is the lesser of 125 % of the dollar limitation determined under Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A) of the Code, or 35 % of the Participant's Section 415 Compensation for such year. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986 in one or more defined contribution plans maintained by an Affiliated Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the SUM of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to product of the excess of the sum of the fractions over 1.0, multiplied by the denominator of THIS fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of THE end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan after May 5, 1986, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. The Annual Addition for any Limitation Year beginning before January 1, 1987, shall not be recomputed to treat 100% of nondeductible Employee contributions as Annual Additions. (f) Excess Amount means, with respect to any Participant, the amount by which Annual Additions exceed the Maximum Annual Additions. -33- 55 (g) Highest Average Compensation means the average compensation for the three consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is determined based on the Plan Year. (h) Limitation Year means the Plan Year. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different period of 12 consecutive months, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (i) Master or Prototype plan means a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (j) Maximum Annual Additions, which is the maximum annual addition that may be contributed or allocated to a Participant's account under the plan for any Limitation Year, means an amount not exceeding the lesser of (a) the Defined Contribution Dollar Limitation or (b) 25 % of the Participant's Section 415 Compensation for the Limitation Year. The compensation limitation referred to in (b) shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition under Section 415(l)(1) or Section 419A(d)(2) of the Code. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different period of 12 consecutive months, the Maximum Annual Additions will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction: number of months in the short Limitation Year ----------------------- 12 (k) Projected Annual Benefit means the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of the Plan assuming: (1) The Participant win continue employment until normal retirement age under the Plan (or current age, if later), and (2) The Participant's Section 415 Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the plan will remain constant for all future Limitation Years. -34- 56 ARTICLE 7. ELIGIBILITY FOR DISTRIBUTION OF BENEFITS 7.1. Retirement. After his Retirement, the amount credited to a Participant's Accounts will be distributed to him in accordance with Article 9. The termination of a Participant's employment with the Affiliated Employers after he has (i) attained the normal retirement age specified in the Plan Agreement, (ii) fulfilled the requirements for early retirement (if any) specified in the Plan Agreement, or (iii) become Disabled will constitute his Retirement. Upon a Participant's Retirement (or, if earlier, his attainment of the normal retirement age specified in the Plan Agreement or fulfillment of the requirements for early retirement, if any, specified in the Plan Agreement), the Participant's Accounts shall become fully vested, regardless of the vesting schedule specified by the Employer in the Plan Agreement. A Participant who separates from service with any vested balance in his Accounts, after satisfying the service requirements for early retirement (if any is specified in the Plan Agreement) but before satisfying the age requirement for early retirement (if any is specified in the Plan Agreement), shall be entitled to a fully vested early retirement benefit upon his satisfaction of such age requirement. 7.2. Death. If a Participant dies before the distribution of his Accounts has been completed, his Beneficiary will be entitled to distribution of benefits in accordance with Article 9. A Participant's Accounts will become My vested upon his death before termination of his employment with the Affiliated Employers, regardless of the vesting schedule specified by the Employer in the Plan Agreement. A Participant may designate a Beneficiary by completing and returning to the Plan Administrator a form provided for this purpose. The form most recently completed and returned to the Plan Administrator before the Participant's death shall supersede any earlier form. If a Participant has not designated any Beneficiary before his death, or if no Beneficiary so designated survives the Participant, his Beneficiary shall be his surviving spouse, or if there is no surviving spouse, his estate. A married Participant may designate a Beneficiary other than his spouse only if his spouse consents in writing to the designation, and the spouse's consent acknowledges the effect of the consent and is witnessed by a notary public or a representative of the Plan. The beneficiary or beneficiaries named in the designation to which the spouse has so consented may not be changed without further written spousal consent unless the terms of the spouse's original written consent expressly permit such a change, and acknowledge that the spouse voluntarily relinquishes the right to limit the consent to a specific beneficiary. The marriage of a Participant shall nullify any designation of a beneficiary previously executed by the Participant. If it is established to the satisfaction of the Plan Administrator that the Participant has no spouse or that the spouse cannot be located, the requirement of spousal consent shall not apply. Any spousal consent, or establishment that spousal consent cannot be obtained, shall apply only to the particular spouse involved. 7.3. Other Termination of Employment. A Participant whose employment terminates for any reason other than his Retirement or death will be entitled to distribution, in accordance -35- 57 with Article 9, or benefits equal to the amount of the vested balance of his Accounts as determined under Article 8. -36- 58 ARTICLE 8. VESTING 8.1. Vested Balance. The vested balance of a Participant's Accounts will be determined as follows: (a) General Rule. A Participant's Elective Deferral Account, Qualified Nonelective Contribution Account, Qualified Matching Account, Participant Contribution Account and Rollover Account shall be fully vested at all times. The vested portion of his Employer Matching Account and Employer Profit Sharing Account shall be equal to the percentage that corresponds, in the vesting schedule specified in the Plan Agreement, to the number of Years of Service credited to the Participant as of the end of the Year of Service in which his employment terminates. (b) Retirement. All of a Participant's Accounts shall become fully vested upon his Retirement or his earlier attainment of the normal retirement age elected by the Employer in the Plan Agreement. For so long as a former Employee does not receive a distribution (or a deemed distribution) of the vested portion of his Accounts, the undistributed portion shall be held in a separate account which shall be invested pursuant to Section 13.3 and shall share in earnings and losses of the Trust Fund pursuant to Section 13.4 in the same manner as the Accounts of active Participants 8.2. Vesting of Accounts of Returned Former Employees. The following rules apply in determining the vested portion of the Accounts of a Participant who incurs one or more consecutive One-Year Vesting Breaks and then returns to employment with an Affiliated Employer: (a) If the Participant incurred fewer than five consecutive One-Year Vesting Breaks, then all of his Years of Service will be taken into account in determining the vested portion of his Accounts, as soon as he has completed one Year of Service following his return to employment. (b) If the Participant incurred five or more consecutive One-Year Vesting Breaks,then: (1) no Year of Service completed after his return to employment will be taken into account in determining the vested portion of his Accounts as of any time before he incurred the first One-Year Vesting Break; (2) years of Service completed before he incurred the first One-Year Vesting Break will not be taken into account in determining the vested portion of his Accounts as of any time after his return to employment (i) unless some -37- 59 portion of his Employer Contribution Account or Employer Matching Account had become vested before he incurred the first One- Year Vesting Break, and (ii) until he has completed one Year of Service following his return to employment; and (3) separate sub-accounts will be maintained for the Participant's pre-break and post-break Employer Contribution Account and Employer Matching Account, until both sub-accounts become fully vested. Both sub-accounts will share in the earnings and losses of the Trust Fund. 8.3. Forfeiture of Non-Vested Amounts. The portion of a former Employee's Accounts that has not become vested under Section 8. 1 shall become a Forfeiture in accordance with the following rules, and shall be applied in accordance with Section 4.13 or Section 5.2. (a) If Distribution Is Made. If any or all of the vested portion of a Participant's Accounts is distributed in accordance with Section 9.1 or 9.2 before the Participant incurs five consecutive One-Year Vesting Breaks, the nonvested portion of his Accounts shall become a Forfeiture in the Plan Year in which the distribution occurs. For purposes of this Section 8.3, if the value of the vested portion of A Participant's Accounts is zero, the Participant shall be deemed to have received a distribution of the entire vested balance of his Accounts on the day his employment terminates. If the Participant elects to have distributed less than the entire vested portion of his Employer Contribution Account or Employer Matching Accounts, the part of the nonvested portion that will become a Forfeiture is the total nonvested portion multiplied by a fraction, the numerator of which is the amount of the distribution and the denominator of which is the total value of the entire vested portion of such Accounts. (b) Right of Repayment. If a Participant who receives a distribution pursuant to paragraph (a) returns to employment with an Affiliated Employer, the balance of his Employer Contribution Account and Employer Matching Account will be restored to the amount of such balance on the date of distribution, if he repays to the Plan the full amount of the distribution, before the earlier of (i) the fifth anniversary of his return to employment or (ii) the date he incurs five consecutive One-Year Vesting Breaks following the date of distribution. If an Employee is deemed to receive a distribution pursuant to this Section 8.3, and he resumes employment covered under this Plan before the date he incurs five consecutive One-Year Vesting Breaks, upon his reemployment the Employer-derived account balance of the Employee will be restored to the amount on the date of such deemed distribution. Such restoration will be made, first, from the amount of any Forfeitures available for reallocation as of the last day of the Plan Year in which repayment is made, to the extent thereof; and to the extent that -38- 60 Forfeitures are not available or are insufficient to restore the balance, from contributions made by the Employer pursuant to Section 4.1(f). (c) If No Distribution Is Made. If no distribution (nor deemed distribution) is made to a Participant before he incurs five consecutive One-Year Vesting Breaks, the nonvested portion of his Accounts shall become a Forfeiture at the end of the Plan Year that constitutes his fifth consecutive One-Year Vesting Break. (d) Adjustment of Accounts. Before a Forfeiture is incurred, a Participant's Accounts shall share in earnings and losses of the Trust Fund pursuant to Section 13.4 in the same manner as the Accounts of active Participants. (e) Accumulated Deductible Contributions. For Plan Years be before January 1, 1989, a Participant's vested Account balance shall not include accumulated deductible contributions within the meaning of Section 72(o)(5)(B) of the Code. 8.4. Special Rule in the Event of a Withdrawal. If a withdrawal pursuant to Section 12.2 or 12.3 is made from a Participant's Employer Profit Sharing Account or Employer Matching Account before the Account is fully vested, and the Participant may subsequently increase the vested percentage in the Account, then a separate account will be established at the time of the withdrawal, and at any relevant time after the withdrawal the vested portion of the separate account will be equal to the amount "X" determined by the following formula: X = P(AB + D) - D For purposes of the formula, P is the Participant's vested percentage at the relevant time, AB is the account balance at the relevant time, and D is the amount of the withdrawal. 8.5. Vesting Election. If the Plan is amended to change any vesting schedule, or is amended in any way that directly or indirectly affects the computation of a Participant's vested percentage, each Participant who has completed not less than three Years of Service may elect, within a reasonable period after the adoption of the amendment or change, in a writing filed with the Employer to have his vested percentage computed under the Plan without regard to such amendment. For a Participant who is not credited with at least one Hour of Service in a Plan Year beginning after December 31, 1988, the preceding sentence shall be applied by substituting 'five Years of Service' for "three Years of Service". The period during which the election may be made shall commence with the date the amendment is adopted, or deemed to be made, and shall end on the latest of (a) 60 days after the amendment -is adopted; (b) 60 days after the amendment becomes effective; or (c) 60 days after the Participant is issued written notice of the amendment by the Employer. -39- 61 ARTICLE 9. PAYMENT OF BENEFITS 9.1. Distribution of Accounts. A Participant or Beneficiary who has become eligible for a distribution of benefits pursuant to Article 7 may elect to receive such benefits at any time, subject to the terms and conditions of this Article 9, Article 10 and Article 11. Unless a Participant or Beneficiary elects otherwise, distribution of benefits will begin no later than the 60th day after the end of the Plan Year in which the latest of the following events occurs: (a) The Participant attains age 65 (or if earlier, the normal retirement age specified by the Employer in the Plan Agreement); or (b) The tenth anniversary of the year in which the Participant commenced participation in the Plan; or (c) The Participant's employment with the Affiliated Employers terminates. A Beneficiary who is the surviving spouse of a Participant may elect to have distribution of benefits begin within the 90-day period following the Participant's death. For purposes of this Section 9. 1, the failure of a Participant (and his spouse, if spousal consent is required pursuant to Article 10) to consent to a distribution while a benefit is 'immediately distributable" within the meaning of Section 9.2 shall be considered an election to defer commencement of payment. The vested portion of a Participant's Accounts will be distributed in a lump slim in cash no later than 60 days after the end of the Plan Year in which his employment terminates, if at the time the Participant first became entitled to a distribution the value of such vested portion derived from Employer and Employee contributions does not exceed $3,500. Commencement of distributions in any case shall be subject to Section 9.4. 9.2. Restriction on Immediate Distributions. A Participant's account balance is considered "immediately distributable" if any part of the account balance could be distributed to the Participant (or his surviving spouse) before the Participant attains, or would have attained if not deceased, the later of the normal retirement age specified in the Plan Agreement or age 62. (a) If the value of a Participant's vested account balance derived from Employer and Employee contributions exceeds (or at the time of any prior distribution exceeded) $3,500, and the account balance is immediately distributable, the Participant and his spouse (or where either the Participant or the spouse has died, the survivor) must consent to any such distribution, unless an exception described in paragraph (b) applies. The consent of the Participant and his spouse shall be obtained in writing within the 90-day period ending on the annuity starting date, which is the first day of the first period for which an amount is paid as an annuity (or any other form). The Plan Administrator shall notify the Participant and the spouse, no less than 30 days and -40- 62 no more than 90 days before the annuity starting date, of the right to defer any distribution until the Participant's account balance is no longer immediately distributable. Such notification shall include a general description of the material features of the optional forms of benefit available under the Plan and an explanation of their relative values, in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code. If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the required notification is given, provided that: (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option); and (2) the Participant, after receiving the notice, affirmatively elects a distribution. (b) Notwithstanding paragraph (a), only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the account balance is immediately distributable. Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant pursuant to Section 1 0. I (b) of the Plan, only the Participant need consent to the distribution of an account balance that is immediately distributable. Neither the consent of the Participant nor the spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termination of the Plan, if the Plan does not offer an annuity option purchased from a commercial provider, and no Affiliated Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), a Participant's account balance shall be distributed to the Participant without his consent. If any Affiliated Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), a Participant's account balance shall be transferred to that defined contribution plan without his consent, unless he consents to an immediate distribution. For purposes of determining the applicability of the foregoing consent requirements to distributions made before the first day of the first Plan Year beginning after December 31, 1988, the Participant's vested account balance shall not include amounts attributable to accumulated deductible employee contributions within the meaning of Section 72(o)(5)(B) of the Code. 9.3. Optional Forms of Distribution. If at the time a Participant first becomes entitled to a distribution the value of his vested Account balance derived from Employer and Employee contributions does not exceed $3,500, distribution shall be made in a lump SUM in cash. Subject to the preceding sentence and to the rules of Article 10 concerning joint and survivor -41- 63 annuities, a Participant or Beneficiary may elect to receive benefits in any of the following optional forms: (a) A lump sum payment in cash or in kind or in a combination of both; (b) A series of installments over a period certain that meets the requirements of Article II; or (c) In the event that the Plan is adopted as an amendment to an existing plan, any optional form of distribution available under the existing plan. Such optional forms of distribution may be made available where necessary through the purchase by the Plan Administrator of an appropriate annuity contract from a commercial provider, with terms complying with the requirements of Article 11. If the Plan is a direct or indirect transferee of a defined benefit plan, money purchase plan, target benefit plan, stock bonus plan, or profit sharing plan which is subject to the survivor annuity requirements of Sections 40 1 (a)(11) and 417 of the Code, the provisions of Article 1O shall apply. 9.4. Distribution Procedure. The Trustee shall make or commence distributions to or for the benefit of Participants only on receipt of an instruction from the Employer in writing or by such other means as shall be acceptable to the Trustee, certifying that a distribution of a Participant's benefits is payable pursuant to the Plan, and specifying the time and manner of payment. The amount to be distributed shall be determined as of the Valuation Date coincident with or next following the Employer's order. The Trustee shall be fully protected in acting upon the directions of the Employer in making benefit distributions, and shall have no duty to determine the rights or benefits of any person under the Plan or to inquire into the right or power of the Employer to direct any such distribution. The Trustee shall be entitled to assume conclusively that any determination by the Employer with respect to a distribution meets the requirements of the Plan. The Trustee shall not be required to make any payment hereunder in excess of the net realizable value of the assets of the Account in question at the time of such payment, nor to make any payment in cash unless the Employer has furnished instructions as to the assets to be converted to cash for the purposes of making payment. 9.5. Lost Distributee. In the event that the Plan Administrator is unable with reasonable effort to locate a person entitled to distribution under the Plan, the Accounts distributable to such A person shall become a Forfeiture at the end of the third Plan Year after the Plan Administrator's efforts to locate such person began; provided, however, that the amount of the Forfeiture shall be restored in the event that such person thereafter submits a claim for benefits under the Plan. Such restoration will be made, first, from the amount of Forfeitures available for reallocation as of the last day of the Plan Year in which the claim is made, to the extent thereof-, and to the extent that Forfeitures are not available or are insufficient to restore the balance, from contributions made by the Employer pursuant to Section 4.1 (f). A Forfeiture occurring under this Section 9.5 shall be used to reduce the -42- 64 amount of contributions required of the Employer as described in Section 4.13 and Section 5.2. 9.6. Direct Rollovers. This Section 9.6 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section 9.6, the following definitions shall apply: (a) Eligible Rollover Distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributees and the distributee's Designated Beneficiary (as defined in Section 11. 3), or for a specified period of ten years or more, any distribution to the extent such distribution is required under section 401(a)(9) of the Code, and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) Eligible Retirement Plan. An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) Distributee. A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a Qualified Domestic Relations Order are distributees with regard to the interest of the spouse or former spouse. (d) Direct Rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 9.7. Distributions Required by a Qualified Domestic Relations Order. To the extent required by a Qualified Domestic Relations Order, the Plan Administrator shall make distributions from a Participant's Accounts to any alternate payee named in such order in a -43- 65 manner consistent with the distribution options OTHERWISE AVAILABLE under the Plan, regardless of whether the Participant is otherwise entitled to A distribution at such time under the Plan. -44- 66 ARTICLE 10. JOINT AND SURVIVOR ANNUITY REQUIREMENTS 10.1. Applicability. (a) Generally. The provisions of Sections 10.2 through 10.5 shall generally apply to a Participant who is credited with at least one Hour of Service on or after August 23, 1984, and such other Participants as provided in Section 10.6. (b) Exception for Certain Plans. The provisions of Sections 10.2 through 10.5 shall not apply to a Participant if: (i) the Participant does not or cannot elect payment of benefits in the form of a life annuity, and (ii) on the death of the Participant, his Vested Account Balance will be paid to his surviving spouse (unless there is no surviving spouse, or the surviving spouse has consented to the designation of another Beneficiary in a manner conforming to a Qualified Election) and the surviving spouse may elect to have distribution of the Vested Account Balance (adjusted in accordance with Section 13.4 for gains or losses occurring after the Participant's death) commence within the 90-day period following the date of the Participant's death. The Participant may waive the spousal death benefit described in this paragraph (b) at any time, provided that no such waiver shall be effective unless it satisfies the conditions applicable under Section 10-4(c) to a Participant's waiver of a Qualified Preretirement Survivor Annuity. The exception in this paragraph (b) shall not be operative with respect to a Participant if the Plan: (1) is a direct or indirect transferee of a defined benefit plan, money purchase pension plan, target benefit plan, stock bonus plan, or profit sharing plan which is subject to the survivor annuity requirements of Sections 401 (a)(11) and 417 of the Code; or (2) is adopted as an amendment of a plan that did not qualify for the exception in this paragraph (b) before the amendment was adopted. For purposes of this paragraph (b), Vested Account Balance shall have the meaning provided in Section 10.4(f). The provisions of Sections 10.2 through 10.6 set forth the survivor annuity requirements of Sections 401 (a)(11) and 417 of the Code. (c) Exception for Certain Amounts. The provisions of Sections 10.2 through 10.5 shall not apply to any distribution made on or after the first day of the first Plan Year beginning after December 31, 1988, from or under a separate account attributable solely to accumulated deductible employee contributions as defined in Section 72(o)(5)(B) of the Code, and maintained on behalf of a Participant in a money purchase pension plan or a target benefit plan, provided that the exceptions applicable to certain profit sharing plans under paragraph (b) are applicable with respect to the separate account (for this purpose, Vested Account Balance means the Participant's -45- 67 separate account balance attributable solely to accumulated deductible employee -contributions within the meaning of Section 72(o)(5)(B) of the Code). 10.2. Qualified Joint and Survivor Annuity. Unless an optional form of benefit is selected pursuant to a Qualified Election within the go-day period ending on the Annuity Starting Date, a married Participant's Vested Account Balance will be paid in the form of A Qualified Joint and Survivor Annuity and an unmarried Participant's Vested Account Balance will be paid in the form of a life annuity. In either case, the Participant may elect to have such an annuity distributed upon his attainment of the Earliest Retirement Age under the Plan. 10.3. Qualified Preretirement Survivor Annuity. Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, the Vested Account Balance of a Participant who dies before the Annuity Starting Date shall be applied toward the purchase of an annuity for the life of his surviving spouse (a "Qualified Preretirement Survivor Annuity"). The surviving spouse may elect to have such an annuity distributed within a reasonable period after the Participant's death. For purposes of this Article 10, the term "spouse" means the current spouse or surviving spouse of a Participant, except that a former spouse will be treated as the spouse or surviving spouse (and a current spouse will not be treated as the spouse or surviving spouse) to the extent provided under A qualified domestic relations order as described in Section 414(p) of the Code. 10.4. Definitions. The following definitions apply: (a) "Election Period" means the period beginning on the first day of the Plan Year in which a Participant attains age 35 and ending on the date of the Participant's death. If a Participant separates from service before the first day of the Plan Year in which he reaches age 35, the Election Period with respect to his account balance as of the date of separation shall begin on the date of separation. A Participant who will not attain age 35 as of the end of a Plan Year may make a special Qualified Election to waive the Qualified Preretirement Survivor Annuity for the period beginning on the date of such election and ending on the first day of the Plan Year in which the Participant will attain age 35. Such an election shall not be valid unless the Participant receives a written explanation of the Qualified Preretirement Survivor Annuity in such terms as are comparable to the explanation required under Section 10.5. Qualified Preretirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age 35. Any new waiver on or after that date shall be subject to the full requirements of this article. (b) "Earliest Retirement Age" means the earliest date on which the Participant could elect to receive Retirement benefits under the Plan. -46- 68 (c) "Qualified Election" means a waiver of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity. Any such waiver shall not be effective unless: (1) the Participant's spouse consents in writing to the waiver; (2) the waiver designates a specific Beneficiary, including any class of beneficiaries or any contingent beneficiaries, which may not be changed without spousal consent (unless the spouse's consent expressly permits designations by the Participant without any further spousal consent); (3) the spouse's consent acknowledges the effect of the waiver; and (4) the spouse's consent is witnessed by a plan representative or notary public. Additionally, a Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the waiver designates a form of benefit payment which may not be changed without spousal consent (unless the spouse's consent expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of a plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed a Qualified Election. Any consent by a spouse obtained under these provisions (and any establishment that the consent of a spouse may not be obtained) shall be effective only with respect to the particular spouse involved. A consent that permits designations by the Participant without any requirement of further consent by the spouse must acknowledge that the spouse has the right to limit the consent to a specific Beneficiary and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of those rights. A revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Section 10.5. (d) "Qualified Joint and Survivor Annuity" means an immediate annuity for the life of a Participant, with a survivor annuity for the life of the spouse which is not less than 50% and not more than 100% of the amount of the annuity which is payable during the joint lives of the Participant and the spouse, and which is the amount of benefit that can be purchased with the Participant's Vested Account Balance. The percentage of the survivor annuity under the Plan shall be 50%. (e) "Annuity Starting Date" means the first day of the first period for which an amount is paid as an annuity (or any other form). (f) "Vested Account Balance" means the aggregate value of the Participant's vested account balance derived from Employer and Employee contributions (including rollovers), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life. The provisions of this Article 10 shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee contributions or both at the time of death or distribution. -47- 69 (g) "Straight life annuity" means an annuity payable in equal installments for the life of the Participant that terminates upon the Participant's death. 10.5. Notice Requirements. In the case of a Qualified Joint and Survivor Annuity, no less than 30 days and no more than 90 days before a Participant's Annuity Starting Date the Plan Administrator shall provide to him a written explanation of (i) the terms and conditions of a Qualified Joint and Survivor Annuity, (ii) the Participant's right to make, and the effect of, an election to waive the Qualified Joint and Survivor Annuity form of benefit, (iii) the rights of the Participant's spouse, and (iv) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. In the case of a Qualified Preretirement Survivor Annuity, within the applicable period for a Participant the Plan Administrator shall provide to him a written explanation of the Qualified Preretirement Survivor Annuity, in terms and manner comparable to the requirements applicable to the explanation of a Qualified Joint and Survivor Annuity as described in the preceding paragraph. The applicable period for a Participant is whichever of the following periods ends last: (i) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close -of the Plan Year preceding the Plan Year in which the Participant attains age 35; (ii) a reasonable period ending after an individual becomes a Participant; (iii) a reasonable period ending after this Article 10 first applies to the Participant. Notwithstanding the foregoing, in the case of a Participant who separates from service before attaining age 35, notice must be provided within a reasonable period ending after his separation from service. For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (ii) and (iii) is the end of the two-year period beginning one year before the date the applicable event occurs, and ending one year after that date. In the case of a Participant who separates from service before the Plan Year in which he reaches age 35, notice shall be provided within the two-year period beginning one year before the separation and ending one year after the separation. If such a Participant thereafter rearm to employment with the Employer, the applicable period for the Participant shall be redetermined. 10.6. Transitional Rules. (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the preceding Sections of this Article 10, must be given the opportunity to elect to have those Sections apply if the Participant is credited with at least one Hour of Service under the Plan or a predecessor plan in a Plan Year beginning on or after January 1, 1976, and the Participant had at least ten years of vesting service when he or she separated from service. -48- 70 (b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under the Plan or a predecessor plan on or after September 2, 1974, and who is not otherwise credited with any service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his benefits paid in accordance with paragraph (d) of this Section 10-6. (c) The respective opportunities to elect (as described in paragraphs (a) and (b) above) must be afforded to the appropriate Participants during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to be paid to those Participants. (d) Any Participant who has so elected pursuant to paragraph (b) of this Section 10. 6, and any Participant who does not elect under paragraph (a), or who meets the requirements of paragraph (a) except that he does not have at least ten years of vesting service when he separates from service, shall have his benefits distributed in accordance with all of the following requirements, if his benefits would otherwise have been payable in the form of a life annuity: (1) Automatic joint and survivor annuity. If benefits in the form of a life annuity become payable to a married Participant who: (A) begins to receive payments under the Plan on or after normal retirement age; or (B) dies on or after normal retirement age while still working for the Employer; or (C) begins to receive payments on or after the qualified early retirement age; or (D) separates from service on or after attaining normal retirement age (or the qualified early retirement age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits; then such benefits will be received under the Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the election period, which must begin at least six months before the Participant attains qualified early retirement age and end not more than 90 days before the commencement of benefits. Any election hereunder will be in writing and may be changed by the Participant at any time. -49- 71 (2) Election of early survivor annuity. A Participant who is employed after attaining the qualified early retirement age will be given the opportunity to elect during the election period to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before his death. Any election under this provision will be in writing and may be changed by the Participant at any time. The election period begins on the later of (i) the 90th day before the Participant attains the qualified early retirement age, or (ii) the date on which participation begins, and ends on the date the Participant terminates employment. (3) For purposes of this Section 10.6, qualified early retirement age is the latest of the earliest date under the Plan on which the Participant may elect to receive Retirement benefits, the first day of the 120th month beginning before the participant reaches normal retirement age, or the date the Participant begins participation. -50- 72 ARTICLE 11. MINIMUM DISTRIBUTION REQUIREMENTS 11.1. General Rules. Subject to Article 10, Joint and Survivor Annuity Requirements, the requirements of this Article I I shall apply to any distribution of a Participant's interest and will take precedence over any inconsistent provisions of the Plan. All distributions required under this Article I I shall be determined and made in accordance with the Income Tax Regulations issued under Section 401(a)(9) of the Code (including proposed regulations, until the adoption of final regulations), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed regulations. 11.2. Required BEGINNING Date. The entire interest of a Participant must be distributed, or begin to be distributed, no later than the Participant's required beginning date, determined as follows. (a) General Rule. The required beginning date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70 1/2. (b) Transitional Rules. The required beginning date of a Participant who attains age 70 1/2 before January 1, 1988, shall be determined in accordance with (1) or (2) below: (1) Non-5 % owners. The required beginning date of a Participant who is not a 5 % owner is the first day of April of the calendar year following the calendar year in which the later of his Retirement or his ATTAINMENT of age 70 1/2 occurs. (2) 5 % owners. The required beginning date of a Participant who is a 5 % owner during any year beginning after December 31, 1979, is the first day of April following the later of. (A) the calendar year in which the Participant attains age 70 1/2, or (B) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a 5 % owner, or the calendar year in which the Participant retires. The required beginning date of a Participant who is not a 5 % owner, who attains age 70 1/2 during 1988 and who has not retired as of January 1, 1989, is April 1, 1990. -51- 73 (c) Rules for 5 % Owners. A Participant is treated as a 5 % owner for purposes of this Section 11. 2 if he is a 5 % owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 but without regard to whether the Plan is top heavy) at any time during the Plan Year ending with or within the calendar year in which he attains age 66 1/2, or any subsequent Plan Year. Once distributions have begun to a 5 % owner under this Section 11. 2, they must continue, even if the Participant ceases to be a 5 % owner in a subsequent year. 11.3. Limits on Distribution Periods. As of the first Distribution Calendar Year, distributions not made in a single sum may be made only over one or a combination of the following periods: (a) the life of the Participant, (b) the life of the Participant and his Designated Beneficiary, (c) a period certain not extending beyond the Life Expectancy of the Participant, or (d) a period certain not extending beyond the Joint and Last Survivor Expectancy of the Participant and his Designated Beneficiary. "Designated Beneficiary" means the individual who is designated as the Beneficiary under the Plan in accordance with Section 401(a)(9) of the Code and the regulations issued thereunder (including proposed regulations, until the adoption of final regulations) and Section 7.2. "Distribution Calendar Year' means a calendar year for which a minimum distribution is required under Section 401(a)(9) of the Code and this Section 11.3. For distributions beginning before the Participant's death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to Section 11.5. "Life Expectancy" and 'Joint and Last Survivor Expectancy" are computed by use of the expected return multiples in Tables V and VI of Section 1.72-9 of the Income Tax Regulations. Unless otherwise elected by the Participant (or his spouse, in the case of distributions described in Section 11.5(b)) by the time distributions are required to begin, Life Expectancies shall be recalculated annually. Any such election shall be irrevocable as to the Participant (or spouse) and shall apply to all subsequent years. The Life Expectancy of a nonspouse beneficiary may not be recalculated. -52- 74 11.4. Determination of Amount to Be Distributed Each Year. interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the required beginning date. paragraphs (a) through (d) apply to distributions in forms other than the purchase of an annuity contract. (a) If a Participant's Benefit (as defined below) is to be distributed over (1) a period not extending beyond the Life Expectancy of the Participant or the Joint Life and Last Survivor Expectancy of the Participant and his Designated Beneficiary, or (2) a period not extending beyond the Life Expectancy of the Designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first Distribution Calendar Year, must at least equal the quotient obtained by dividing the Participant's Benefit by the Applicable Life Expectancy (as defined below). (b) For calendar years beginning before January 1, 1989, if the Participant's spouse is not the Designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is paid within the Life Expectancy of the Participant. (c) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first Distribution Calendar Year, shall not be less than the quotient obtained by dividing the Participant's Benefit by the lesser of (1) the Applicable Life Expectancy or (2) if the Participant's spouse is not the Designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Section 1.4 01(a)(9)-2 of the Proposed Income Tax Regulations. Distributions after the death of the Participant shall be distributed using the Applicable Life Expectancy in paragraph (a) above as the relevant divisor, without regard to Proposed Regulations Section 1.401(a)(9)-2. (d) The minimum distribution required for the Participant's first Distribution Calendar Year must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the Distribution Calendar Year in which the Employee's required beginning date occurs, must be made on or before December 31 of that Distribution Calendar Year. (e) If the Participant's Benefit is distributed in the form of an annuity contract purchased from an insurance company, distributions thereunder shall be in accordance with the requirements of Section 401(a)(9) of the Code and the regulations issued thereunder (including proposed regulations, until the adoption of final regulations). "Applicable Life Expectancy" means the Life Expectancy (or Joint and Last Survivor Expectancy) calculated using the attained age of the Participant (or Designated Beneficiary) as -53- 75 of the Participant's (or Designated Beneficiary's) birthday in the applicable calendar year, reduced by one for each calendar year which has elapsed since the date Life Expectancy was first calculated. If Life Expectancy is being recalculated, the Applicable Life Expectancy shall be the Life Expectancy as so recalculated. The applicable calendar year shall be the first Distribution Calendar Year, and if Life Expectancy is being recalculated such succeeding calendar year. If annuity payments commence in accordance with Section 11.4(e) before the required beginning date, the applicable calendar year is the year such payments commence. If distribution is in the form of an immediate annuity purchased after the Participant's death with the Participant's remaining interest in the Plan, the applicable calendar year is the year of purchase. "Participant's Benefit" means the account balance as of the last valuation date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year), increased by the amount of any contributions or Forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. For purposes of the preceding sentence, if any portion of the minimum distribution for the first Distribution Calendar Year is made in the second Distribution Calendar Year on or before the required beginning date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. 11.5. Death Distribution Provisions. (a) Distribution Beginning before Death. If the Participant dies after distribution of his interest has begun, the remaining portion of his interest will continue to be distributed at least as rapidly as under the method of distribution being used before the Participant's death. (b) Distribution Beginning after Death. If the Participant dies before distribution of his interest begins, distribution of his entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death, except to the extent that an election is made to receive distributions in accordance with (1) or (2) below: (1) If any portion of the Participant's interest is payable to a Designated Beneficiary, distributions may be made over the Designated Beneficiary's life, or over a period certain not greater than the Life Expectancy of the Designated Beneficiary, commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died; or (2) If the Designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin in accordance with (1) above -54- 76 shall not be earlier than the later of (i) December 31 of the calendar Year immediately following the calendar year in which the Participant died, and (ii) December 31 of the calendar year in which the Participant would have attained age 70 1/2 If the Participant has not made an election pursuant to this Section 11.5 by the time of his death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of (i) December 31 of the calendar year in which distributions would be required to begin under this Section 11.5, or (ii) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (c) For purposes of paragraph (b), if the surviving spouse dies after the Participant, but before payments to the spouse begin, the provisions of paragraph (b), with the exception of subparagraph (2) therein, shall be applied as if the surviving spouse were the Participant. (d) For purposes of this Section 11.5, any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse of the Participant if the amount becomes payable to the surviving spouse when the child reaches the age of majority. (e) For the purposes of this Section 11.5, distribution of a Participant's interest is considered to begin on the Participant's required beginning date (or, if paragraph (c) above is applicable, the date distribution is required to begin to the surviving spouse pursuant to paragraph (b) above). If distribution in the form of an annuity contract described in Section 11.4(e) irrevocably commences to the Participant before the required beginning date, the date distribution is considered to begin is the date distribution actually commences. 11.6. Transitional Rule. Notwithstanding the other requirements of this Article 11, and subject to the requirements of Article 10, Joint and Survivor Annuity Requirements, distribution on behalf of any Participant, including a 5 % owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences): (a) The distribution is one which would not have disqualified the Trust under Section 401(a)(9) of the Internal Revenue Code of 1954 as in effect before its amendment by the Deficit Reduction Act of 1984. -55- 77 (b) The distribution is in accordance with a method of distribution -designated by the Employee whose interest in the Trust is being distributed or, if the Employee is deceased, by a Beneficiary of the Employee. (c) The designation specified in paragraph (b) was in writing, was signed by the Employee or the Beneficiary, and was made before January 1, 1984. (d) The Employee had accrued a benefit under the Plan as of December 31, 1983. (e) The method of distribution designated by the Employee or the Beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Employee's death, the Beneficiaries of the Employee listed in order of priority. A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Employee. For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Employee or the Beneficiary to whom such distribution is being made will BE presumed to have designated the method of distribution under which the distribution is being made, if the method of distribution was specified in writing and the distribution satisfies the requirements in paragraphs (a) and (e). If a designation is revoked, any subsequent distribution must satisfy the requirements of Section 401(a)(9) of the Code and the regulations thereunder. If a designation is revoked after the date distributions are required to begin, the Trust must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Section 401(a)(9) of the Code and the regulations thereunder, but for the designation described in paragraphs (b) through (e). For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of the Proposed Income Tax Regulations. Any changes in the designation generally will be considered to be a revocation of the designation, but the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be A revocation of the designation, so long as the substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case of an amount transferred or rolled over from one plan to another plan, the rules in Q&A J-2 and Q&A J-3 of Section 1.401(a)(9)-l of the Proposed Income Tax Regulations shall apply. -56- 78 ARTICLE 12. WITHDRAWALS AND LOANS 12.1. Withdrawals from Participant Contribution Accounts. Subject to the requirements of Article 10, a Participant may upon written notice (or in such other manner as shall be made available and agreed upon by the Employer and Putnam) to the Employer withdraw any amount from his Participant Contribution Account (if any). A withdrawn amount may not be repaid to the Plan. No Forfeiture will occur solely as a result of an Employee's withdrawal from a Participant Contribution Account. 12.2. Withdrawals on Account of Hardship. (a) If the Employer has so elected in the Plan Agreement, upon a Participant's written request (or in such other manner as shall be made available and agreed upon by the Employer and Putnam), the Plan Administrator may permit a withdrawal of FUNDS from the vested portion of the Participant's Accounts on account of the Participant's financial hardship, which must be demonstrated to the satisfaction of the Plan Administrator, provided, that no hardship withdrawal shall be made from Qualified Nonelective Contribution Account or Qualified Matching Account. In considering such requests, the Plan Administrator shall apply uniform standards that do not discriminate in favor of Highly Compensated Employees. If hardship withdrawals are permitted from more than one of the Elective Deferral Account, Rollover Account, Employer Matching Account, and Employer Profit Sharing Account, they shall be made first from a Participant's Elective Deferral Account, then from his Rollover Account, then from his Employer Matching Account, and finally from his Employer Profit Sharing Account. A withdrawn amount may not be repaid to the Plan. (b) The maximum amount that may be withdrawn on account of hardship from an Elective Deferral Account after December 31, 1988, shall not exceed the sum of (1) the amount credited to the Account as of December 31, 1988, and (2) the aggregate amount of the Elective Deferrals made by the Participant after December 31, 1988, and before the hardship withdrawal. (c) Hardship withdrawals shall be permitted only on account of the following financial needs: (1) Expenses for medical care described in Section 213(d) of the Code for the Participant, his spouse, children and dependents, or necessary for these persons to obtain such care; (2) Purchase of the principal residence of the Participant (excluding regular mortgage payments); -57- 79 (3) Payment of tuition and related educational fees and room and board expenses for the upcoming 12 months of post-secondary education for the Participant, his spouse, children or dependents; or (4) Payments necessary to prevent the Participant's eviction from, or the foreclosure of a mortgage on, his principal residence. (d) Hardship withdrawals shall be subject to the spousal consent requirements contained in Sections 411 (a)(11) and 417 of the Code, to the same extent that those requirements apply to a Participant pursuant to Section 10. 1. (e) A hardship distribution will be permitted to a Participant only upon satisfaction of the following conditions: (1) The Participant has obtained all nontaxable loans and all distributions other than hardship withdrawals available to him from all plans maintained by the Affiliated Employers; (2) The hardship withdrawal does not exceed the amount of the Participant's financial need as described in paragraph (b) plus any amounts necessary to pay federal, state and local income taxes and penalties reasonably anticipated to result from the withdrawal; (3) With respect to withdrawals from an Elective Deferral Account, all plans maintained by the Affiliated Employers provide that the Participant's Elective Deferrals and voluntary after-tax contributions will be suspended for a period of 12 months following his receipt of a hardship withdrawal; and (4) With respect to withdrawals from an Elective Deferral Account, all plans maintained by the Affiliated Employers provide that the amount of Elective Deferrals that the Participant may make in his taxable year immediately following the year of a hardship withdrawal will not exceed the applicable limit under Section 402(g) of the Code for the taxable year, reduced by the amount of Elective Deferrals made by the Participant in the taxable year of the hardship withdrawal. 12.3. Withdrawals After Reaching Age 59 1/2. A Participant who has reached age 59 1/2 may upon written request to the Employer (or in such other manner as shall be made available and agreed upon by the Employer and Putnam) withdraw during his employment any amount not exceeding the vested balance of his Accounts. A withdrawn amount may not be repaid to the Plan. -58- 80 12.4. Loans. If the Employer has so elected in the Plan Agreement, the Employer may direct the Trustee to make a loan to a Participant or Beneficiary from the vested portion of his Accounts, subject to the following terms and conditions and to such reasonable additional rules and regulations as the Plan Administrator may establish for the orderly operation of the program: (a) The Plan Administrator shall administer the loan program subject to the terms and conditions of this Section 12.4. (b) A Participant's or Beneficiary's request for a loan shall be submitted to the Plan Administrator by means of a written application on a form supplied by the Plan Administrator (or in such other manner as shall be made available and agreed upon by the Employer and Putnam). Applications shall be approved or denied by the Plan Administrator on the basis of its assessment of the borrower's ability to collateralize and repay the loan, as revealed in the loan application. (c) Loans shall be made to all Participants and Beneficiaries on a reasonably equivalent basis. Loans shall not be made available to Highly Compensated Employees (as defined in Section 414(q) of the Code) in amounts greater than the amounts made available to other Employees (relative to the borrower's Account balance). (d) Loans must be evidenced by the Participant's promissory note for the amount of the loan payable to the order of the Trustee, and adequately secured by assignment of not more than fifty percent (50%) of the Participant's entire right, title and interest in and to the Trust Fund, exclusive of any asset as to which Putnam is not the Trustee. (e) Loans must bear a reasonable interest rate comparable to the rate charged by commercial lenders in the geographical area for similar loans. The Plan Administrator shall not discriminate among Participants in the matter of interest rates, but loans may bear different interest rates if, in the opinion of the Plan Administrator, the difference in rates is justified by conditions that would customarily be taken into account by a commercial lender in the Employer's geographical area. (f) The period for repayment for any loan shall not exceed five years, except in the case of a loan used to acquire a dwelling unit which within a reasonable time is to be used as the principal residence of the Participant, in which case the repayment period may exceed five years The terms of a loan shall require that it be repaid in level payments of principal and interest not less frequently then quarterly throughout the repayment period, except that alternative arrangements for repayment. may apply in the event that the borrower is on unpaid leave of absence for a period not to exceed one year. -59- 81 (g) To the extent that a Participant would be required under Article 10 to obtain the consent of his spouse to a distribution of an immediately distributable benefit other than a Qualified Joint and Survivor Annuity, the consent of the Participant's spouse shall be required for the use of his Account as security for a loan. The spouse's consent must be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured, and obtained in accordance with the requirements of Section 10.4(c) for a Qualified Election. Any such consent shall thereafter be binding on the consenting spouse and any subsequent spouse of the Participant. A new consent shall be required for use of the Account as security for any extension, renewal, renegotiation or revision of the original loan. (h) If valid spousal consent has been obtained in accordance with Section 12.4(g), then notwithstanding any other provision of the Plan the portion of the Participant's account balance used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100 % of the Participant's vested account balance (determined without regard to the preceding sentence) is payable to the surviving spouse, then the account balance shall be adjusted by first reducing the vested account balance by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse. (i) In the event of default on a loan by a Participant who is an active Employee, foreclosure on the Participant's Account as security will not occur until the Employer has reported to the Trustee the occurrence of an event permitting distribution from the Plan in accordance with Article 9 or Section 4.12. (j) No loan shall be made to an Owner-Employee or a Shareholder-Employee unless a prohibited transaction exemption is obtained by the Employer. (k) No loan to any Participant or Beneficiary can be made to the extent that the amount of the loan, when added to the outstanding balance of all other loans to the Participant or Beneficiary, would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one year period ending on the day before the loan is made, over the outstanding balance of loans from the Plan on the date the loan is made, or (b) one-half the value of the vested account balance of the Participant. For the purpose of the above limitation, all loans from all qualified plans of the Affiliated Employers are aggregated. (1) Loans shall be considered investments directed by a Participant pursuant to Section 13.3. The amount loaned shall be charged solely against the -60- 82 Accounts of the Participant, and repaid amounts and interest shall be credited solely thereto. 12.5. Procedure; Amount Available. Withdrawals and loans shall be made subject to the terms and conditions applicable to distributions pursuant to Section 9.4, except that the amount of any withdrawal or loan shall be determined by reference to the vested balance of the Participant's Account as of the most recent Valuation Date preceding the withdrawal or loan, and shall not exceed the amount of the vested account balance. 12.6. Protected Benefits. Notwithstanding any provision to the contrary, if an Employer amends an existing retirement plan ("prior plan") by adopting this Plan, to the extent any withdrawal option or form of payment available under the prior plan is an optional form of benefit within the meaning of Code Section 411 (d)(6), such option or form of payment shall continue to be available to the extent required by such Code Section. 12.7. Restrictions Concerning Transferred Assets. Notwithstanding any provision to the contrary, if an Employer amends an existing defined benefit or money purchase pension plan ('prior pension plan') by adopting this Plan, accrued benefits attributable to the assets and liabilities transferred from the prior pension plan (which accrued benefits include the account balance of such Participant in the Plan attributable to such accrued benefits as of the date of the transfer and any earnings on such account balance subsequent to the transfer) shall be distributable only on or after the events upon which distributions are or were permissible under the prior pension plan. -61- 83 ARTICLE 13. TRUST FUND AND INVESTMENTS 13.1. Establishment of Trust Fund. The Employer and the Trustee hereby agree to the establishment of a Trust Fund consisting of all amounts as shall be contributed or transferred from time to time to the Trustee pursuant to the Plan, and all earnings thereon. The Trustee shall hold the assets of the Trust Fund for the exclusive purpose of providing benefits to Participants and Beneficiaries and defraying the reasonable expenses of administering the Plan, and no such assets shall ever revert to the Employer, except that: (a) contributions made by the Employer by mistake of fact, as determined by the Employer, may be returned to the Employer within one (1) year of the date of payment, (b) contributions that are conditioned on their deductibility under Section 404 of the Code may be returned to the Employer, to the extent disallowed, within one (1) year of the disallowance of the deduction, (c) contributions that are conditioned on the initial qualification of the Plan under the Code, and all investment gains attributable to them, may be returned to the Employer within one (1) year after such qualification is denied by determination of the Internal Revenue Service, but only if an application for determination of such qualification is made within the time prescribed by law for filing the Employer's federal income tax return for its taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe, and (d) amounts held in a suspense account may be returned to the Employer on termination of the Plan, to the extent that they may not then be allocated to any Participant's Account in accordance with Article 6. All Employer contributions under the Plan other than those made pursuant to Section 4.1 (f) are hereby expressly conditioned on the initial. qualification of the Plan and their deductibility under the Code. Investment gains attributable to contributions returned pursuant to Subsections (a) and (b) shall not be returned to the contributing Employer, and investment losses attributable to such contributions shall reduce the amount returned. 13.2. Management of Trust Fund. The assets of the Trust Fund shall be held in trust by the Trustee and accounted for in accordance with this Article 13, and shall be invested in accordance with Section 13.3 in the Investment Products specified by the Employer in the Plan Agreement and from time to time thereafter in writing (or in such other manner as shall be made available and agreed upon by the Employer and Putnam). The Employer shall have the exclusive authority and discretion to select the Investment Products available under the Plan. in making that selection, the Employer shall use the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar -62- 84 with such matters would use in the conduct of an enterprise of like character and with like aims. The Employer shall cause the available Investment Products to be diversified sufficiently to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. It is especially intended that the Trustee shall have no discretionary authority to determine the investment of Trust assets. Notwithstanding the foregoing, assets of the Trust Fund shall also be invested in Employer Stock if so elected by the Employer and agreed to by Putnam under the Service Agreement. 13.3. Investment Instructions. All amounts held in the Trust Fund under the Plan shall be invested in Investment Products solely in accordance with the instructions of the Participant to whose Accounts they are allocable, as delivered to Putnam in accordance with the Service Agreement. Instructions shall apply to future contributions, past accumulations, or both, according to their terms, and shall be communicated by the Employer to Putnam in accordance with procedures prescribed in the Service Agreement. Instructions shall be effective prospectively, coincident with or within a reasonable time after their receipt in good order by Putnam. An instruction once received shall remain in effect until it is changed by the provision of a new instruction. New instructions shall be accepted by Putnam on any valuation date. In the event that the Employer adopts this Putnam prototype Plan as an amendment to or restatement of an existing plan, the Employer shall specify one or more Investment Products to serve as the sole investments for all Participants' Accounts during the period in which existing records of the Plan are transferred to the Recordkeeper. During that period, new investment instructions as to existing assets of the Plan cannot be carried out, nor can distributions be made from the Plan except to the extent permitted under the terms of the Service Agreement. The Employer and the Recordkeeper shall use their best efforts to minimize the duration of the period to which the preceding sentence applies. To the extent specifically authorized and provided in the Service Agreement, the Employer may direct the Trustee to establish as an Investment Product a fund all of the assets of which shall be invested in shares of stock of the Employer that constitute "qualifying employer securities' within the meaning of section 407(d)(5) of ERISA ("Employer Stock"). The Plan Administrator as named fiduciary shall continually monitor the suitability of acquiring and holding Employer Stock under the fiduciary duty rules of section 404(a)(1) of ERISA (as modified by section 404(a)(2) of ERISA) and the requirements of section 404(c) of ERISA, and shall be responsible for ensuring that the procedures relating to the purchase, holding and sale of Employer Stock, and the exercise of any and all rights with respect to such Employer Stock shall be in accordance with section 404(c) of ERISA unless the Employer retains voting, tender or similar rights with respect to the Employer Stock. The Trustee shall not be liable for any loss, or by reason of any breach, which arises from the direction of the Plan Administrator with respect to the acquisition and holding of Employer Stock. The Employer shall be responsible for determining whether, under the circumstances prevailing at a given time, its fiduciary duty to Plan Participants and Beneficiaries under the Plan and -63- 85 ERISA-requires that the Employer follow the advice of independent counsel as to the voting and tender or retention of Employer Stock. Putnam shall be under no duty to question or review the directions given by the Employer or to make suggestions to the Employer in connection therewith. Putnam shall not be liable for any loss, or by reason of any breach, that arises from the Employer's exercise or non- exercise of rights under this Article 13, or from any direction of the Employer unless it is clear on the face of the direction that the actions to be taken under the direction are prohibited by the fiduciary duty rules of Section 404(a) of ERISA. All interest, dividends and other income received with respect to, and any proceeds received from the sale or other disposition of, securities or other property held in an investment fund shall be credited to and reinvested in such investment fund, and all expenses of the Trust that are properly allocated to a particular investment fund shall be so allocated and charged. The Employer may at any time direct Putnam to eliminate any investment fund or funds, and Putnam shall thereupon dispose of the assets of such investment fund and reinvest the proceeds thereof in accordance with the directions of the Employer. Neither the Employer nor the Trustee nor Putnam shall be responsible for questioning any instructions of a Participant or for reviewing the investments selected therein, or for any loss resulting from instructions of a Participant or from the failure of a Participant to provide or to change instructions. Neither Putnam nor the Trustee shall have any duty to question any instructions received from the Employer or a Participant or to review the investments selected thereby, nor shall Putnam or the Trustee be responsible for any loss resulting from instructions received from the Employer or a Participant or from the failure of the Employer or a Participant to provide or to change instructions. In the event that Putnam or the Trustee receives a contribution under the Plan as to which no instructions are delivered, or such instructions as are delivered are unclear to Putnam or the Trustee, such contribution shall be invested until clear instructions are received in the default investment option set forth in the Service Agreement or other written agreement between the Employer and Putnam, or if no such option is so set forth, the Employer, by execution of the Plan Agreement, shall affirmatively elect to have such contributions invested in the Putnam Money Market Fund. Neither Putnam nor the Trustee shall have any discretionary authority or responsibility in the investment of the assets of the Trust Fund. 13.4. Valuation of the Trust Fund. As of each Valuation Date, the Trustee shall determine the fair market value of the Trust Fund, and the net earnings or losses and expenses of the Trust Fund for the period elapsed since the most recent previous Valuation Date shall be allocated among the Accounts of Participants. Earnings, losses and expenses which pertain to investments which are specifically held for a given Participant's Account shall be allocated solely to that Account. In the event that an investment is not specifically held for a given Participant's Account, the earnings, losses and expenses pertaining to that investment shall be allocated among all Participants' Accounts in the ratio that each such Account bears to the total of all Accounts of all Participants. Each Participant's Accounts shall be adjusted pursuant to -64- 86 this Section 13.4 until such time as they are either fully distributed or forfeited, regardless of whether the Participant continues to be an Employee. 13.5. Distribution on Investment Company Shares. Subject to Section 9.3, all dividends and capital gains or other distributions received on any Investment Company Shares credited to Participant's Account will (unless received in additional Investment Company Shares) be reinvested in full and fractional shares of the same Investment Company at the price determined as provided in the then current prospectus of the Investment Company. The shares so received or purchased upon such reinvestment will be credited to such accounts. If any dividends or capital gain or other distributions may be received on such Investment Company Shares at the election of the shareholder in additional shares or in cash or other property, the Trustee will elect to receive such dividends or distributions in additional Investment Company Shares. 13.6. Registration and Voting of Investment Company Shares. All Investment Company Shares shall be registered in the name of the Trustee or its nominee. Subject to any requirements of applicable law, the Trustee will transmit to the Employer copies of any notices of shareholders' meetings, proxies and proxy-soliciting materials, prospectuses and the ANNUAL or other reports to shareholders, with respect to Investment Company Shares held in the Trust Fund. The Trustee shall act in accordance with directions received from the Employer with respect to matters to be voted upon by the shareholders of the Investment Company. Such directions must be in writing on a form approved by the Trustee, signed by the Employer and delivered to the Trustee within the time prescribed by it. The Trustee will not vote Investment Company Shares as to which it receives no written directions. 13.7. Investment Manager. The Employer, with the consent of Putnam, may appoint an investment manager, as defined in Section 3(38) of the ERISA, with respect to all or a portion of the assets of the Trust Fund. The Trustee shall have no liability in connection with any action or nonaction pursuant to directions of such an investment manager. 13.8. Employer Stock. (a) Voting Rights. Notwithstanding any other provision of the Plan, the provisions of this Section 13.8(a) shall govern the voting of Employer Stock held by Putnam as Trustee under the Plan. The Trustee shall vote Employer Stock in accordance with the directions of the Employer unless the Employer has elected in the Plan Agreement that Participants shall be appointed named fiduciaries as to the voting of Employer Stock and shall direct the Trustee as to the voting of Employer Stock in accordance with the provisions of this Section 13.8(a). In either case, the Employer shall be responsible for determining whether, under the circumstances prevailing at a given time, its fiduciary duty to Participants and Beneficiaries under the Plan and ERISA requires that the Employer follow the advice of independent counsel as to, the voting of Employer Stock. The remainder of this Section 13.8(a) applies only if the -65- 87 Employer elects in the Plan Agreement that participants shall direct the Trustee as to the voting of Employer Stock. For purposes of this Section 13.8(a), the term "Participant" includes any Beneficiary with an Account in the Plan which is invested in Employer Stock. When the issuer of Employer Stock files preliminary proxy solicitation materials with the Securities and Exchange Commission, the Employer shall cause a copy of all the materials to be simultaneously sent to the Trustee, and the Trustee shall prepare a voting instruction form based upon these materials. At the time of mailing of notice of each annual or special stockholders' meeting of the issuer of Employer Stock, the Employer shall cause a copy of the notice and all proxy solicitation materials to be sent to each Participant, together with the foregoing voting instruction form to be returned to the Trustee or its designee. The form shall show the number of full and fractional shares of Employer Stock credited to the Participant's accounts, whether or not vested. For purposes of this Section 13.8(a), the number of shares of Employer Stock deemed credited to a Participant's Accounts shall be determined as of the date of record determined by the Employer for which an allocation has been completed and Employer Stock has actually been credited to Participant's Accounts. Procedures for the execution of purchases and sales of Employer Stock shall be as set forth in the Service Agreement. The Employer shall provide the Trustee with a copy of any materials provided to Participants and shall certify to the Trustee that the materials have been mailed or otherwise sent to Participants. Each Participant shall have the right to direct the Trustee as to the manner in which to vote that number of shares of Employer Stock held under the Plan (whether or not vested) equal to a fraction, of which the numerator is the number of shares of Employer Stock credited to his Account and the denominator is the number of shares of Employer Stock credited to all Participants' Accounts. Such directions shall be communicated in writing (or in such other manner as shall be made available and agreed upon by the Employer and Putnam) and shall be held in confidence by the Trustee and not divulged to the Employer, or any officer or employee thereof, or any other persons. Upon its receipt of directions, the Trustee shall vote the shares of Employer Stock as directed by the Participant. The Trustee shall not vote those shares of employer Stock credited to the Accounts of Participants for which no voting directions are received. With respect to shares of Employer Stock held in the Trust which are not credited to a Participant's Account, the Plan Administrator shall retain the status of named fiduciary and shall direct the voting of such Employer Stock. (b) Tendering Rights. Notwithstanding any other provision of the Plan, the provisions of this Section 13.8(b) shall govern the tendering of Employer Stock by Putnam as Trustee under the Plan. In the event of a tender offer, the Trustee shall tender Employer Stock in accordance with the directions of the Employer unless the Employer has elected in the Plan Agreement that Participants shall be appointed named -66- 88 fiduciaries as to the tendering of Employer Stock in accordance with the provisions of this Section 13.8(b). The remainder of this Section 13.8(b) applies only if the Employer elects in the Plan Agreement that Participants shall direct the Trustee as to the tendering of Employer Stock. For purposes of this Section 13.8(b), the term "Participant" includes any Beneficiary with an Account in the Plan which is invested in Employer Stock. Upon commencement of a tender offer for any Employer Stock, the Employer shall notify each Plan Participant, and use its best efforts to distribute timely or cause to be distributed to Participants the same information that is distributed to shareholders of the issuer of Employer Stock in connection with the tender offer, and after consulting with the Trustee shall provide at the Employer's expense a means by which Participants may direct the Trustee whether or not to tender the Employer Stock credited to their Accounts (whether or not vested). The Employer shall provide to the Trustee a copy of any material provided to Participants and shall certify to the Trustees that the materials have been mailed or otherwise sent to Participants. Each Participant shall have the right to direct the Trustee to tender or not to tender some or all of the shares of Employer Stock credited to his Accounts. Directions from a Participant to the Trustee concerning the tender of Employer Stock shall be communicated in writing (or in such other manner as shall be made available and agreed upon by the Employer and Putnam) as is agreed upon by the Trustees and the Employer. The Trustee shall tender or not tender shares of Employer Stock as directed by the Participant. A Participant who has directed the Trustee to tender some or all of the shares of Employer Stock credited to his Accounts may, at any time before the tender offer withdrawal date, direct the Trustee to withdraw some or all of the tendered shares, and the Trustee shall withdraw the directed number of shares from the tender offer before the tender offer withdrawal deadline. A Participant shall not be limited as to the number of directions to tender or withdraw that he may give to the Trustee. The Trustee shall not tender shares of Employer Stock credited to a Participant's Accounts for which it has received no directions from the Plan Participant. The Trustee shall tender that number of shares of Employer Stock not credited to Participants' Accounts determined by multiplying the total number of such shares by a fraction, the numerator of which is the number of shares of Employer Stock credited to Participants' Accounts for which the Trustee has received directions from Participants to tender (which directions have not been withdrawn as of the date of this determination), and the denominator of which is the total number of shares of Employer Stock credited to Participants' Accounts. A direction by a Participant to the Trustee to tender shares of Employer Stock credited to his Accounts shall not be considered a written election under the Plan by the Participant to withdraw or to have distributed to him any or all of such shares. The Trustee shall credit to each account of the Plan Participant from which the tendered -67- 89 shares were taken the proceeds received by the Trustee in exchange for the shares of Employer Stock tendered from that account. Pending receipt of directions through the Administrator from the Participant as to the investment of the proceeds of the tendered shares, the Trustee shall invest the proceeds as the Administrator shall direct. To the extent that any Participant gives no direction as to the tendering of Employer stock that he has the right to direct under this Section 13.8(a), the Trustee shall not tender such Employer Stock. (c) Other Rights. With respect to all rights in connection with Employer Stock other than the right to vote and the right to tender, Participants are hereby appointed named fiduciaries to the same extent (if any) as provided in the foregoing paragraphs of this Section 13.8 with regard to the right to vote, and the Trustee shall follow the directions of Participants and the Plan Administrator with regard to the exercise of such rights to the same extent as with regard to the right to vote. 13.9. Insurance Contracts. If so provided in the Plan Agreement or other agreement between the Employer and the Trustee, the Plan Administrator may direct the Trustee to receive and hold or apply assets of the Trust to the purchase of individual or group insurance or annuity contracts ("Policies' or "contracts") issued by any insurance company and in a form approved by the Plan Administrator (including contracts under which the contract holder is granted options to purchase insurance or annuity benefits), or financial agreements which are backed by group insurance or annuity contracts ("financial agreements"). If such investments are to be made, the Plan Administrator shall direct the Trustee to execute and deliver such applications and other documents as are necessary to establish record ownership, to value such policies, contracts or financial agreements under the method of valuation selected by the Plan Administrator, and to record or report such values to the Plan Administrator or any investment manager selected by the Plan Administrator, in the form and manner agreed to by the Plan Administrator. The Plan Administrator may direct the Trustee to exercise or may exercise directly the powers of contract holder under any policy, contract or financial agreement, and the Trustee shall exercise such powers only upon direction of the Plan Administrator. The Trustee shall have no authority to act in its own discretion, with respect to the terms, acquisition, valuation, continued holding and/or disposition of any such policy, contract or financial agreement or any asset held thereunder. The Trustee shall be under no duty to question any direction of the Plan Administrator or to review the form of any such policy, contract or financial agreement or the selection of the issuer thereof, or to make recommendations to the Plan Administrator or to any issuer with respect to the form of any such policy, contract or financial agreement. The Trustee shall be fully protected in acting in accordance with written directions of the Plan Administrator, and shall be under no liability for any loss of any kind which may result by reason of any action taken or omitted by it in accordance with any direction of the Plan Administrator, or by reason of inaction in the absence of written directions from the Plan -68- 90 Administrator. In the event that the Plan Administrator directs that any monies or property be paid or delivered to the contract holder other than for the benefit of specific individual beneficiaries, the Trustee agrees to accept such monies or property as assets of the Trust subject to all the terms hereof. 13.10. Registration and Voting of Non-Putnam Investment Company Shares. All shares of registered investment companies other than Investment Companies shall be registered in the name of the Trustee or its nominee. Subject to any requirements of applicable law and to the extent provided in an agreement between Putnam and a third party investment provider, the Trustee shall transmit to the Employer copies of any notices of shareholders' meetings, proxies or proxy-soliciting materials, prospectuses or the annual or other reports to shareholders, with respect to shares of registered investment companies other than Investment Companies held in the Trust Fund. The Trustee shall vote shares of registered investment companies other than Investment Companies in accordance with the directions of the Employer. Directions as to voting such shares must be in writing on a form approved by the Trustee or such other manner acceptable to the Trustee, signed by the addressee and delivered to the Trustee within the time prescribed by it. The Trustee shall vote those shares of registered investment companies other than Investment Companies for which no voting directions are received in the same proportion as it votes those shares for which it has received voting directions. -69- 91 ARTICLE 14. TOP-HEAVY PLANS 14.1. Superseding Effect. For any Plan Year beginning after December 3 1, 1983, in which Plan is determined to be a Top-Heavy Plan under Section 14.2(b), the provisions of this Article 15 will supersede any conflicting provisions in the Plan or the Plan Agreement. 14.2. Definitions. For purposes of this Article 14, the terms below shall be defined as follows: (a) Key Employee means any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was: (i) an officer of the Employer having annual compensation greater than 50% of the amount in effect under Section 415(b)(1)(A) of the Code; (ii) an owner (or considered an owner under Section 318 of the Code) of one of the ten largest interests in the Employer having annual compensation exceeding the dollar limitation under Section 415(c)(1)(A) of the Code; (iii) a 5 % owner of the Employer; or (iv) a I % owner of the Employer having annual compensation of more than $150,000. Annual compensation means compensation satisfying the definition elected by the Employer in the Plan Agreement, but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the Regulations thereunder. (b) Top-Heavy: The Plan is Top-Heavy for any Plan Year beginning after December 31, 1983, if any of the following conditions exists: (1) If the Top-Heavy Ratio for this Plan exceeds 60 % and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (2) If this Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60%. (3) If this plan is part of a Required Aggregation Group and part of a Permissive Aggregation Group of Plans and the Top-Heavy Ratio for the Permissive Aggregation group exceeds 60%. (c) Top-Heavy Ratio means the following: -70- 92 (1) If the Employer maintains one or more qualified defined contribution plans (or any simplified employee pension plan) and the Employer has not maintained any qualified defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy ratio for this Plan alone or for the Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) (including any part of any account distributed in the 5-year period ending on the Determination Date(s)), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), both computed in accordance with Section 416 of the Code and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Section 416 of the Code and the regulations thereunder. (2) If the Employer maintains one or more qualified defined contribution plans (or any simplified employee pension plan) and the Employer maintains or has maintained one or more qualified defined benefit plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated qualified defined contribution plan or plans for all Key. Employees, determined in accordance with (1) above, and the Present Value of accrued benefits under the aggregated qualified defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated qualified defined contributions plan or plans for all Participants, determined in accordance with (1) above, and the Present Value of accrued benefits under the qualified defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in accordance with Section 416 of the Code and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the 5-year period ending on the Determination Date. (3) For purposes of (1) and (2) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date; except as provided in Section 416 of the Code and the regulations thereunder for the first and second Plan Years of a defined benefit plan. The account balances and accrued benefits of a Participant (A) -71- 93 who is not a Key Employee but who was a Key Employee in a prior Plan Year, or (B) who has not been credited with at least one Hour of Service for the Employer during the 5-year period ending on the Determination Date, will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers and transfers are taken into account will be made in accordance with Section 416 of the Code and the regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411 (b)(1)(C) of the Code. (d) Permissive Aggregation Group means the Required Aggregation Group of plans plus any other qualified plan or plans (or simplified employee pension plan) of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (e) Required Aggregation Group means (i) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated) and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Section 401(a)(4) or 410 of the Code. (f) Determination Date means, for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the Determination Date is the last day of that Plan Year. (g) Valuation Date means the last day of the Plan Year. (h) Present Value means present value based only on the interest and mortality rates specified by the Employer in the Plan Agreement. 14.3. Minimum Allocation. (a) Except as otherwise provided in paragraphs (c) and (d) below, the Employer contributions and Forfeitures (if any) allocated on behalf of any Participant -72- 94 who is not a Key Employee shall not be less than the lesser of 3 % of such Participant's Earnings, or in the case where the Employer has no defined benefit plan which designates this Plan to satisfy Section 401 of the Code, the largest percentage of Employer contributions and Forfeitures, as a percentage of the Key Employee's Earnings, allocated on behalf of any Key Employee for that year. The minimum allocation is determined without regard to any Social Security contribution. This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation of the Employer's contributions and Forfeitures for the Plan Year because of (1) the Participant's failure to be credited with at least 1,000 Hours of Service, or (2) the Participant's failure to make mandatory Employee contributions to the Plan, or (3) the Participant's receiving Earnings less than a stated amount. Neither Elective Deferrals, Employer Matching Contributions nor Qualified Matching Contributions for non-Key Employees shall be taken into account for purposes of satisfying the requirement of this Section 14.3(a). (b) For purposes of computing the minimum allocation, Earnings will mean Section 415 Compensation as defined in Section 6- 5(b) of the Plan. (c) The provision in paragraph (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (d) The provision in paragraph (a) above shall not apply to any Participant to the extent he is covered under any other plan or plans of the Employer, and the Employer has provided in the Plan Agreement that the minimum allocation requirement applicable to Top-Heavy Plans will be met in the other plan or plans. (e) The minimum allocation required (to the extent required to be nonforfeitable under Section 416(b) of the Code) may not be forfeited under Sections 411 (a)(3)(B) or (D) of the Code. 14.4. Adjustment of Fractions. For any Plan Year in which the Plan is Top-Heavy, the Defined Benefit Fraction and the Defined Contribution Fraction described in Article 6 shall each be computed using 100% of the dollar limitations specified in Sections 415(b)(1)(A) and 415(c)(1)(A) instead of 125 %. The foregoing requirement shall not apply if the Top-Heavy Ratio does not exceed 90 % and the Employer has elected in the Plan Agreement to provide increased minimum allocations or benefits satisfying Section 416(h)(2) of the Code. 14.5. Minimum Vesting Schedules. For any Plan Year in which this Plan is Top-Heavy and for any subsequent Plan Year, a minimum vesting schedule will automatically apply to the Plan, as follows: -73- 95 (a) If the Employer has selected in the Plan Agreement as the Plan's regular vesting schedule 100% immediate vesting, the Three-year Cliff, Five-Year Graded or Six-Year Graded schedule, then the schedule selected in the Plan Agreement shall continue to apply for any Plan Year to which this Section 14.5 applies. (b) If the Employer has selected in the Plan Agreement as the Plan's regular vesting schedule the Five-Year Cliff schedule, then the Three-Year Cliff schedule shall apply in any Plan Year to which this Section 14.5 applies. (c) If the Employer has selected in the Plan Agreement as the Plan's regular vesting schedule the Seven-Year Graded schedule, then the Six-Year Graded schedule shall apply in any Plan Year to which this Section 14.5 applies. (d) If the Employer has selected in the Plan Agreement as the Plan's regular vesting schedule a schedule other than those described in paragraphs (a), (b) and (c), then the Top-Heavy schedule specified by the Employer in the Plan Agreement for this purpose shaft apply in any Plan Year to which this Section 14.5 applies. The minimum vesting schedule applies to all benefits within the meaning of Section 41 1 (a)(7) of the Code except those attributable to Elective Deferrals, rollover contributions described in Section 5.3, Qualified Matching Contributions, Qualified Nonelective Contributions, or Participant Contributions, but including benefits accrued before the effective date of Section 416 of the Code and benefits accrued before the Plan became Top-Heavy. Further, no reduction in a Participant's nonforfeitable percentage may occur in the event the Plan's status as Top- Heavy changes for any Plan Year. However, the vested portion of the Employer Profit Sharing Account or Employer Matching Account of any Employee who does not have an Hour of Service after the Plan has initially become Top-Heavy will be determined without regard to this Section 14.5. -74- 96 ARTICLE 15. ADMINISTRATION OF THE PLAN 15.1. Plan Administrator. The Plan shall be administered by the Employer, as Plan Administrator and Named Fiduciary within the meaning of ERISA, under rules of uniform application; provided, however, that the Plan Administrator's duties and responsibilities may be delegated to a person appointed by the Employer or a committee established by the Employer for that purpose, in which case the committee shall be the Plan Administrator and Named Fiduciary. The members of such a committee shall act by majority vote, and may by majority vote authorize any one or ones of their number to act for the committee. The person or committee (if any) initially appointed by the Employer may be named in the Plan Agreement, but the Employer may remove any such person or committee member by written notice to him, and any such person or committee may resign by written notice to the Employer, without the necessity of amending the Plan Agreement. To the extent permitted under applicable law, the Plan Administrator shall have the sole authority to enforce the terms hereof on behalf of any and all persons having or claiming any interest under the Plan, and shall be responsible for the operation of the Plan in accordance with its terms. The Plan Administrator shall have discretionary authority to determine all questions arising out of the administration, interpretation and application of the Plan, all of which determinations shall be conclusive and binding on all persons. The Plan Administrator, in carrying out its responsibilities under the Plan, may rely upon the written opinions of its counsel and on certificates of physicians. Subject to the provisions of the Plan and applicable law, the Plan Administrator shall have no liability to any person as a result of any action taken or omitted hereunder by the Plan Administrator. 15.2. Claims Procedure. Claims for participation in or distribution of benefits under the Plan shall be made in writing to the Plan Administrator, or an agent designated by the Plan Administrator whose name SHALL have been communicated to all Participants and other persons as required by law. If any claim so made is denied in whole or in part, the claimant shall be furnished promptly by the Plan Administrator with a written notice: (a) setting forth the reason for the denial, (b) making reference to pertinent Plan provisions, (c) describing any additional material or information from the claimant which is necessary and why, and (d) explaining the claim review procedure set forth herein. Within 60 days after denial of any claim for participation or distribution under the Plan, the claimant may request in writing a review of the denial by the Plan Administrator. Any claimant seeking review hereunder shall be entitled to examine all pertinent documents and to submit issues and comments in writing. The Plan Administrator shall render a decision -75- 97 on review hereunder; provided, that if the Plan Administrator determines that a hearing would be appropriate, its decision on review shall be rendered within 120 days after receipt of the request for review. The decision on review shall be in writing and shall state the reason for the decision, referring to the Plan provisions upon which it is based. 15.3. Employer's Responsibilities. The Employer shall be responsible for: (a) Keeping records of employment and other matters containing all relevant data pertaining to any person affected hereby and his eligibility to participate, allocations to his Accounts, and his other rights under the Plan; (b) Periodic, timely filling of all statements, reports and returns required to be filed by ERISA; (c) Timely preparation and distribution of disclosure materials required by ERISA; (d) Providing notice to interested parties as required by Section 7476 of the Code; (e) Retention of records for periods required by law; and (f) Seeing that all persons required to be bonded on account of handling assets of the Plan are bonded. 15.4. Recordkeeper. The Recordkeeper is hereby designated as agent of the Employer under the Plan to perform directly or through agents certain ministerial duties in connection with the Plan, in particular: (a) To keep and regularly furnish to the Employer a detailed statement of each Participant's Accounts, showing contributions thereto by the Employer and the Participant, Investment Products purchased therewith, earnings thereon and Investment Products purchased therewith, and each redemption or distribution made for any reason, including fees or benefits; and (b) To the extent agreed between the Employer and the Recordkeeper, to prepare for the Employer or to assist the Employer to prepare such returns, reports or forms as the Employer shall be required to furnish to Participants and Beneficiaries or other interested persons and to the Internal Revenue Service or the Department of Labor; all as may be more fully set forth in the Service Agreement. If the Employer does not appoint another person or entity as Recordkeeper, the Employer itself shall be the Recordkeeper. -76- 98 15.5. Prototype Plan. Putnam is the sponsor of the Putnam Basic Plan Document, a prototype plan approved as to form by the Internal Revenue Service. provided that an Employer's adoption of the Plan is made known to and accepted by Putnam in accordance with the Plan Agreement, Putnam will inform the Employer of amendments to the prototype plan and provide such other services in connection with the Plan as may be agreed between Putnam and the Employer. Putnam may impose for its services as sponsor of the prototype plan such fees as it may establish from time to time in a fee schedule addressed to the Employer. Such fees shall, unless paid by the Employer, be paid from the Trust Fund, and shall in that case be charged pro rata against the Accounts of all Participants. The Trustee is expressly authorized to cause Investment Products to be sold or redeemed for the purpose of paying such fees. -77- 99 ARTICLE 16. TRUSTEE 16.1. Powers and Duties of the Trustee. The Trustee shall have the authority, in addition to any authority given by law, to exercise the following powers in the administration of the Trust: (a) To invest all or a part of the Trust Fund in Investment Products in accordance with the investment instructions delivered by the Employer pursuant to Section 13.3, without restriction to investments authorized for fiduciaries, including without limitation any common, collective or commingled trust fund maintained by the Trustee (or any other such fund, acceptable to Putnam and the Trustee, that qualifies for exemption from federal income tax pursuant to Revenue Ruling 81-100). Any investment in, and any terms and conditions of, any such common, collective or commingled trust fund available only to employee trusts which meet the requirements of the Code, or corresponding provisions of subsequent income tax laws of the United States, shall constitute an integral part of this Agreement; (b) If Putnam and the Trustee have consented thereto in writing, to invest without limit in stock of the Employer or any affiliated company; (c) To dispose of all or part of the investments, securities or other property which may from time to time or at any time constitute the TRUST Fund in accordance with the written directions furnished by the Employer for the investment of Participants' separate Accounts or the payment of benefits or expenses of the Plan, and to make, execute and deliver to the purchasers thereof good and sufficient deeds of conveyance therefore, and all assignments, transfers and other legal instruments, either necessary or convenient for passing the title and ownership thereto, free and discharged of all trusts and without liability on the part of such purchasers to see to the application of the purchase money; (d) To hold cash uninvested to the extent necessary to pay benefits or expenses of the Plan; (e) To follow the directions of an investment manager appointed pursuant to Section 13.7; (f) To cause any investment of the Trust Fund to be registered in the name of the Trustee or the name of its nominee or nominees or to retain such investment unregistered or in a form permitting transfer by delivery; provided that the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; -78- 100 (g) Upon written direction of or through the Employer, to vote in person or by proxy (in accordance with Sections 13.6 and 13.10 and, in the case of stock of the Employer, at the direction of the Employer or Participants in accordance with 13.8)on with respect to all securities that are part of the TRUST Fund; (h) To consult and employ any suitable agent to act on behalf of the Trustee and to contract for legal, accounting, clerical and other services deemed necessary by the Trustee to manage and administer the Trust Fund according to the terms of the Plan; (i) Upon the written direction of the Employer, to make loans from the Trust Fund to Participants in amounts and on terms approved by the Plan Administrator in accordance with the provisions of the Plan; provided that the Employer shall have the sole responsibility for computing and collecting all loan repayments required to be made under the Plan; and (j) To pay from the Trust Fund all taxes imposed or levied with respect to the Trust Fund or any part thereof under existing or future laws, and to contest the validity or amount of any tax assessment, claim or demand respecting the Trust Fund or any part thereof. 16.2. Limitation of Responsibilities. Except as may otherwise be required under applicable law, neither the Trustee nor any of its agents shall have any responsibility for: (a) Determining the correctness of the amount of any contribution for the sole collection or payment of contributions, which shall be the sole responsibility of the Employer; (b) Loss or breach caused by any Participant's exercise of control over his Accounts, which shall be the sole responsibility of the Participant; (c) Loss or breach caused by the Employer's exercise of control over Accounts pursuant to Section 13.3, which shall be THE sole responsibility of the Employer; (d) Performance of any other responsibilities not specifically allocated to them under the Plan. 16.3. Fees and Expenses. The Trustee's fees for performing its duties hereunder shall be such reasonable amounts as shall be established by the Trustee from time to time in a fee schedule addressed to the Employer. Such fees, any taxes of any kind which may be levied or assessed upon or in respect of the Trust Fund and any and all expenses reasonably incurred by the Trustee shall, unless paid by the Employer, be paid from the Trust Fund and shall, unless -79- 101 allocable to the Accounts of specific Participants, be charged pro rata against the Accounts of all Participants. The Trustee is expressly authorized to cause Investment Products to be sold or redeemed for the purpose of paying such amounts. Charges and expenses incurred in connection with a specific Investment Product, unless allocable to the Accounts of specific Participants, shall be charged pro rata against the Accounts of all Participants for whose benefit amounts have been invested in the specific Investment Product. 16.4. Reliance on Employer. The Trustee and its agents shall rely upon any decision of the Employer, or of any person authorized by the Employer, purporting to be made pursuant to the terms of the Plan, and upon any information or statements submitted by the Employer or such person (including those relating to the entitlement of any Participant to benefits under the Plan), and shall not inquire as to the basis of any such decision or information or statements, and shall incur no obligation or liability for any action taken or omitted in reliance thereon. The Trustee and its agents shall be entitled to rely on the latest written instructions received from the Employer as to the person or persons authorized to act for the Employer hereunder, and to sign on behalf of the Employer any directions or instructions, until receipt from the Employer of written notice that such authority has been revoked. 16.5. Action Without Instructions. If the Trustee receives no instructions from the Employer in response to communications sent by registered or certified mail to the Employer at its last known address as shown on the books of the Trustee, then the Trustee may make such determinations with respect to administrative matters arising under the Plan as it considers reasonable, notwithstanding any prior instructions or directions given by or on behalf of the Employer, but subject to any instruction or direction given by or on behalf of the Participants. To the extent permitted by applicable law, any determination so made will be binding on all persons having or claiming any interest under the Plan or Trust, and the Trustee will incur no obligation or responsibility for any such determination made in good faith or for any action taken pursuant thereto. In making any such determination the Trustee may require that it be furnished with such relevant documents as it reasonable considers necessary. 16.6. Advice of Counsel. The Trustee may consult with legal counsel (who may, but need not be, counsel for the Employer) concerning any questions which may arise with respect to its rights and duties under the Plan, and the opinion of such counsel shall be full and complete protection to the extent permitted by applicable law in the respect of any action taken or omitted by the Trustee hereunder in accordance with the opinion of such counsel. 16.7. Accounts. The Trustee shall keep full accounts of all receipts and disbursements which pertain to investments in Investment Products, and of such other transactions as it is required to perform hereunder. Within a reasonable time following the close of each Plan Year, or upon its removal or resignation or upon termination of the Trust and at such other times as may be appropriate, the Trustee shall render to the Employer and any other persons as may be required by law an account of its administration of the Plan and Trust during the -80- 102 period since the last previous such accounting, including such information as may be required by law. The written approval of any account by the Employer and all other persons to whom an account is rendered shall be final and binding as to all matters and transactions stated or shown therein, upon the Employer and Participants and all persons who then are or thereafter become interested in the Trust. The failure of the Employer or any other person to whom an account is rendered to notify the party rendering the account within 60 days after the receipt of any account of his or its objection to the account shall be the equivalent of written approval. If the Employer or any other person to whom an account is rendered files any objections within such 60-day period with respect to any matters or transactions stated or shown in the account and the Employer or such other person and the party rendering the account cannot amicably settle the questions raised by such objections, the party rendering the account and the Employer or such person shall have the right to have such questions settled by judicial proceedings, although the Employer or such other person to whom an account is rendered shall have, to the extent permitted by applicable law, only 60 days from filing of written objection to the account to commence legal proceedings. Nothing herein contained shall be construed so as to deprive the Trustee of the right to have a judicial settlement of its accounts. In any proceeding for a judicial settlements of any account or for instructions, the only necessary parties shall be the Trustee, the Employer and persons to whom an account is required by law to be rendered. 16.8. Access to Records. The Trustee shall give access to its records with respect to the Plan at reasonable times and on reasonable notice to any person required by law to have access to such records. 16.9. Successors. Any corporation into which the Trustee may merge or with which it may consolidate or any corporation resulting from any such merger or consolidation shall be the successor of the Trustee without the execution or filing of any additional instrument or the performance of any further act. 16.10. Persons Dealing with Trustee. No person dealing with the Trustee shall be bound to see to the application of any money or property paid or delivered to the Trustee or to inquire into the validity or propriety of any transactions. 16.11. Resignation and Removal: Procedure. The Trustee may resign at any time by giving 60 days' written notice to the Employer and to Putnam. The Employer may remove the Trustee at any time by giving 60 days' written notice to the party removed and to Putnam. In any case of resignation or removal hereunder, the period of notice may be reduced to such shorter period as is satisfactory to the Trustee and the Employer. Notwithstanding anything to the contrary herein, any resignation hereunder shall take effect at the time notice thereof is given if the Employer may no longer participate in the prototype Plan and is deemed to have an individually designed plan at the time notice is given. -81- 103 16.12. Action of Trustee Following Resignation or Removal. When the resignation or removal of the Trustee becomes effective, the Trustee shall perform all acts necessary to transfer the Trust Fund to its successor. However, the Trustee may reserve such portion of the Trust Fund as it may reasonably determine to be necessary for payment of its fees and any taxes and expenses, and any balance of such reserve remaining after payment of such fees, taxes and expenses shall be paid over to its successor. The Trustee shall have no responsibility for acts or omissions occurring after its resignation becomes effective. 16.13. Effect of Resignation or Removal. Resignation or removal of the Trustee shall not terminate the Trust. In the event of any vacancy in the position of Trustee, whether the vacancy occurs because of the resignation or removal of the Trustee, the Employer shall appoint a successor to fill the vacant position. If the Employer does not appoint such a successor who accepts appointment by the later of 60 days after notice of resignation or removal is given or by such later date as the Trustee and Employer may agree in writing to postpone the effective date of the Trustee's resignation or removal, the Trustee may apply to a court of competent jurisdiction for such appointment or cause the Trust to be terminated effective as of the date specified by the Trustee in writing delivered to the Employer. Each successor Trustee so appointed and accepting a trusteeship hereunder shall have all of the rights and powers and all of the duties and obligations of the original Trustee, under the provisions hereof, but shall have no responsibility for acts or omissions before he becomes a Trustee. 16.14. Fiscal Year of Trust. The fiscal year of the Trust will coincide with the Plan Year. 16.15. Limitation of Liability. Except as may otherwise be required by law and other provisions of the Plan, no fiduciary of the Plan, within the meaning of Section 3(21) of ERISA, shall be liable for any losses incurred with respect to the management of the Plan, nor shall he or it be liable for any acts or omissions except those caused by his or its own negligence or bad faith in failing to carry out his or its duties under the terms contained in the Plan. 16.16. Indemnification. Subject to the limitations of applicable law, the Employer agrees to indemnify and hold harmless (i) all fiduciaries, within the meaning of ERISA Sections 3(21) and 404, and (ii) Putnam, for all liability occasioned by any act of such party or omission to act, in good faith and without gross negligence, and for all expenses incurred by any such party in determining its duty or liability under ERISA with respect to any question under the Plan. -82- 104 ARTICLE 17. AMENDMENT 17.1. General. The Employer reserves the power at any time or times to amend the provisions of the Plan and the Plan Agreement to any extent and in any manner that it may deem advisable. If, however, the Employer makes any amendment (including an amendment occasioned by a waiver of the minimum funding requirement under Section 412(d) of the Code) other than (a) a change in an election made in the Plan Agreement, (b) amendments stated in the Plan Agreement which allow the Plan to satisfy Section 415 and to avoid duplication of minimums under Section 416 of the Code because of the required aggregation of multiple plans, or (c) model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as individually designed, the Employer shall cease to participate in this prototype Plan and will be considered to have an individually designed plan. In that event, Putnam shall have no further responsibility to provide to the Employer any amendments or other material incident to the prototype plan, and Putnam may resign immediately as Trustee and as Recordkeeper. Any amendment shall be made by delivery to the Trustee (and the Recordkeeper, if any) of a written instrument executed by the Employer providing for such amendment. Upon the delivery of such instrument to the Trustee, such instrument shall become effective in accordance with its terms as to all Participants and all persons having or claiming any interest hereunder, provided, that the Employer shall not have the power: (1) to amend the Plan in such a manner as would cause or permit any part of the assets of the Trust to be diverted to purposes other than the exclusive benefit of Participants or their Beneficiaries, or as would cause or permit any portion of such assets to revert to or become the property of the Employer. (2) to amend the Plan retroactively in such a manner as would have the effect of decreasing a Participant's accrued benefit, except that a Participant's Account balance may be reduced to the extent permitted under Section 412(c)(8) of the Code. For purposes of this paragraph (2), an amendment shall be treated as reducing a Participant's accrued benefit if it has the effect of reducing his Account balance, or of eliminating an optional form of benefit with respect to amounts attributable to contributions made performed before the adoption of the amendment; or -83- 105 (3) to amend the Plan so as to decrease the portion of a Participant's Account balance that has become vested, as compared to the portion that was vested, under the terms of the Plan without regard to the amendment, as of the later of the date the amendment is adopted or the date it becomes effective. (4) to amend the Plan in such a manner as would increase the duties or liabilities of the Trustee or the Recordkeeper unless the Trustee or the Recordkeeper consents thereto in writing. 17.2. Delegation of Amendment Power. The Employer and all sponsoring organizations of the Putnam Basic Plan Document delegate to Putnam Mutual Funds Corp., the power to amend the Plan (including the power to amend this Section 17.2 to name a successor to which such power of amendment shall be delegated), for the purpose of adopting amendments which are certified to Putnam Mutual Funds Corp., by counsel satisfactory to it, as necessary or appropriate under applicable law, including any regulation or ruling issued by the United States Treasury Department or any other federal or state department or agency; provided that Putnam Mutual Funds Corp., or such successor may amend the Plan only if it has mailed a copy of the proposed amendment to the Employer at its last known address as shown on its books by the date on which it delivers a written instrument providing for such amendment, and only if the same amendment is made on said date to all plans in this form as to which Putnam Mutual Funds Corp., or such successor has a similar power of amendment. If a sponsoring organization does not adopt any amendment made by Putnam Mutual Funds Corp., such sponsoring organization shall cease to participate in this prototype Plan and will be considered to have an individually designed plan. If, upon the submission of this Putnam Basic Plan Document #06 to the Internal Revenue Service for a determination letter, the Internal Revenue Service determines that changes are required to the Basic Plan Document but not to the form of Plan Agreement, Putnam shall furnish a copy of the revised Basic Plan Document to the Employer and the Employer will not be required to execute a revised Plan Agreement. -84- 106 ARTICLE 18. TERMINATION OF THE PLAN AND TRUST 18.1. General. The Employer has established the plan and the Trust with the bona fide intention and expectation that contributions will be continued indefinitely, but the Employer shall have no obligation or liability whatsoever to maintain the Plan for any given length of time and may discontinue contributions under the Plan or terminate the Plan at any time by written notice delivered to the Trustee, without any liability whatsoever for any such discontinuance or termination. 18.2. Events of Termination. The Plan will terminate upon the happening of any of the following events: (a) Death of the Employer, if a sole proprietor, or dissolution or termination of the Employer, unless within 60 days thereafter provision is made by the successor to the business with respect to which the Plan was established for the continuation of the Plan, and such continuation is approved by the Trustee; (b) Merger, consolidation or reorganization of the Employer 'into one or more corporations or organizations, unless the surviving corporations or organizations adopt the Plan by an instrument in writing delivered to the Trustee within 60 days after such a merger, consolidation and reorganization; (c) Sale of all or substantially all of the assets of the Employer, unless the purchaser adopts the Plan by an instrument in writing delivered to the Trustee within 60 days after the sale; (d) The institution of bankruptcy proceedings by or against the Employer, or a general assignment by the Employer to or for the benefit of its creditors; or (e) Delivery of notice of termination as provided in Section 18.1. 18.3. Effect of Termination. Notwithstanding any other provisions of this Plan, other than Section 18.4, upon termination of the Plan or complete discontinuance of contributions thereunder, each Participant's Accounts will become fully vested and nonforfeitable, and upon partial termination of the Plan, the Accounts of each Participant affected by the partial termination will become fully vested and nonforfeitable. The Employer shall notify the Trustee in writing of such termination, partial termination or complete discontinuance of contributions. In the event of the complete termination of the Plan or discontinuance of contributions, the Trustee will, after payment of all expenses of the Trust Fund, make distribution of the Trust assets to the Participants or other persons entitled thereto, in such form as the Employer may direct pursuant to Article 10 or, in the absence of such direction, in a single payment in cash or in kind. Upon completion of such distributions under this Article, -85- 107 the Trust win terminate, the Trustee will be relieved from its obligations under the Trust, and no Participant or other person will have any further claim thereunder. 18.4. Approval of Plan. Notwithstanding any other provision of the Plan, if the Employer fails to obtain or to retain the approval by the Internal Revenue Service of the Plan as a qualified plan under Section 401 (a) of the Code, then (i) the Employer shall promptly notify the Trustee, and (ii) the Employer may no longer participate in the Putnam prototype plan, but will be deemed to have an individually designed plan. If it is determined by the Internal Revenue Service that the Plan upon its initial adoption does not qualify under Section 401 (a) of the Code, all assets then held under the Plan will be returned within one year of the denial of initial qualification to the Participants and the Employer to the extent attributable to their respective contributions and any income earned thereon, but only if the application for qualification is made by the time prescribed by law for filing the Employer's federal income tax return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. Upon such distribution, the Plan will be considered to be rescinded and to be of no force or effect. -86- 108 ARTICLE 19. TRANSFERS TO OR FROM OTHER QUALIFIED PLANS; MERGERS 19.1. General. Notwithstanding any other provision hereof, subject to the approval of the Trustee there may be transferred to the Trustee all or any of the assets held (whether by a trustee, custodian or otherwise) in respect of any other plan which satisfies the applicable requirements of Section 401 (a) of the Code and which is maintained for the benefit of any Employee (provided, however, that the Employee is not a member of a class of Employees excluded from eligibility to participate in the Plan). Any such assets so transferred shall be accompanied by written instructions from the Employer naming the persons for whose benefit such assets have been transferred and showing separately the respective contributions made by the Employer and by the Participants and the current value of the assets attributable thereto. Notwithstanding the foregoing, if a Participant's employment classification changes under Section 3.4 such that he begins participation in another plan of the Employer, his Account, if any, shall, upon the Administrator's direction, be transferred to the plan in which he has become eligible to participate, if such plan permits receipt of such Account. 19.2. Amounts Transferred. The Employer shall credit any assets transferred pursuant to Section 19.1 or Section 3.4 to the appropriate Accounts of THE persons for whose benefit such assets have been transferred. Any amounts credited as contributions previously made by an employer or by such persons under such other plan shall be treated as contributions previously made under the Plan by the Employer or by such persons, as the case may be. 19.3. Merger or Consolidation. The Plan shall not be merged or consolidated with any other plan, nor shall any assets or liabilities of the Trust Fund be transferred to any other plan, unless each Participant would receive a benefit immediately after the transaction, if the Plan then terminated, which is equal to or greater than the benefit he would have been entitled to receive immediately before the transaction if the Plan had then terminated. -87- 109 ARTICLE 20. MISCELLANEOUS 20.1. Notice of Plan. The Plan shall be communicated to all Participants by the Employer on or before the last day on which such communication may be made under applicable law. 20.2. No Employment Rights. Neither the establishment of the Plan and the Trust, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits shall be construed as giving to any Participant or any other person any legal or equitable right against the Employer, or the Trustee, except as provided herein or by ERISA; and in no event shall the terms of employment or service of any Participant be modified or in any way be affected hereby. 20.3. Distributions Exclusively From Plan. Participants and Beneficiaries shall look solely to the assets held in the Trust purchased pursuant to the Plan for the payment of any benefits under the Plan. 20.4. No Alienation. The benefits provided hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, and any attempt to cause such benefits to be so subjected shall not be recognized, except as provided in Section 12.4 or in accordance with a Qualified Domestic Relations Order. The Plan Administrator shall determine whether a domestic relations order is qualified in accordance with written procedures adopted by the Plan Administrator. Notwithstanding the foregoing, an order shall not fail to be a Qualified Domestic Relations Order merely because it requires a distribution to an alternate payee (or the segregation of accounts pending distribution to an alternate payee) before the Participant is otherwise entitled to a distribution under the Plan. 20.5. Provision of Information. The Employer and the Trustee shall furnish to each other such information relating to the Plan and Trust as may be required under the Code or ERISA and any regulations issued or forms adopted by the Treasury Department or the Labor Department or otherwise thereunder. 20.6. No Prohibited Transactions. The Employer and the Trustee shall, to the extent of their respective powers and authority under the Plan, prevent the Plan from engaging in any transaction known by that person to constitute a transaction prohibited by Section 4975 of the Code and any rules or regulations with respect thereto. 20.7. Governing Law. The Plan shall be construed, administered, regulated and governed in all respects under and by the laws of the United States, and to the extent permitted by such laws, by the laws of the Commonwealth of Massachusetts 20.8. Gender. Whenever used herein, a pronoun in the masculine gender includes the feminine gender unless the context clearly indicates otherwise. -88- EX-10.4 24 INDEMNITY AGREEMENT 1 EXHIBIT 10.4 INDEMNITY AGREEMENT THIS AGREEMENT is made and entered into this ____ day of _________, 1996 by and between JT STORAGE, INC., a Delaware corporation (the "Corporation"), and ____________ ("Agent"). RECITALS WHEREAS, Agent performs a valuable service to the Corporation in his/her capacity as _______________ of the Corporation; WHEREAS, the stockholders of the Corporation have adopted bylaws (the "Bylaws") providing for the indemnification of the directors, officers, employees and other agents of the Corporation, including persons serving at the request of the Corporation in such capacities with other corporations or enterprises, as authorized by the Delaware General Corporation Law, as amended (the "Code"); WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit contracts between the Corporation and its agents, officers, employees and other agents with respect to indemnification of such persons; and WHEREAS, in order to induce Agent to continue to serve as ______________ of the Corporation, the Corporation has determined and agreed to enter into this Agreement with Agent; NOW, THEREFORE, in consideration of Agent's continued service as _______________ after the date hereof, the parties hereto agree as follows: AGREEMENT 1. SERVICES TO THE CORPORATION. Agent will serve, at the will of the Corporation or under separate contract, if any such contract exists, as ______________ of the Corporation or as a director, officer or other fiduciary of an affiliate of the Corporation (including any employee benefit plan of the Corporation) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws or other applicable charter documents of the Corporation or such affiliate; provided, however, that Agent may at any time and for any reason resign from such position (subject to any contractual obligation that Agent may have assumed apart from this Agreement) and that the Corporation or any affiliate shall have no obligation under this Agreement to continue Agent in any such position. 2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold harmless and indemnify Agent to the fullest extent authorized or permitted by the provisions of the Bylaws and the Code, as the same may be amended from time to time (but only to the extent that such 1. 2 amendment permits the Corporation to provide broader indemnification rights than were permitted by the Bylaws or the Code prior to adoption of such amendment). 3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the exclusions set forth in Section 4 hereof, the Corporation hereby further agrees to hold harmless and indemnify Agent: (a) against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative (including an action by or in the right of the Corporation) to which Agent is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Agent is, was or at any time becomes a director, officer, employee or other agent of Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Agent by the Corporation under the non-exclusivity provisions of the Code and Section 43 of the Bylaws. 4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3 hereof shall be paid by the Corporation: (a) on account of any claim against Agent for an accounting of profits made from the purchase or sale by Agent of securities of the Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) on account of Agent's conduct that was knowingly fraudulent or deliberately dishonest or that constituted willful misconduct; (c) on account of Agent's conduct that constituted a breach of Agent's duty of loyalty to the Corporation or resulted in any personal profit or advantage to which Agent was not legally entitled; (d) for which payment has actually been made to Agent under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; (e) if indemnification is not lawful (and, in this respect, both the Corporation and Agent have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); or 2. 3 (f) in connection with any proceeding (or part thereof) initiated by Agent, or any proceeding by Agent against the Corporation or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the Corporation, (iii) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof. 5. CONTINUATION OF INDEMNITY. All agreements and obligations of the Corporation contained herein shall continue during the period Agent is a director, officer, employee or other agent of the Corporation (or is or was serving at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Agent shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Agent was a _______ of the Corporation or was serving in any other capacity referred to herein. 6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Corporation shall indemnify Agent for the portion thereof to which Agent is entitled. 7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Agent of notice of the commencement of any action, suit or proceeding, Agent will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability which it may have to Agent otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Agent notifies the Corporation of the commencement thereof: (a) the Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Agent. After notice from the Corporation to Agent of its election to assume the defense thereof, the Corporation will not be liable to Agent under this Agreement for any legal or other expenses subsequently incurred by Agent in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Agent shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Agent unless (i) the employment of counsel by Agent has been authorized by the Corporation, (ii) Agent shall 3. 4 have reasonably concluded that there may be a conflict of interest between the Corporation and Agent in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Agent's separate counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Agent shall have made the conclusion provided for in clause (ii) above; and (c) the Corporation shall not be liable to indemnify Agent under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Agent without Agent's written consent, which may be given or withheld in Agent's sole discretion. 8. EXPENSES. The Corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Agent in connection with such proceeding upon receipt of an undertaking by or on behalf of Agent to repay said amounts if it shall be determined ultimately that Agent is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Code or otherwise. 9. ENFORCEMENT. Any right to indemnification or advances granted by this Agreement to Agent shall be enforceable by or on behalf of Agent in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Agent, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for advancement of expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Corporation) that Agent is not entitled to indemnification because of the limitations set forth in Section 4, but the burden of proof with respect to such defense shall be on the Corporation hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Agent is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or its stockholders) that such indemnification is improper shall be a defense to the action or create a presumption that Agent is not entitled to indemnification under this Agreement or otherwise. 10. SUBROGATION. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Agent, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this Agreement shall not be exclusive of any other right which Agent may have or hereafter acquire under any statute, provision of the Corporation's Certificate of Incorporation or Bylaws, agreement, vote 4. 5 of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. 12. SURVIVAL OF RIGHTS. (a) The rights conferred on Agent by this Agreement shall continue after Agent has ceased to be a director, officer, employee or other agent of the Corporation or to serve at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Agent's heirs, executors and administrators. (b) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 13. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Corporation shall nevertheless indemnify Agent to the fullest extent provided by the Bylaws, the Code or any other applicable law. 14. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 15. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 17. HEADINGS. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified or registered mail with postage prepaid: 5. 6 (a) If to Agent, at the address indicated on the signature page hereof. (b) If to the Corporation, to JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 Attention: President or to such other address as may have been furnished to Agent by the Corporation. 6. 7 IN WITNESS WHEREOF,the parties hereto have executed this Agreement on and as of the day and year first above written. JT STORAGE, INC. By:______________________________________ Title:___________________________________ AGENT _________________________________________ Address: _________________________________________ _________________________________________ 7. EX-10.5 25 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This Employment Agreement is entered into between JT Storage, Inc., a Delaware corporation (the "Company"), and Kenneth D. Wing ("Executive") effective as of June 26, 1995 (the "Effective Date") and sets forth the terms and conditions of the Company's employment of Executive, as follows: 1. Position. Upon the Effective Date, Executive is employed as Senior Vice President-Engineering and Quality, reporting directly to the Chief Executive Officer of the Company. 2. Employment Term. The term of employment shall be "at will," and may be terminated by either party at any time either with or without cause (subject to certain severance obligations of the Company to Executive under certain circumstances within two years after the Effective Date, as provided in Section 7 below). 3. Base Compensation. For his services, the Company will pay Executive a base salary at the rate of $225,000 per year (the "Base Salary"), payable in accordance with the Company's general practices for the payment of base salary to its executives. The Company, by action of its Board of Directors in its discretion, may increase, but not decrease, the Base Salary at any time and from time to time during the first two years following the Effective Date. 4. Management Bonus Programs. Executive shall be eligible to participate in any distribution of bonuses in a manner commensurate with the participation of the Company's other executives. The Company intends to establish a Management Bonus Program after such time as the Company's operations become profitable. It is anticipated that, under such Management Bonus Program, Executive and other senior executives will receive a performance and compensation review on an annual basis. 5. Loan to Executive. Upon the Effective Date, Executive will receive a $160,000 loan from the Company (the "Loan") which shall bear interest at the lowest applicable federal rate required to avoid imputed interest under federal tax laws. The principal amount of the Loan, plus such interest, will be subject to forgiveness as follows: (a) subject to Executive's continued employment with the Company through January 1, 1996, on January 1, 1996 $80,000 principal of the Loan will be forgiven and all interest accrued thereon as of such date will be forgiven; and 2 (b) subject to Executive's continued employment with the Company through January 1, 1997, on January 1, 1997 $80,000 principal balance and all accrued interest on the Loan shall be forgiven. As provided in Section 7 below, if, prior to January 1, 1997, Executive is terminated by the Company without "cause" (as defined in Section 7(b) below) or Executive dies or becomes disabled, all principal and accrued interest on the Loan shall be forgiven as of the termination date. If Executive is terminated by the Company for "cause," or if Executive terminates his employment with the Company, in either case prior to January 1, 1997, all unpaid principal and accrued interest on the Loan shall become due and payable immediately upon such termination. 6. Stock Options. Upon Executive's commencement of employment, Executive will be granted an incentive stock option, under the Company's 1995 Stock Option Plan (a copy of which has been delivered to Executive, and receipt of which is hereby acknowledged by Executive), to purchase 300,000 shares of Common Stock of the Company at an option exercise price of $.25 per share. Such option shall vest (that is, become exercisable) over a four-year period, such that 37,500 shares shall vest six months after the Effective Date and, thereafter, an additional 6,250 shares shall vest on a monthly basis until the option becomes fully vested on the fourth anniversary of the Effective Date. Such option shall otherwise be in accordance with the terms and conditions of the 1995 Stock Option Plan and shall not be in any manner affected by this Agreement. As an alternative to the foregoing, Executive may choose (subject to compliance with all applicable securities laws) to purchase 300,000 shares of Common Stock, at a price of $.25 per share, which shares will be subject to a repurchase right of the Company (at $.25 per share) upon any termination of employment with or without cause, and which repurchase right will terminate in the same manner that the option described above would vest (i.e., the Company's repurchase right would terminate as to 37,500 shares six months after the Effective Date and, thereafter, would terminate as to an additional 6,250 shares on a monthly basis until the fourth anniversary of the Effective Date, at which time the Company's repurchase right would have fully terminated). If this alternative is used, Executive will pay 20% of the purchase price for the shares in cash, and the balance will be represented by a full recourse promissory note (bearing interest at the lowest applicable federal rate required to avoid imputed interest under federal tax laws), which would require four equal annual payments of principal, plus accrued interest through the date of payment, on each anniversary of the purchase date. Such promissory note would be secured by the 300,000 shares of Common Stock. 2. 3 7. Termination of Employment Within Two Years. (a) Termination by Company Without Cause. If the Company elects to terminate Executive's employment hereunder without "cause" (as defined in paragraph (b) below) within two years after the Effective Date, the Company will provide Executive the following severance benefits: (i) The Company will continue to pay to Executive the Executive's then-effective Base Salary (which shall not be less than $225,000) until the second anniversary of the Effective Date; provided, however, that (1) such Base Salary payments shall be reduced by any amounts earned or accrued by Executive during such period as compensation from any subsequent employer, and (2) such Base Salary payments shall terminate immediately if Executive commences employment with, or provides advice or consulting services to, a competitor of the Company; and (ii) The Company shall continue to provide Executive with medical, dental and life insurance coverage (as generally available to executives of the Company) during such period as the Company is obligated to continue to pay to Executive the full amount of Base Salary pursuant to the immediately preceding paragraph (i). (b) Termination by Executive, or Termination by Company for Cause. If the Executive terminates his employment hereunder (including a termination by reason of death or disability) or if the Company elects to terminate Executive's employment for cause, in either case within two years after the Effective Date, such employment will terminate on the date fixed by Executive or the Company (as the case may be), and thereafter the Company will not be obligated to pay Executive any additional compensation, other than compensation due and owing to the date of termination. "Cause," for purposes of this Agreement, shall mean any of the following: (i) Willful breach by Executive of any material provision of this Agreement; (ii) Gross negligence or dishonesty in the performance of Executive's duties hereunder; or (iii) Executive intentionally engaging in conduct which is materially detrimental to the business of the Company. 3. 4 8. Other Provisions. (a) Executive shall be entitled to all standard Company benefits. (b) Upon presentation of itemized documentation, the Company shall pay or reimburse Executive for all reasonable and necessary expenses incurred by him in connection with his duties hereunder. (c) If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect or impair the validity or enforceability of the remaining provisions of this Agreement, which shall remain in full force and effect in accordance with their terms. This Agreement, together with the Company's standard form of confidentiality and inventions assignment agreement (which Executive hereby agrees to execute and perform), embodies the entire agreement between the parties relating to the subject matter hereof, and supersedes all previous agreements or understandings. No provision of this Agreement may be amended or waived, except by a writing signed by the parties. (d) This Agreement shall be governed by the laws of the State of California. JT STORAGE, INC. By: /s/ D. T. Mitchell ---------------------------------- David T. Mitchell, President /s/ Kenneth Wing -------------------------------------- Kenneth D. Wing, individually 4. EX-10.6 26 JT STORAGE CONSULTING AGREEMENT/ROGER W. JOHNSON 1 EXHIBIT 10.6 JT STORAGE, INC. CONSULTING AGREEMENT FOR ROGER W. JOHNSON THIS AGREEMENT is made by JT STORAGE, INC., its successors and its subsidiaries worldwide ("JTS"), and Roger W. Johnson, an individual residing at Number 2 Rocklege Road, Laguna Beach, CA 92651 ("Consultant"), effective April 1, 1996 (the "Effective Date"), for the purpose of setting forth the exclusive terms and conditions under which Consultant will provide services on a temporary basis to JTS. In consideration of the mutual obligations specified in this Agreement, and any compensation paid to Consultant for his services, the parties agree to the following: 1. WORK AND PAYMENT. Attached to this Agreement as Exhibit A hereto is a statement of the work to be performed by Consultant, Consultant's rate of payment for such work, expenses to be paid in connection with such work, the maximum price JTS shall be obligated to pay under this Agreement and such other terms and conditions as shall be deemed appropriate or necessary for the performance of the work. JTS is not obligated to issue any additional orders for work by Consultant under this Agreement. 2. NONDISCLOSURE AND TRADE SECRETS. During the term of this Agreement and in the course of Consultant's performance hereunder, Consultant may receive and otherwise be exposed to confidential and proprietary information relating to JTS' business practices, strategies and technologies. Such confidential and proprietary information may include but not be limited to confidential and proprietary information supplied to Consultant with the legend "JTS Confidential and Proprietary," or equivalent, JTS' marketing and customer support strategies, JTS' financial information, including sales, costs, profits and pricing methods, JTS' internal organization, employee information and customer lists, JTS' technology, including discoveries, inventions, research and development efforts, processes, hardware/software design and maintenance tools, samples and/or media (and procedures and formulations for producing any such samples and/or media), formulas, methods, product know-how and show-how, and all derivatives, improvements and enhancements to any of the above which are created or developed by Consultant under this Agreement and information of third parties as to which JTS has an obligation of confidentiality (collectively referred to as "Information"). Consultant acknowledges the confidential and secret character of the Information and agrees that the Information is the sole, exclusive and extremely valuable property of JTS. Accordingly, Consultant agrees not to reproduce any of the Information without the applicable prior written consent of JTS, not to use the Information except in the performance of this Agreement, and not to disclose all or any part of the Information in any form to any third party, either during or after the term of this Agreement. Upon termination of this Agreement and the request of JTS, Consultant agrees to cease using and to return to JTS all whole and partial copies and derivatives of the Information, whether in Consultant's possession or under Consultant's direct or indirect control. 1. 2 Consultant shall not disclose or otherwise make available to JTS in any manner any confidential information of Consultant or received by Consultant from third parties. Consultant agrees not to export, directly or indirectly, any U.S. source technical data acquired from JTS or any products utilizing such data to any countries outside the United States which export may be in violation of the United States Export Laws or Regulations. Nothing in this section releases Consultant from any obligation stated elsewhere in this Agreement not to disclose such data. This Section 2 shall survive the termination of this Agreement for any reason, including expiration of term. 3. OWNERSHIP OF WORK PRODUCT. Consultant shall specifically describe and identify in Exhibit A to this Agreement all technology (a) which Consultant intends to use in performing under this Agreement, (b) which is either owned solely by Consultant or licensed to Consultant with a right to sublicense, and (c) which is in existence in the form of a writing or working prototype prior to the effective date of this Agreement ("Background Technology"). Consultant agrees that any and all ideas, improvements, inventions and works of authorship conceived, written, created or first reduced to practice in the performance of work under this Agreement shall be the sole and exclusive property of JTS and hereby assigns to JTS all its right, title and interest in and to any and all such ideas, improvements, inventions and works of authorship. Consultant further agrees that except for Consultant's rights in Background Technology, JTS is and shall be vested with all rights, title and interests including patent, copyright, trade secret and trademark rights in all of Consultant's work product under this Agreement. Consultant hereby grants to JTS a non-exclusive, royalty free and worldwide right to use and sublicense the use of Background Technology for the purpose of developing and marketing JTS products, but not for the purpose of marketing Background Technology separate from JTS products. Consultant shall execute all papers, including patent applications, invention assignments and copyright assignments, and otherwise shall assist JTS as reasonably required to perfect in JTS the rights, title and other interests in Consultant's work product expressly granted to JTS under this Agreement. Costs related to such assistance, if required, shall be paid by JTS. This Section 3 shall survive the termination of this Agreement for any reason, including expiration of term. 4. TERMINATION. Either JTS or Consultant may terminate this Agreement in the event of a material breach of the Agreement which is not cured within thirty (30) days of written notice to the other party of such breach. Material breaches include but are not limited to the filing of bankruptcy papers or other similar arrangements due to insolvency, the assignment of Consultant's obligations to perform to third parties and Consultant's acceptance of employment or consulting arrangements with third parties which are or may be detrimental to JTS' business 2. 3 interests. Unless earlier terminated as described above, this Agreement shall terminate two (2) years following the Effective Date. 5. COMPLIANCE WITH APPLICABLE LAWS. Consultant warrants and covenants that all material supplied and work performed under this Agreement complies with or will comply with all applicable United States and foreign laws and regulations. 6. INDEPENDENT CONTRACTOR. Consultant is an independent contractor, is not an agent or employee of JTS and is not authorized to act on behalf of JTS. Consultant will not be eligible for any employee benefits, nor will JTS make deductions from any amounts payable to Consultant for taxes. Taxes shall be the sole responsibility of Consultant. 7. LEGAL AND EQUITABLE REMEDIES. Consultant hereby acknowledges and agrees that in the event of any breach of this Agreement by Consultant, including, without limitation, the actual or threatened disclosure of Information without the prior express written consent of JTS, JTS will suffer an irreparable injury, such that no remedy at law will afford it adequate protection against, or appropriate compensation for, such injury. Accordingly, Consultant hereby agrees that JTS shall be entitled to specific performance of Consultant's obligations under this Agreement, as well as such further relief as may be granted by a court of competent jurisdiction. 8. GENERAL. The parties' rights and obligations under this Agreement will bind and inure to the benefit of their respective successors, heirs, executors, and administrators and permitted assigns. This Agreement and its Exhibits attached hereto and hereby incorporated herein constitute the parties' final, exclusive and complete understanding and agreement with respect to the subject matter hereof, and supersede all prior and contemporaneous understandings and agreements relating to its subject matter. This Agreement may not be waived, modified, amended or assigned unless mutually agreed upon in writing by both parties. In the event any provision of this Agreement is found to be legally unenforceable, such unenforceability shall not prevent enforcement of any other provision of the Agreement. This Agreement shall be governed by the laws of the State of California, excluding its conflicts of laws principles. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery, facsimile transmission or sent by certified or registered mail, postage prepaid, three (3) days after the date of mailing. 3. 4 IN WITNESS WHEREOF,the parties hereto have executed this Agreement as of the date first set forth above. JT STORAGE, INC. CONSULTANT By: W. Virginia Walker By: Roger W. Johnson ----------------------------- --------------------------------- /s/ W. Virginia Walker /s/ Roger W. Johnson - --------------------------------- ------------------------------------- W. Virginia Walker Roger W. Johnson _________________________________ _____________________________________ Executive Vice President, [Social Security Number] Finance and Administration, Chief Financial Officer and Secretary 4. 5 EXHIBIT A WORK TO BE PERFORMED: Roger W. Johnson shall be reasonably available to JTS during the term of this Agreement to consult and confer with JTS in connection with strategic business planning, industry conditions, business relationships and other such areas as may be reasonably requested by JTS. RATE OF PAYMENT: $2,000 per month METHOD OF PAYMENT: A method consistent with JTS' then-current payment policies. EXPENSES TO BE PAID: Such expenses as are approved in writing by JTS consistent with its then-current expense reimbursement policies and for which appropriate documentation is furnished. MAXIMUM AMOUNT JTS IS REQUIRED TO PAY: $48,000 JTS FACILITIES WHERE WORK IS TO BE PERFORMED: JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 Moduler Electronics (India) Pvt. Ltd. Madras, India BACKGROUND TECHNOLOGY: 5. EX-10.7 27 RESTRICTED STK PUR AGREE/DAVID T. MITCHELL 1/2/96 1 EXHIBIT 10.7 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of January 2, 1996 (the "Effective Date") by and between JT Storage, Inc., a Delaware corporation ("JT Storage"), and David T. Mitchell ("Purchaser"), with reference to the following: RECITALS: A. JT Storage desires to advance its growth, development and financial success by providing additional incentives to its key executive personnel by assisting them to acquire shares of JT Storage's common stock (the "Common Stock"), and to benefit directly from JT Storage's growth, development and financial success. B. JT Storage desires to sell to Purchaser on the Effective Date, and Purchaser desires to subscribe for and purchase from JT Storage at such time, certain shares of Common Stock as set forth in this Agreement. C. In order to induce JT Storage to sell such shares, Purchaser desires to have such shares subject to the restrictions and interests created by this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants and conditions contained herein, the parties agree as follows: 1. Sale and Purchase of Stock. JT Storage hereby agrees to sell to Purchaser, subject to the conditions and restrictions contained in this Agreement, and Purchaser hereby agrees to purchase from JT Storage, 2,000,000 shares (the "Shares") of Common Stock at a price of $.25 per Share for an aggregate purchase price of $500,000 (the "Purchase Price"). Purchaser shall pay $100,000 of the Purchase Price by personal check payable to JT Storage and shall issue a secured promissory note attached hereto as Exhibit A (the "Note") to JT Storage for $400,000, constituting the balance of the Purchase Price. The Note shall be secured by a pledge of the Shares, in conjunction with which Purchaser shall execute a Stock Pledge Agreement (the "Pledge Agreement") attached hereto as Exhibit B. The check, Note and Pledge Agreement, Joint Escrow Instructions attached hereto as Exhibit C (the "Escrow Instructions"), and two copies of a Stock Assignment Separate from Certificate (the "Stock 2 Assignment") attached hereto as Exhibit D shall be delivered to JT Storage on the Effective Date. 2. Vesting. The Shares purchased pursuant to Section 1 hereof will vest over a four-year period from Purchaser's June 5, 1995 commencement of employment (the "Vesting Commencement Date"), with 250,000 Shares vested immediately and with the balance vesting in 42 successive monthly installments of 41,666- 2/3 shares each commencing January 5, 1996 and thereafter on the fifth day of each successive month through and until June 5, 1999. JT Storage's repurchase option as described in Section 4 hereof shall be limited to those Shares which have not so vested (herein referred to as "Unvested Shares") in accordance with this Section 2 at the time of termination of the Purchaser's employment with JT Storage. Accordingly, such repurchase right shall not apply to any Shares which have vested (herein referred to as "Vested Shares") as of the time of termination of Purchaser's employment with JT Storage. 3. Restriction on Transfer of the Unvested Shares. Except as otherwise specifically provided herein, Purchaser may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Unvested Shares, or any right or interest therein. Any purported sale, transfer (including involuntary transfers initiated by operation of legal process), hypothecation or disposition of any of the Unvested Shares or any right or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 3. 4. Repurchase Option Upon Termination. (a) JT Storage's Repurchase Option. In the event that Purchaser's employment by JT Storage terminates for any reason (including, without limitation, death, disability, retirement, voluntary or involuntary resignation or dismissal, with or without cause) prior to the fifth anniversary of the Vesting Commencement Date, JT Storage or its nominee(s) shall have the right and option (the "Repurchase Option") to purchase from Purchaser all or any portion of the Unvested Shares for a period of 60 days after the date of such termination (the "Termination Date"). The amount of Unvested Shares shall be determined as of the Termination Date. (b) Repurchase Price Under Repurchase Option. The purchase price for each Share to be purchased pursuant to the Repurchase Option (the "Repurchase Price") shall be $.25 per 2. 3 Share. The Company may apply unpaid amounts owing under the Note against the Repurchase Price. (c) Exercise of Repurchase Option. The Repurchase Option shall be exercised by JT Storage or its nominee(s) by delivery, within the 60-day period specified in Section 4(a) above, to Purchaser of (i) a written notice specifying the number of Shares to be purchased and (ii) a check in the amount of the Repurchase Price, calculated as provided in this Section 4, for all Shares to be purchased. 5. Dividends, Splits and Certain Reorganizations. If, from time to time during the term of this Agreement: (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of JT Storage; or (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of JT Storage; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Shares shall be immediately subject to this Agreement and be included in the word "Shares" (as either Vested Shares or Unvested Shares, as appropriate) for all purposes with the same force and effect as the Shares presently subject to this Agreement. All such securities or other property so included in the word "Shares" shall be delivered to the Escrow Agent (as hereinafter defined) and held pursuant to the Escrow Instructions in accordance with Section 7 hereof. While the total Repurchase Price pursuant to the Repurchase Option shall remain the same after each such event, the Repurchase Price per Share upon exercise of the Repurchase Option shall be appropriately adjusted, as necessary. 6. Change of Control. Notwithstanding the foregoing provisions of Section 2 of this Agreement, in the event there occurs a Change of Control (as defined below) and within three (3) years thereafter any one or more of the following events occurs: (a) JT Storage terminates Purchaser's employment with JT Storage, other than by reason of Purchaser's willful failure to discharge his duties of employment to JT Storage; or 3. 4 (b) Purchaser is assigned a different employment position with JT Storage involving a significant reduction in responsibility, stature or compensation compared to Purchaser's position immediately preceding such Change of Control; or (c) Purchaser's continuation of employment with JT Storage is conditioned on Purchaser's place of principal employment being relocated by more than fifty (50) miles from such place of principal employment immediately preceding such Change of Control; then, in any such event, any Unvested Shares shall automatically become Vested Shares and JT Storage's repurchase right with respect thereto shall accordingly terminate. For purposes of this paragraph, "Change of Control" shall mean either of the following events: (i) Any "person" (as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of JT Storage representing more than 50% of the total voting power represented by the then outstanding voting securities of JT Storage; provided, however, that the foregoing shall not apply with respect to any such "person" who, at the date of this Agreement, is such "beneficial owner" of securities of JT Storage representing at least 20% of the total voting power represented by the presently outstanding voting securities of JT Storage; or (ii) The stockholders of JT Storage shall approve a merger or consolidation of JT Storage with any other corporation other than a merger or consolidation which would result in the voting securities of JT Storage outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of JT Storage or such surviving entity outstanding immediately after such merger or consolidation, as applicable, or the stockholders of JT Storage approve a plan of complete liquidation of JT Storage or an agreement for the sale or disposition by JT Storage of all or substantially all of the assets of JT Storage. 7. Limitation on Payments. In the event that the automatic vesting of all Unvested Shares provided for under Section 6 of this Agreement (i) constitutes a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 7 would be subject to the excise tax imposed by Section 4999 of the 4. 5 Code, then the Unvested Shares shall become automatically vested either: (a) as to all of the Unvested Shares, or (b) such lesser number of Unvested Shares which would result in no portion of value of such acceleration being subject to excise tax under Section 4999 of the Code, whichever of the foregoing, taking into account the applicable federal, state, and local employment taxes, income taxes, and the excise tax imposed by Section 4999 of the Code, results in the receipt by the Purchaser, on an after-tax basis, of the greatest benefit of such acceleration, notwithstanding that the value of all or some portion of such benefit may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 7 shall be made in writing by JT Storage's independent public accountants (the "Accounting Firm"). JT Storage shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Purchaser. Notice must be given to the Accounting Firm within fifteen (15) business days after an event causing automatic vesting of Unvested Shares under Section 6 of this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by JT Storage. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). 8. Escrow. In the event the Note is repaid prior to the termination of the Repurchase Option and the certificates representing Unvested Shares are released pursuant to the Pledge Agreement, as security for the faithful performance of the terms of this Agreement and to insure the availability for delivery of the Unvested Shares upon exercise of the Repurchase Option herein provided for, Purchaser agrees to deliver to, and deposit with, the Secretary of JT Storage, or such other person designated by JT Storage (the "Escrow Agent"), as the Escrow Agent in this transaction, two copies of the Stock Assignment duly endorsed (with date and number of shares blank), together with the certificate or certificates evidencing the Unvested Shares. Said documents are to held by the Escrow Agent and delivered by the Escrow Agent pursuant to the Escrow Instructions. 9. Permitted Transfers. Purchaser may, at any time or times, transfer any or all of the Unvested Shares only: (a) inter vivos to Purchaser's spouse or issue, or to a trust for their benefit, (b) upon Purchaser's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) 5. 6 hereof are collectively referred to herein as "Permitted Transferee"), provided, however, that such Unvested Shares shall not be transferred until the Permitted Transferee executes a valid undertaking to JT Storage to the effect that the Unvested Shares so transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option in the event Purchaser's employment with JT Storage is terminated for any reason prior to the fifth anniversary of the Vesting Commencement Date) as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Purchaser. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 9. 10. Rights as Shareholder. Subject to compliance with the provisions of this Agreement and of the Pledge Agreement, Purchaser shall exercise all rights and privileges of the registered holder of the Shares while they are held by JT Storage pursuant to the Pledge Agreement or the Escrow Instructions, and shall be entitled to receive any dividend or other distribution thereof; provided, however, that any dividends or distributions with respect to the Shares in the form of shares of capital stock of JT Storage (whether by way of stock dividend, stock split or recapitalization) shall be subject to this Agreement, the Pledge Agreement and the Escrow Instructions. 11. Investment Representations. Purchaser represents and warrants to JT Storage as follows: (a) Purchaser's Own Account. Purchaser is acquiring the Shares for Purchaser's own account and not with a view to or for sale in connection with any distribution of the Shares. (b) Access to Information. Purchaser (i) is familiar with the business of JT Storage, (ii) has had an opportunity to discuss with representatives of JT Storage the condition of any prospects for the continued operation and financing of JT Storage and such other matters as Purchaser has deemed appropriate in considering whether to invest in the Shares and (iii) has been provided access to all available information about JT Storage requested by Purchaser. (c) Shares Not Registered. Purchaser understands that the Shares have not been registered under the Act or registered or qualified under the securities laws of any state and that Purchaser may not sell or otherwise transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, 6. 7 or unless an exemption is available which permits sale or other transfer without such registration and qualification. 12. Underwriters' Lock-Up. The Purchaser agrees that, in connection with any underwritten offering of Common Stock of JT Storage pursuant to a registration statement under the Securities Act of 1933, the Purchaser shall withhold from the market any or all of the Shares for a period, not to exceed one hundred and eighty (180) days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 13. No Contract of Employment. Purchaser acknowledges and agrees that this Agreement shall not be construed to give Purchaser any right to be retained in the employ of JT Storage, and that the right and power of JT Storage to dismiss or discharge Purchaser (with or without cause) is strictly reserved. 14. Miscellaneous. (a) Legends on Certificates. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND A PURCHASE OPTION IN FAVOR OF THE ISSUER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN RESTRICTED STOCK PURCHASE AGREEMENT DATED AS OF JANUARY 2, 1996 BY AND BETWEEN JT STORAGE, INC., A DELAWARE CORPORATION, AND DAVID T. MITCHELL, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF JT STORAGE." Such certificates shall also bear such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. (b) Further Assurances. Each party hereto agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the intent of this Agreement. (c) Binding Agreement. This Agreement shall bind and inure to the benefit of the successors and assigns of JT 7. 8 Storage and the personal representatives, heirs and legatees of Purchaser. (d) Other Restrictions on Transfers. The restrictions on transfer set forth in this Agreement are in addition to any and all restrictions imposed pursuant to any applicable state or federal law or regulation. (e) Notices. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Purchaser at the address set forth on the signature page hereof and (ii) to JT Storage, Inc. at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. (f) Amendments. This Agreement may be amended only by the written agreement and consent of the parties hereof. (g) Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of laws rules thereof. (h) Disputes. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. (i) Entire Agreement. This Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (j) Headings. Introductory headings at the beginning of each section of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section. (k) Counterparts. This Agreement may be executed in counterparts, both of which, when taken together, shall constitute one and the same instrument. 8. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. JT STORAGE: JT STORAGE, INC., a Delaware corporation By: /s/ W. Virginia Walker ----------------------------------- W. Virginia Walker, Executive Vice President and Chief Financial Officer PURCHASER: /s/ D. T. Mitchell -------------------------------------- David T. Mitchell Address:28560 Matadero Creek Road Los Altos Hills, CA 94022 9. 10 EXHIBIT A SECURED PROMISSORY NOTE $400,000 January 2, 1996 FOR VALUE RECEIVED, the undersigned ("Borrower") hereby promises to pay to JT Storage, Inc., a Delaware corporation ("Payee"), the principal sum of Four Hundred Thousand Dollars ($400,000), together with interest at 5.91% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. Principal payments of $100,000 plus all accrued interest hereon shall be paid in four installments on each of the first four anniversary dates hereof. Payments of principal and interest on this Secured Promissory Note (this "Promissory Note") shall be made in legal tender of the United States of America and shall be made at the office of Payee at 166 Baypointe Parkway, San Jose, California 95134 or at such other place as Payee shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 2,000,000 shares (the "Shares") of the common stock of Payee, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of January 2, 1996 by and between Borrower and Payee. This Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Payee and Borrower. The principal of, and accrued interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. In the event Borrower shall (i) fail to make complete payment of any installment of principal or accrued interest when due under this Promissory Note or (ii) commit a breach of, or default under, the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this 11 Promissory Note or breach of or default under the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce payment of this Promissory Note, Borrower agrees to pay such attorneys' fees and court costs as Payee may incur as a result thereof, whether or not suit is commenced. IN WITNESS WHEREOF, this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER: /s/ D. T. Mitchell -------------------------------------- David T. Mitchell 2. 12 EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of January 2, 1996 by and between David T. Mitchell, as pledgor ("Pledgor"), and JT Storage, Inc., a Delaware corporation, as pledgee ("Pledgee"), with reference to the following: RECITALS: A. Pursuant to that certain Restricted Stock Purchase Agreement (the "Purchase Agreement") of even date herewith, by and between Pledgor and Pledgee, Pledgor has agreed to purchase 2,000,000 shares (the "Shares") of the common stock of Pledgee. B. Pursuant to the terms of that certain Secured Promissory Note in the original principal amount of $400,000 (the "Note") of even date herewith delivered by Pledgor to Pledgee, Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Note, Pledgor shall execute this Pledge Agreement to assure compliance with the terms and conditions of the Note. D. In order to induce Pledgee to make the loan evidenced by the Note, Pledgor desires to have the Shares held subject to this Pledge Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. Grant of Security Interest. Pledgor hereby grants to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of the Note and the full, faithful and timely performance by Pledgor of all of its other obligations under the Note and this Pledge Agreement. The Certificates, together with a stock assignment duly executed in blank with signatures appropriately guaranteed or witnessed, are being retained by Pledgee, as the pledgeholder for the Shares. Notwithstanding the foregoing, the Pledgee shall, from time to time at the request of the Pledgor, cause to be delivered to the Pledgor one or more certificates which, together with all other such certificates theretofore delivered pursuant to this sentence, evidences that portion of the Shares which is equal to the portion of the full purchase price for all of the Shares then 13 actually paid to the Pledgee by the Pledgor (i.e., the portion determined by adding the cash payment amount set forth in Section 1 of the Purchase Agreement to all principal payments on the Note which have theretofore been made by the Pledgor at the time of such request), subject in all cases to the provisions of Section 7 of the Purchase Agreement requiring the continued escrow of Unvested Shares. 2. Representations and Warranties of Pledgor. Pledgor represents and warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except any restriction upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and by the Subscription Agreement. 3. Voting of Shares in the Absence of Default. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgor shall not be entitled to vote the Shares at any time that there exists an Event of Default as provided in Section 9 hereof. 4. Dividends and Other Distributions. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to receive any dividend or other distribution with respect to the Shares except as provided in Section 5 of this Pledge Agreement. If there exists an Event of Default, such dividend or distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. Stock Dividends. In the event of any distribution in shares of capital stock of Pledgee (whether by way of stock dividend, stock split, recapitalization or otherwise) with respect to the Shares, the shares to be distributed to Pledgor shall be delivered to Pledgee, together with an appropriately executed stock certificate and an appropriately executed stock power, to be held as additional collateral security under this Pledge Agreement. 6. Pledgee's Duties. So long as Pledgee exercises reasonable care with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding 2. 14 sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 7. Sale of Collateral. Upon the occurrence of any Event of Default as provided in Section 9 hereof, Pledgee shall have all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of California at that time and also may, without notice, except as specified below, at its option, sell, resell, assign, transfer and deliver all or any part of the Shares, for cash or on credit for future delivery. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any part of the Shares being sold, free from, and discharged of, all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Note, including collection costs and expenses of sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such Shares, or the part thereof to be sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 8 hereof, Pledgee, in its sole and absolute discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effect such sale or restrict such sale to a purchaser or purchasers who will represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any such sale shall be deemed to be a sale made in a commercially reasonable manner within the meaning of the California Uniform Commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the 3. 15 Shares regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. Redemption of Collateral. Notwithstanding any other provision of this Pledge Agreement, upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other disposition is to be made at least ten days before the date fixed for any public sale or the day on or after which any private sale or other disposition is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such ten days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding monetary obligations of Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such ten-day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 9. Events of Default. At the option of Pledgee, the principal balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set out below ("Events of Default"): (a) Pledgor shall fail to make complete payment or prepayment of principal or interest when due in accordance with the terms of the Note; or (b) Pledgor shall commit a breach or default of any of his obligations under this Pledge Agreement. 10. Termination. This Pledge Agreement shall terminate upon the payment in full of the principal amount and all accrued interest thereon under the Note. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates and any other collateral security then held by Pledgee pursuant to Section 4 or Section 5 of this Pledge Agreement. 11. Cumulation of Remedies; Waiver of Rights. The remedies provided herein in favor of Pledgee shall not be deemed 4. 16 exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. Execution of Endorsements, Assignments, Etc. Upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to Section 4 or Section 5 of this Pledge Agreement. 13. Miscellaneous. (a) Further Documents. Pledgor agrees to execute, acknowledge and deliver any documents or instruments which Pledgee may request in order to better evidence or effectuate this Pledge Agreement and the transactions contemplated hereby. (b) Binding Agreement. This Pledge Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, personal representatives, heirs and legatees. Notwithstanding the foregoing, Pledgor may not assign any of his rights or delegate any of his duties hereunder without the prior written consent of Pledgee. The parties hereto acknowledge that Pledgee shall have the right to assign, with absolute discretion, any or all of its rights and obligations under this Pledge Agreement to any bank(s) or lending institution(s) as collateral security. (c) Notice. Any notice required or permitted to be given pursuant to this Pledge Agreement shall be in writing and shall be deemed given upon personal delivery, or if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Pledgor, at the address set forth on the signature page hereof and (ii) to Pledgee at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other party setting forth the new address for the giving of notices pursuant to this Pledge Agreement. 5. 17 (d) Amendments. This Pledge Agreement may be amended only by the written agreement and consent of the parties hereto. (e) Governing Law. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the conflicts of laws rules thereof. (f) Disputes. In the event of any dispute between the parties arising out of this Pledge Agreement, the prevailing party shall be entitled to receive from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (g) Entire Agreement. This Pledge Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (h) Headings. Introductory headings at the beginning of each section of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section and shall not affect the meanings or construction of the terms and provisions of this Pledge Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGOR: /s/ D. T. Mitchell ------------------------------------- David T. Mitchell Address: 28560 Matadero Creek Road Los Altos Hills, CA 94022 PLEDGEE: JT STORAGE, INC., a Delaware corporation By: /s/ W. Virginia Walker ---------------------------------- W. Virginia Walker, Executive Vice President and Chief Financial Officer 166 Baypointe Parkway San Jose, California 95134 6. 18 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary January 2, 1996 JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 Dear Sir: As Escrow Agent for both JT Storage, Inc., a Delaware corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents, including stock certificates and stock assignments, delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (the "Agreement"), dated as of even date, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Corporation and/or any nominee or assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the Repurchase Option set forth in the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed to (a) date the stock assignments necessary for the transfer in question, (b) fill in the number of shares being transferred and (c) deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Repurchase Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and 19 privileges of a shareholder of the Corporation while the shares of stock are held by you. 4. From time to time upon written request of the Purchaser, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Corporation's Repurchase Option and are not required to remain pledged with JT Storage pursuant to the Pledge Agreement. Within 30 days after the expiration of the 60-day period referred to in paragraph 3 of the Agreement, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares sold and issued pursuant to the Agreement and not purchased by the Corporation or its assignees pursuant to exercise of the Repurchase Option. 5. Notwithstanding the foregoing paragraphs 1, 2, 3 and 4, your duties and obligations as Escrow Agent shall not commence until such time as the certificates representing the shares of stock of the Corporation subject to these instructions pursuant to the Agreement together with two duly executed stock assignments separate from certificate are delivered to you. It is also understood and agreed that you may, on behalf of the Corporation, concurrent with your duties hereunder, hold such certificates and stock assignments as collateral for Purchaser's obligations pursuant to a Secured Promissory Note of even date herewith in the aggregate principal amount of $400,000. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, 2. 20 notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary to advise you properly in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be obligated to reimburse you for your expenses in this connection. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the shares of stock held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said shares until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of arbitrators or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given upon personal delivery, if mailed, or upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses 3. 21 as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 PURCHASER: David T. Mitchell Address: 28560 Matadero Creek Road Los Altos Hills, CA 94022 ESCROW AGENT: Secretary of JT Storage 166 Baypointe Parkway San Jose, California 95134 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, JT Storage, Inc., a Delaware corporation By: /s/ W. Virginia Walker ----------------------------------- W. Virginia Walker, Executive Vice President and Chief Financial Officer PURCHASER: /s/ D. T. Mitchell -------------------------------------- David T. Mitchell ESCROW AGENT: /s/ W. Virginia Walker - ---------------------------------- W. Virginia Walker, Secretary 4. 22 EXHIBIT D ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement and Stock Pledge Agreement, each dated as of January 2, 1996 by and between JT Storage, Inc., a Delaware corporation (the "Corporation"), and the undersigned, David T. Mitchell hereby sells, assigns and transfers unto ___________________________________________________________________________ (_________) shares of the common stock of the Corporation standing in the undersigned's name on the books of the Corporation represented by Certificate No. ___ herewith, and does hereby irrevocably constitute and appoint __________ ______________________________________________________ attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: _____________________ [do not date] /s/ D. T. Mitchell ----------------------------------- David T. Mitchell EX-10.8 28 RESTRICTED STK PUR AGREE/DAVID T. MITCHELL 3/6/96 1 EXHIBIT 10.8 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT(this "Agreement") is made as of March 6, 1996 (the "Effective Date") by and between JT STORAGE, INC., a Delaware corporation ("JT Storage"), and DAVID T. MITCHELL ("Purchaser"), with reference to the following: RECITALS A. JT Storage desires to advance its growth, development and financial success by providing additional incentives to its key executive personnel by assisting them to acquire shares of JT Storage's common stock (the "Common Stock"), and to benefit directly from JT Storage's growth, development and financial success. B. JT Storage desires to sell to Purchaser on the Effective Date, and Purchaser desires to subscribe for and purchase from JT Storage at such time, certain shares of Common Stock as set forth in this Agreement. C. In order to induce JT Storage to sell such shares, Purchaser desires to have such shares subject to the restrictions and interests created by this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants and conditions contained herein, the parties agree as follows: 1. SALE AND PURCHASE OF STOCK. JT Storage hereby agrees to sell to Purchaser, subject to the conditions and restrictions contained in this Agreement, and Purchaser hereby agrees to purchase from JT Storage, 1,000,000 shares (the "Shares") of Common Stock at a price of $1.00 per Share for an aggregate purchase price of $1,000,000 (the "Purchase Price"). Purchaser shall pay the Purchase Price by issuing a secured promissory note attached hereto as Exhibit A (the "Note") to JT Storage for $1,000,000. The Note shall be secured by a pledge of the Shares, in conjunction with which Purchaser shall execute a Stock Pledge Agreement (the "Pledge Agreement") attached hereto as Exhibit B. The Note and Pledge Agreement, Joint Escrow Instructions attached hereto as Exhibit C (the "Escrow Instructions"), and two copies of a Stock Assignment Separate from Certificate (the "Stock Assignment") attached hereto as Exhibit D shall be delivered to JT Storage on the Effective Date. 2. VESTING. The Shares purchased pursuant to Section 1 hereof will vest over a five-year period from February 21, 1996 (the "Vesting Commencement Date"), with 1,000,000 Shares vesting in one lump sum on February 21, 2001. Notwithstanding the foregoing, in the event that the merger of Atari Corporation with and into JT Storage (the "Merger") closes, the 1. 2 Shares purchased pursuant to Section 1 hereof will vest over a four-year period from the Vesting Commencement Date, with 125,000 Shares vesting in one lump sum on August 21, 1996 and with the balance vesting in 42 successive monthly installments of 20,833-1/3 Shares each commencing September 21, 1996 and thereafter on the twenty-first day of each successive month through and until February 21, 2000. JT Storage's repurchase option as described in Section 4 hereof shall be limited to those Shares which have not so vested (herein referred to as "Unvested Shares") in accordance with this Section 2 at the time of termination of the Purchaser's employment with JT Storage. Accordingly, such repurchase right shall not apply to any Shares which have vested (herein referred to as "Vested Shares") as of the time of termination of Purchaser's employment with JT Storage. 3. RESTRICTION ON TRANSFER OF THE UNVESTED SHARES. Except as otherwise specifically provided herein, Purchaser may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Unvested Shares, or any right or interest therein. Any purported sale, transfer (including involuntary transfers initiated by operation of legal process), hypothecation or disposition of any of the Unvested Shares or any right or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 3. 4. REPURCHASE OPTION UPON TERMINATION. (a) JT STORAGE'S REPURCHASE OPTION. In the event that Purchaser's employment by JT Storage terminates for any reason (including, without limitation, death, disability, retirement, voluntary or involuntary resignation or dismissal, with or without cause) prior to the fifth anniversary of the Vesting Commencement Date, JT Storage or its nominee(s) shall have the right and option (the "Repurchase Option") to purchase from Purchaser all or any portion of the Unvested Shares for a period of 60 days after the date of such termination (the "Termination Date"). The amount of Unvested Shares shall be determined as of the Termination Date. (b) REPURCHASE PRICE UNDER REPURCHASE OPTION. The purchase price for each Share to be purchased pursuant to the Repurchase Option (the "Repurchase Price") shall be $1.00 per Share. The Company may apply unpaid amounts owing under the Note against the Repurchase Price. (c) EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be exercised by JT Storage or its nominee(s) by delivery, within the 60-day period specified in Section 4(a) above, to Purchaser of (i) a written notice specifying the number of Shares to be purchased and (ii) a check in the amount of the Repurchase Price, calculated as provided in this Section 4, for all Shares to be purchased. 2. 3 5. DIVIDENDS, SPLITS AND CERTAIN REORGANIZATIONS. If, from time to time during the term of this Agreement: (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of JT Storage; or (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of JT Storage; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Shares shall be immediately subject to this Agreement and be included in the word "Shares" (as either Vested Shares or Unvested Shares, as appropriate) for all purposes with the same force and effect as the Shares presently subject to this Agreement. All such securities or other property so included in the word "Shares" shall be delivered to the Escrow Agent (as hereinafter defined) and held pursuant to the Escrow Instructions in accordance with Section 7 hereof. While the total Repurchase Price pursuant to the Repurchase Option shall remain the same after each such event, the Repurchase Price per Share upon exercise of the Repurchase Option shall be appropriately adjusted, as necessary. 6. CHANGE OF CONTROL. Notwithstanding the foregoing provisions of Section 2 of this Agreement, in the event there occurs a Change of Control (as defined below) and within three (3) years thereafter any one or more of the following events occurs: (a) JT Storage terminates Purchaser's employment with JT Storage, other than by reason of Purchaser's willful failure to discharge his duties of employment to JT Storage; or (b) Purchaser is assigned a different employment position with JT Storage involving a significant reduction in responsibility, stature or compensation compared to Purchaser's position immediately preceding such Change of Control; or (c) Purchaser's continuation of employment with JT Storage is conditioned on Purchaser's place of principal employment being relocated by more than fifty (50) miles from such place of principal employment immediately preceding such Change of Control; then, in any such event, any Unvested Shares shall automatically become Vested Shares and JT Storage's repurchase right with respect thereto shall accordingly terminate. For purposes of this paragraph, "Change of Control" shall mean either of the following events: (i) Any "person" (as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of JT Storage 3. 4 representing more than 50% of the total voting power represented by the then outstanding voting securities of JT Storage; provided, however, that the foregoing shall not apply with respect to any such "person" (excluding Atari Corporation) who, at the date of this Agreement, is such "beneficial owner" of securities of JT Storage representing at least 20% of the total voting power represented by the presently outstanding voting securities of JT Storage; or (ii) The stockholders of JT Storage shall approve a merger or consolidation of JT Storage with any other corporation other than a merger or consolidation which would result in the voting securities of JT Storage outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of JT Storage or such surviving entity outstanding immediately after such merger or consolidation, as applicable, or the stockholders of JT Storage approve a plan of complete liquidation of JT Storage or an agreement for the sale or disposition by JT Storage of all or substantially all of the assets of JT Storage. Notwithstanding the foregoing, the Merger shall not constitute a Change of Control for purposes of this Section 6. 7. LIMITATION ON PAYMENTS. In the event that the automatic vesting of all Unvested Shares provided for under Section 6 of this Agreement (i) constitutes a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 7 would be subject to the excise tax imposed by Section 4999 of the Code, then the Unvested Shares shall become automatically vested either: (a) as to all of the Unvested Shares, or (b) such lesser number of Unvested Shares which would result in no portion of value of such acceleration being subject to excise tax under Section 4999 of the Code, whichever of the foregoing, taking into account the applicable federal, state, and local employment taxes, income taxes, and the excise tax imposed by Section 4999 of the Code, results in the receipt by the Purchaser, on an after-tax basis, of the greatest benefit of such acceleration, notwithstanding that the value of all or some portion of such benefit may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 7 shall be made in writing by JT Storage's independent public accountants (the "Accounting Firm"). JT Storage shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Purchaser. Notice must be given to the Accounting Firm within fifteen (15) business days after an event causing automatic vesting of Unvested Shares under Section 6 of this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by JT Storage. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). 4. 5 8. ESCROW. In the event the Note is repaid prior to the termination of the Repurchase Option and the certificates representing Unvested Shares are released pursuant to the Pledge Agreement, as security for the faithful performance of the terms of this Agreement and to insure the availability for delivery of the Unvested Shares upon exercise of the Repurchase Option herein provided for, Purchaser agrees to deliver to, and deposit with, the Secretary of JT Storage, or such other person designated by JT Storage (the "Escrow Agent"), as the Escrow Agent in this transaction, two copies of the Stock Assignment duly endorsed (with date and number of shares blank), together with the certificate or certificates evidencing the Unvested Shares. Said documents are to held by the Escrow Agent and delivered by the Escrow Agent pursuant to the Escrow Instructions. 9. PERMITTED TRANSFERS. Purchaser may, at any time or times, transfer any or all of the Unvested Shares only: (a) inter vivos to Purchaser's spouse or issue, or to a trust for their benefit, (b) upon Purchaser's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) hereof are collectively referred to herein as "Permitted Transferee"), provided, however, that such Unvested Shares shall not be transferred until the Permitted Transferee executes a valid undertaking to JT Storage to the effect that the Unvested Shares so transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option in the event Purchaser's employment with JT Storage is terminated for any reason prior to the fifth anniversary of the Vesting Commencement Date) as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Purchaser. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 9. 10. RIGHTS AS SHAREHOLDER. Subject to compliance with the provisions of this Agreement and of the Pledge Agreement, Purchaser shall exercise all rights and privileges of the registered holder of the Shares while they are held by JT Storage pursuant to the Pledge Agreement or the Escrow Instructions, and shall be entitled to receive any dividend or other distribution thereof; provided, however, that any dividends or distributions with respect to the Shares in the form of shares of capital stock of JT Storage (whether by way of stock dividend, stock split or recapitalization) shall be subject to this Agreement, the Pledge Agreement and the Escrow Instructions. 11. INVESTMENT REPRESENTATIONS. Purchaser represents and warrants to JT Storage as follows: (a) PURCHASER'S OWN ACCOUNT. Purchaser is acquiring the Shares for Purchaser's own account and not with a view to or for sale in connection with any distribution of the Shares. 5. 6 (b) ACCESS TO INFORMATION. Purchaser (i) is familiar with the business of JT Storage, (ii) has had an opportunity to discuss with representatives of JT Storage the condition of any prospects for the continued operation and financing of JT Storage and such other matters as Purchaser has deemed appropriate in considering whether to invest in the Shares and (iii) has been provided access to all available information about JT Storage requested by Purchaser. (c) SHARES NOT REGISTERED. Purchaser understands that the Shares have not been registered under the Act or registered or qualified under the securities laws of any state and that Purchaser may not sell or otherwise transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, or unless an exemption is available which permits sale or other transfer without such registration and qualification. 12. UNDERWRITERS' LOCK-UP. The Purchaser agrees that, in connection with any underwritten offering of Common Stock of JT Storage pursuant to a registration statement under the Securities Act of 1933, the Purchaser shall withhold from the market any or all of the Shares for a period, not to exceed one hundred and eighty (180) days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 13. NO CONTRACT OF EMPLOYMENT. Purchaser acknowledges and agrees that this Agreement shall not be construed to give Purchaser any right to be retained in the employ of JT Storage, and that the right and power of JT Storage to dismiss or discharge Purchaser (with or without cause) is strictly reserved. 14. MISCELLANEOUS. (a) LEGENDS ON CERTIFICATES. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND A PURCHASE OPTION IN FAVOR OF THE ISSUER AND May NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN RESTRICTED STOCK PURCHASE AGREEMENT DATED AS OF MARCH 6, 1996 BY AND BETWEEN JT STORAGE, INC., A DELAWARE CORPORATION, AND DAVID T. MITCHELL, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF JT STORAGE." Such certificates shall also bear such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. 6. 7 (b) FURTHER ASSURANCES. Each party hereto agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the intent of this Agreement. (c) BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of the successors and assigns of JT Storage and the personal representatives, heirs and legatees of Purchaser. (d) OTHER RESTRICTIONS ON TRANSFERS. The restrictions on transfer set forth in this Agreement are in addition to any and all restrictions imposed pursuant to any applicable state or federal law or regulation. (e) NOTICES. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Purchaser at the address set forth on the signature page hereof and (ii) to JT Storage, Inc. at 166 Baypointe Parkway, San Jose, California 95134. A party may change address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. (f) AMENDMENTS. This Agreement may be amended only by the written agreement and consent of the parties hereof. (g) GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of laws rules thereof. (h) DISPUTES. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. (i) ENTIRE AGREEMENT. This Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (j) HEADINGS. Introductory headings at the beginning of each section of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section. 7. 8 (k) COUNTERPARTS. This Agreement may be executed in counterparts, both of which, when taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF,the parties hereto have duly executed this Agreement as of the day and year first above written. JT STORAGE: JT STORAGE, INC., a Delaware corporation By: /s/ W. Virginia Walker - ----------------------------------------- W. Virginia Walker Executive Vice President, Finance and Administration, Chief Financial Officer PURCHASER: /s/ D. T. Mitchell - ----------------------------------------- David T. Mitchell Address: c/o JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 8. 9 EXHIBIT A SECURED PROMISSORY NOTE $1,000,000 March 6, 1996 FOR VALUE RECEIVED,the undersigned ("Borrower") hereby promises to pay to JT Storage, Inc., a Delaware corporation ("Payee"), the principal sum of One Million Dollars ($1,000,000), together with interest at 5.45% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. Principal payments of $250,000 plus all accrued interest hereon shall be paid in four installments on each of the first four anniversary dates hereof. Payments of principal and interest on this Secured Promissory Note (this "Promissory Note") shall be made in legal tender of the United States of America and shall be made at the office of Payee at 166 Baypointe Parkway, San Jose, California 95134 or at such other place as Payee shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 1,000,000 shares (the "Shares") of the common stock of Payee, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of March 6, 1996 by and between Borrower and Payee. This Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Payee and Borrower. The principal of, and accrued interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. In the event Borrower shall (i) fail to make complete payment of any installment of principal or accrued interest when due under this Promissory Note or (ii) commit a breach of, or default under, the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this Promissory Note or breach of or default under the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce 1. 10 payment of this Promissory Note, Borrower agrees to pay such attorneys' fees and court costs as Payee may incur as a result thereof, whether or not suit is commenced. IN WITNESS WHEREOF,this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER /s/ D. T. Mitchell ---------------------------------------- David T. Mitchell 2. 11 EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of March 6, 1996 by and between DAVID T. MITCHELL, as pledgor ("Pledgor"), and JT STORAGE, INC., a Delaware corporation, as pledgee ("Pledgee"), with reference to the following: RECITALS A. Pursuant to that certain Restricted Stock Purchase Agreement (the "Purchase Agreement") of even date herewith, by and between Pledgor and Pledge, Pledgor has agreed to purchase 1,000,000 shares (the "Shares") of the common stock of Pledgee. B. Pursuant to the terms of that certain Secured Promissory Note in the original principal amount of $1,000,000 (the "Note") of even date herewith delivered by Pledgor to Pledgee, Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Note, Pledgor shall execute this Pledge Agreement to assure compliance with the terms and conditions of the Note. D. In order to induce Pledgee to make the loan evidenced by the Note, Pledgor desires to have the Shares held subject to this Pledge Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. GRANT OF SECURITY INTEREST. Pledgor hereby grants to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of the Note and the full, faithful and timely performance by Pledgor of all of its other obligations under the Note and this Pledge Agreement. The Certificates, together with a stock assignment duly executed in blank with signatures appropriately guaranteed or witnessed, are being retained by Pledgee, as the pledgeholder for the Shares. Notwithstanding the foregoing, the Pledgee shall, from time to time at the request of the Pledgor, cause to be delivered to the Pledgor one or more certificates which, together with all other such certificates theretofore delivered pursuant to this sentence, evidences that portion of the Shares which is equal to the portion of the full purchase price for all of the Shares then actually paid to the 1. 12 Pledgee by the Pledgor (i.e., the portion determined by adding the cash payment amount set forth in Section 1 of the Purchase Agreement to all principal payments on the Note which have theretofore been made by the Pledgor at the time of such request), subject in all cases to the provisions of Section 7 of the Purchase Agreement requiring the continued escrow of Unvested Shares. 2. REPRESENTATIONS AND WARRANTIES OF PLEDGOR. Pledgor represents and warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except any restriction upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and by the Subscription Agreement. 3. VOTING OF SHARES IN THE ABSENCE OF DEFAULT. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgor shall not be entitled to vote the Shares at any time that there exists an Event of Default as provided in Section 9 hereof. 4. DIVIDENDS AND OTHER DISTRIBUTIONS. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to receive any dividend or other distribution with respect to the Shares except as provided in Section 5 of this Pledge Agreement. If there exists an Event of Default, such dividend or distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. STOCK DIVIDENDS. In the event of any distribution in shares of capital stock of Pledgee (whether by way of stock dividend, stock split, recapitalization or otherwise) with respect to the Shares, the shares to be distributed to Pledgor shall be delivered to Pledgee, together with an appropriately executed stock certificate and an appropriately executed stock power, to be held as additional collateral security under this Pledge Agreement. 6. PLEDGEE'S DUTIES. So long as Pledgee exercises reasonable care with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 2. 13 7. SALE OF COLLATERAL. Upon the occurrence of any Event of Default as provided in Section 9 hereof, Pledgee shall have all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of California at that time and also may, without notice, except as specified below, at its option sell, resell, assign, transfer and deliver all or any part of the Shares, for cash or on credit for future delivery. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any part of the Shares being sold, free from, and discharged of, all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Note, including collection costs and expenses of sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such Shares, or the part thereof to be sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 8 hereof, Pledgee, in its sole and absolute discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effect such sale or restrict such sale to a purchaser or purchasers who will represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any such sale shall be deemed to be a sale made in a commercially reasonable manner within the meaning of the California Uniform commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the Shares regardless of notice of sale having been given. Pledgee may adjourn any-public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. REDEMPTION OF COLLATERAL. Notwithstanding any other provision of this Pledge Agreement, upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other disposition is to be made at least ten days before the date fixed for any public sale or the day on or after which any private sale or other disposition is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such ten days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding monetary obligations of Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such ten-day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 3. 14 9. EVENTS OF DEFAULT. At the option of Pledgee, the principal balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set out below ("Events of Default"): (a) Pledgor shall fail to make complete payment or prepayment of principal or interest when due in accordance with the terms of the Note; or (b) Pledgor shall commit a breach or default of any of his obligations under this Pledge Agreement. 10. TERMINATION. This Pledge Agreement shall terminate upon the payment in full of the principal amount and all accrued interest thereon under the Note. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates and any other collateral security then held by Pledgee pursuant to Section 4 or Section 5 of this Pledge Agreement. 11. CUMULATION OF REMEDIES; WAIVER OF RIGHTS. The remedies provided herein in favor of Pledgee shall not be deemed exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. EXECUTION OF ENDORSEMENTS, ASSIGNMENTS, ETC. Upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to Section 4 or Section 5 of this Pledge Agreement. 13. MISCELLANEOUS. (a) FURTHER DOCUMENTS. Pledgor agrees to execute, acknowledge and deliver any documents or instruments which Pledgee may request in order to better evidence or effectuate this Pledge Agreement and the transactions contemplated hereby. 4. 15 (b) BINDING AGREEMENT. This Pledge Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, personal representatives, heirs and legatees. Notwithstanding the foregoing, Pledgor may not assign any of his rights or delegate any of his duties hereunder without the prior written consent of Pledgee. The parties hereto acknowledge that Pledgee shall have the right to assign, with absolute discretion, any or all of its rights and obligations under this Pledge Agreement to any bank(s) or lending institution(s) as collateral security. (c) NOTICE. Any notice required or permitted to be given pursuant to this Pledge Agreement shall be in writing and shall be deemed given upon personal delivery, or if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Pledgor, at the address set forth on the signature page hereof and (ii) to Pledgee at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other party setting forth the new address for the giving of notices pursuant to this Pledge Agreement. (d) AMENDMENTS. This Pledge Agreement may be amended only by-the written agreement and consent of the parties hereto. (e) GOVERNING LAW. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the conflicts of laws rules thereof. (f) DISPUTES. In the event of any dispute between the parties arising out of this Pledge Agreement, the prevailing party shall be entitled to receive from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (g) ENTIRE AGREEMENT. This Pledge Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. 5. 16 (h) HEADINGS. Introductory headings at the beginning of each section of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section and shall not affect the meanings or construction of the terms and provisions of this Pledge Agreement. IN WITNESS WHEREOF,the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGOR: /s/ D. T. Mitchell --------------------------------------------- David T. Mitchell Address: c/o JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 PLEDGEE: JT Storage, Inc. a Delaware corporation By: /s/ W. Virginia Walker ---------------------------------------- W. Virginia Walker Executive Vice President, Finance and Administration and Chief Financial Officer 166 Baypointe Parkway San Jose, California 95134 6. 17 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary March 6, 1996 JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 Dear Sir or Madame: As Escrow Agent for both JT Storage, Inc., a Delaware corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents, including stock certificates and stock assignments, delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (the "Agreement"), dated as of even date, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Corporation and/or any nominee or assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the Repurchase Option set forth in the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed to (a) date the stock assignments necessary for the transfer in question, (b) fill in the number of shares being transferred and (c) deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Repurchase Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Corporation while the shares of stock are held by you. 1. 18 4. From time to time upon written request of the Purchaser you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Corporation's Repurchase Option and are not required to remain pledged with JT Storage pursuant to the Pledge Agreement. Within 30 days after the expiration of the 60-day period referred to in paragraph 3 of the Agreement, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares sold and issued pursuant to the Agreement and not purchased by the Corporation or its assignees pursuant to exercise of the Repurchase Option. 5. Notwithstanding the foregoing paragraphs 1, 2, 3 and 4, your duties and obligations as Escrow Agent shall not commence until such time as the certificates representing the shares of stock of the Corporation subject to these instructions pursuant to the Agreement together with two duly executed stock assignments separate from certificate are delivered to you. It is also understood and agreed that you may, on behalf of the Corporation, concurrent with your duties hereunder, hold such certificates and stock assignments as collateral for Purchaser's obligations pursuant to a Secured Promissory Note of even date herewith in the aggregate principal amount of $1,000,000. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding-any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 2. 19 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary to advise you properly in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be obligated to reimburse you for your expenses in this connection. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the shares of stock held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said shares until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of arbitrators or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given upon personal delivery, if mailed, or upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 PURCHASER: David T. Mitchell Address: c/o JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 ESCROW AGENT: Secretary of JT Storage 166 Baypointe Parkway San Jose, California 95134 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 3. 20 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, JT STORAGE, INC., a Delaware corporation By: /s/ W. Virginia Walker ------------------------------------ W. Virginia Walker Executive Vice President, Finance and Administration and Chief Executive Officer PURCHASER: /s/ D. T. Mitchell ---------------------------------------- David T. Mitchell ESCROW AGENT: /s/ W. Virginia Walker - ------------------------------- W. Virginia Walker, Secretary 4. 21 EXHIBIT D ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement and Stock Pledge Agreement, each dated as of March 6, 1996 by and between JT STORAGE, INC., a Delaware corporation (the "Corporation"), and the undersigned, DAVID T. MITCHELL hereby sells, assigns and transfers unto (_________________________) Shares of the common stock of the Corporation standing in the undersigned's name on the books of the Corporation represented by Certificate No. ______ herewith, and does hereby irrevocably constitute and appoint ____________________ attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ___________________ [do not date] /s/ D.T. Mitchell ____________________________________ David T. Mitchell EX-10.9 29 RESTRICTED STK PUR AGREE/SIRJANG LAL TANDON 3/6/96 1 EXHIBIT 10.9 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT(this "Agreement") is made as of March 6, 1996 (the "Effective Date") by and between JT STORAGE, INC., a Delaware corporation ("JT Storage"), and SIRJANG LAL TANDON ("Purchaser"), with reference to the following: RECITALS A. JT Storage desires to advance its growth, development and financial success by providing additional incentives to its key executive personnel by assisting them to acquire shares of JT Storage's common stock (the "Common Stock"), and to benefit directly from JT Storage's growth, development and financial success. B. JT Storage desires to sell to Purchaser on the Effective Date, and Purchaser desires to subscribe for and purchase from JT Storage at such time, certain shares of Common Stock as set forth in this Agreement. C. In order to induce JT Storage to sell such shares, Purchaser desires to have such shares subject to the restrictions and interests created by this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants and conditions contained herein, the parties agree as follows: 1. SALE AND PURCHASE OF STOCK. JT Storage hereby agrees to sell to Purchaser, subject to the conditions and restrictions contained in this Agreement, and Purchaser hereby agrees to purchase from JT Storage, 1,000,000 shares (the "Shares") of Common Stock at a price of $1.00 per Share for an aggregate purchase price of $1,000,000 (the "Purchase Price"). Purchaser shall pay the Purchase Price by issuing a secured promissory note attached hereto as Exhibit A (the "Note") to JT Storage for $1,000,000. The Note shall be secured by a pledge of the Shares, in conjunction with which Purchaser shall execute a Stock Pledge Agreement (the "Pledge Agreement") attached hereto as Exhibit B. The Note and Pledge Agreement, Joint Escrow Instructions attached hereto as Exhibit C (the "Escrow Instructions"), and two copies of a Stock Assignment Separate from Certificate (the "Stock Assignment") attached hereto as Exhibit D shall be delivered to JT Storage on the Effective Date. 2. VESTING. The Shares purchased pursuant to Section 1 hereof will vest over a five-year period from February 21, 1996 (the "Vesting Commencement Date"), with 1,000,000 Shares vesting in one lump sum on February 21, 2001. Notwithstanding the foregoing, in the event that (a) the merger of Atari Corporation with and into JT Storage (the "Merger") closes, (b) JT Storage's acquisition of Moduler Electronics (India) Pvt. Ltd. ("Moduler") closes and (c) certain credit facilities in the amount of $10,000,000 are furnished to Moduler by certain 1. 2 institutional lenders within India, the Shares purchased pursuant to Section 1 hereof will vest over a four-year period from the Vesting Commencement Date, with 125,000 Shares vesting in one lump sum on August 21, 1996 and with the balance vesting in 42 successive monthly installments of 20,833-1/3 Shares each commencing September 21, 1996 and thereafter on the twenty-first day of each successive month through and until February 21, 2000. JT Storage's repurchase option as described in Section 4 hereof shall be limited to those Shares which have not so vested (herein referred to as "Unvested Shares") in accordance with this Section 2 at the time of termination of the Purchaser's employment with JT Storage. Accordingly, such repurchase right shall not apply to any Shares which have vested (herein referred to as "Vested Shares") as of the time of termination of Purchaser's employment with JT Storage. 3. RESTRICTION ON TRANSFER OF THE UNVESTED SHARES. Except as otherwise specifically provided herein, Purchaser may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Unvested Shares, or any right or interest therein. Any purported sale, transfer (including involuntary transfers initiated by operation of legal process), hypothecation or disposition of any of the Unvested Shares or any right or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 3. 4. REPURCHASE OPTION UPON TERMINATION. (a) JT STORAGE'S REPURCHASE OPTION. In the event that Purchaser's employment by JT Storage terminates for any reason (including, without limitation, death, disability, retirement, voluntary or involuntary resignation or dismissal, with or without cause) prior to the fifth anniversary of the Vesting Commencement Date, JT Storage or its nominee(s) shall have the right and option (the "Repurchase Option") to purchase from Purchaser all or any portion of the Unvested Shares for a period of 60 days after the date of such termination (the "Termination Date"). The amount of Unvested Shares shall be determined as of the Termination Date. (b) REPURCHASE PRICE UNDER REPURCHASE OPTION. The purchase price for each Share to be purchased pursuant to the Repurchase Option (the "Repurchase Price") shall be $1.00 per Share. The Company may apply unpaid amounts owing under the Note against the Repurchase Price. (c) EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be exercised by JT Storage or its nominee(s) by delivery, within the 60-day period specified in Section 4(a) above, to Purchaser of (i) a written notice specifying the number of Shares to be purchased and (ii) a check in the amount of the Repurchase Price, calculated as provided in this Section 4, for all Shares to be purchased. 5. DIVIDENDS, SPLITS AND CERTAIN REORGANIZATIONS. If, from time to time during the term of this Agreement: 2. 3 (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of JT Storage; or (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of JT Storage; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Shares shall be immediately subject to this Agreement and be included in the word "Shares" (as either Vested Shares or Unvested Shares, as appropriate) for all purposes with the same force and effect as the Shares presently subject to this Agreement. All such securities or other property so included in the word "Shares" shall be delivered to the Escrow Agent (as hereinafter defined) and held pursuant to the Escrow Instructions in accordance with Section 7 hereof. While the total Repurchase Price pursuant to the Repurchase Option shall remain the same after each such event, the Repurchase Price per Share upon exercise of the Repurchase Option shall be appropriately adjusted, as necessary. 6. CHANGE OF CONTROL. Notwithstanding the foregoing provisions of Section 2 of this Agreement, in the event there occurs a Change of Control (as defined below) and within three (3) years thereafter any one or more of the following events occurs: (a) JT Storage terminates Purchaser's employment with JT Storage, other than by reason of Purchaser's willful failure to discharge his duties of employment to JT Storage; or (b) Purchaser is assigned a different employment position with JT Storage involving a significant reduction in responsibility, stature or compensation compared to Purchaser's position immediately preceding such Change of Control; or (c) Purchaser's continuation of employment with JT Storage is conditioned on Purchaser's place of principal employment being relocated by more than fifty (50) miles from such place of principal employment immediately preceding such Change of Control; then, in any such event, any Unvested Shares shall automatically become Vested Shares and JT Storage's repurchase right with respect thereto shall accordingly terminate. For purposes of this paragraph, "Change of Control" shall mean either of the following events: (i) Any "person" (as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of JT Storage representing more than 50% of the total voting power represented by the then outstanding voting securities of JT Storage; provided, however, that the foregoing shall not apply with respect to any such "person" (excluding Atari Corporation) who, at the date of this Agreement, is such "beneficial owner" of securities of JT Storage representing at least 20% of the total voting power represented by the presently outstanding voting securities of JT Storage; or 3. 4 (ii) The stockholders of JT Storage shall approve a merger or consolidation of JT Storage with any other corporation other than a merger or consolidation which would result in the voting securities of JT Storage outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of JT Storage or such surviving entity outstanding immediately after such merger or consolidation, as applicable, or the stockholders of JT Storage approve a plan of complete liquidation of JT Storage or an agreement for the sale or disposition by JT Storage of all or substantially all of the assets of JT Storage. Notwithstanding the foregoing, the Merger shall not constitute a Change of Control for purposes of this Section 6. 7. LIMITATION ON PAYMENTS. In the event that the automatic vesting of all Unvested Shares provided for under Section 6 of this Agreement (i) constitutes a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 7 would be subject to the excise tax imposed by Section 4999 of the Code, then the Unvested Shares shall become automatically vested either: (a) as to all of the Unvested Shares, or (b) such lesser number of Unvested Shares which would result in no portion of value of such acceleration being subject to excise tax under Section 4999 of the Code, whichever of the foregoing, taking into account the applicable federal, state, and local employment taxes, income taxes, and the excise tax imposed by Section 4999 of the Code, results in the receipt by the Purchaser, on an after-tax basis, of the greatest benefit of such acceleration, notwithstanding that the value of all or some portion of such benefit may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 7 shall be made in writing by JT Storage's independent public accountants (the "Accounting Firm"). JT Storage shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Purchaser. Notice must be given to the Accounting Firm within fifteen (15) business days after an event causing automatic vesting of Unvested Shares under Section 6 of this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by JT Storage. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). 8. ESCROW. In the event the Note is repaid prior to the termination of the Repurchase Option and the certificates representing Unvested Shares are released pursuant to the Pledge Agreement, as security for the faithful performance of the terms of this Agreement and to insure the availability for delivery of the Unvested Shares upon exercise of the Repurchase Option herein provided for, Purchaser agrees to deliver to, and deposit with, the Secretary of JT Storage, or such other person designated by JT Storage (the "Escrow Agent"), as the Escrow 4. 5 Agent in this transaction, two copies of the Stock Assignment duly endorsed (with date and number of shares blank), together with the certificate or certificates evidencing the Unvested Shares. Said documents are to held by the Escrow Agent and delivered by the Escrow Agent pursuant to the Escrow Instructions. 9. PERMITTED TRANSFERS. Purchaser may, at any time or times, transfer any or all of the Unvested Shares only: (a) inter vivos to Purchaser's spouse or issue, or to a trust for their benefit, (b) upon Purchaser's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) hereof are collectively referred to herein as "Permitted Transferee"), provided, however, that such Unvested Shares shall not be transferred until the Permitted Transferee executes a valid undertaking to JT Storage to the effect that the Unvested Shares so transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option in the event Purchaser's employment with JT Storage is terminated for any reason prior to the fifth anniversary of the Vesting Commencement Date) as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Purchaser. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 9. 10. RIGHTS AS SHAREHOLDER. Subject to compliance with the provisions of this Agreement and of the Pledge Agreement, Purchaser shall exercise all rights and privileges of the registered holder of the Shares while they are held by JT Storage pursuant to the Pledge Agreement or the Escrow Instructions, and shall be entitled to receive any dividend or other distribution thereof; provided, however, that any dividends or distributions with respect to the Shares in the form of shares of capital stock of JT Storage (whether by way of stock dividend, stock split or recapitalization) shall be subject to this Agreement, the Pledge Agreement and the Escrow Instructions. 11. INVESTMENT REPRESENTATIONS. Purchaser represents and warrants to JT Storage as follows: (a) PURCHASER'S OWN ACCOUNT. Purchaser is acquiring the Shares for Purchaser's own account and not with a view to or for sale in connection with any distribution of the Shares. (b) ACCESS TO INFORMATION. Purchaser (i) is familiar with the business of JT Storage, (ii) has had an opportunity to discuss with representatives of JT Storage the condition of any prospects for the continued operation and financing of JT Storage and such other matters as Purchaser has deemed appropriate in considering whether to invest in the Shares and (iii) has been provided access to all available information about JT Storage requested by Purchaser. (c) SHARES NOT REGISTERED. Purchaser understands that the Shares have not been registered under the Act or registered or qualified under the securities laws of any state and that Purchaser may not sell or otherwise transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, or 5. 6 unless an exemption is available which permits sale or other transfer without such registration and qualification. 12. UNDERWRITERS' LOCK-UP. The Purchaser agrees that, in connection with any underwritten offering of Common Stock of JT Storage pursuant to a registration statement under the Securities Act of 1933, the Purchaser shall withhold from the market any or all of the Shares for a period, not to exceed one hundred and eighty (180) days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 13. NO CONTRACT OF EMPLOYMENT. Purchaser acknowledges and agrees that this Agreement shall not be construed to give Purchaser any right to be retained in the employ of JT Storage, and that the right and power of JT Storage to dismiss or discharge Purchaser (with or without cause) is strictly reserved. 14. MISCELLANEOUS. (a) LEGENDS ON CERTIFICATES. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND A PURCHASE OPTION IN FAVOR OF THE ISSUER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN RESTRICTED STOCK PURCHASE AGREEMENT DATED AS OF MARCH 6, 1996 BY AND BETWEEN JT STORAGE, INC., A DELAWARE CORPORATION, AND DAVID T. MITCHELL, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF JT STORAGE." Such certificates shall also bear such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. (b) FURTHER ASSURANCES. Each party hereto agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the intent of this Agreement. (c) BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of the successors and assigns of JT Storage and the personal representatives, heirs and legatees of Purchaser. (d) OTHER RESTRICTIONS ON TRANSFERS. The restrictions on transfer set forth in this Agreement are in addition to any and all restrictions imposed pursuant to any applicable state or federal law or regulation. 6. 7 (e) NOTICES. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Purchaser at the address set forth on the signature page hereof and (ii) to JT Storage, Inc. at 166 Baypointe Parkway, San Jose, California 95134. A party may change address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. (f) AMENDMENTS. This Agreement may be amended only by the written agreement and consent of the parties hereof. (g) GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of laws rules thereof. (h) DISPUTES. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. (i) ENTIRE AGREEMENT. This Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (j) HEADINGS. Introductory headings at the beginning of each section of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section. (k) COUNTERPARTS. This Agreement may be executed in counterparts, both of which, when taken together, shall constitute one and the same instrument. 7. 8 IN WITNESS WHEREOF,the parties hereto have duly executed this Agreement as of the day and year first above written. JT STORAGE: JT STORAGE, INC., a Delaware corporation By: /s D.T. Mitchell ------------------------------------- David T. Mitchell President and Chief Executive Officer PURCHASER: /s/ Sirjang Lal Tandon - ------------------------------------------ Sirjang Lal Tandon Address: c/o JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 8. 9 EXHIBIT A SECURED PROMISSORY NOTE $1,000,000 March 6, 1996 FOR VALUE RECEIVED,the undersigned ("Borrower") hereby promises to pay to JT Storage, Inc., a Delaware corporation ("Payee"), the principal sum of One Million Dollars ($1,000,000), together with interest at 5.45% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. Principal payments of $250,000 plus all accrued interest hereon shall be paid in four installments on each of the first four anniversary dates hereof. Payments of principal and interest on this Secured Promissory Note (this "Promissory Note") shall be made in legal tender of the United States of America and shall be made at the office of Payee at 166 Baypointe Parkway, San Jose, California 95134 or at such other place as Payee shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 1,000,000 shares (the "Shares") of the common stock of Payee, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of March 6, 1996 by and between Borrower and Payee. This Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Payee and Borrower. The principal of, and accrued interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. In the event Borrower shall (i) fail to make complete payment of any installment of principal or accrued interest when due under this Promissory Note or (ii) commit a breach of, or default under, the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this Promissory Note or breach of or default under the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce 1. 10 payment of this Promissory Note, Borrower agrees to pay such attorneys' fees and court costs as Payee may incur as a result thereof, whether or not suit is commenced. IN WITNESS WHEREOF,this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER /s/ Sirjang Lal Tandon ------------------------------------ Sirjang Lal Tandon 2. 11 EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of March 6, 1996 by and between SIRJANG LAL TANDON, as pledgor ("Pledgor"), and JT STORAGE, INC., a Delaware corporation, as pledgee ("Pledgee"), with reference to the following: RECITALS A. Pursuant to that certain Restricted Stock Purchase Agreement (the "Purchase Agreement") of even date herewith, by and between Pledgor and Pledge, Pledgor has agreed to purchase 1,000,000 shares (the "Shares") of the common stock of Pledgee. B. Pursuant to the terms of that certain Secured Promissory Note in the original principal amount of $1,000,000 (the "Note") of even date herewith delivered by Pledgor to Pledgee, Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Note, Pledgor shall execute this Pledge Agreement to assure compliance with the terms and conditions of the Note. D. In order to induce Pledgee to make the loan evidenced by the Note, Pledgor desires to have the Shares held subject to this Pledge Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. GRANT OF SECURITY INTEREST. Pledgor hereby grants to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of the Note and the full, faithful and timely performance by Pledgor of all of its other obligations under the Note and this Pledge Agreement. The Certificates, together with a stock assignment duly executed in blank with signatures appropriately guaranteed or witnessed, are being retained by Pledgee, as the pledgeholder for the Shares. Notwithstanding the foregoing, the Pledgee shall, from time to time at the request of the Pledgor, cause to be delivered to the Pledgor one or more certificates which, together with all other such certificates theretofore delivered pursuant to this sentence, evidences that portion of the Shares which is equal to the portion of the full purchase price for all of the Shares then actually paid to the Pledgee by the Pledgor (i.e., the portion determined by adding the cash payment amount set forth in Section 1 of the Purchase Agreement to all principal payments on the Note which have theretofore been made by the Pledgor at the time of such request), subject in all cases to the 1. 12 provisions of Section 7 of the Purchase Agreement requiring the continued escrow of Unvested Shares. 2. REPRESENTATIONS AND WARRANTIES OF PLEDGOR. Pledgor represents and warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except any restriction upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and by the Subscription Agreement. 3. VOTING OF SHARES IN THE ABSENCE OF DEFAULT. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgor shall not be entitled to vote the Shares at any time that there exists an Event of Default as provided in Section 9 hereof. 4. DIVIDENDS AND OTHER DISTRIBUTIONS. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to receive any dividend or other distribution with respect to the Shares except as provided in Section 5 of this Pledge Agreement. If there exists an Event of Default, such dividend or distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. STOCK DIVIDENDS. In the event of any distribution in shares of capital stock of Pledgee (whether by way of stock dividend, stock split, recapitalization or otherwise) with respect to the Shares, the shares to be distributed to Pledgor shall be delivered to Pledgee, together with an appropriately executed stock certificate and an appropriately executed stock power, to be held as additional collateral security under this Pledge Agreement. 6. PLEDGEE'S DUTIES. So long as Pledgee exercises reasonable care with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 7. SALE OF COLLATERAL. Upon the occurrence of any Event of Default as provided in Section 9 hereof, Pledgee shall have all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of California at that time and also may, without notice, except as specified below, at its option sell, resell, assign, transfer and deliver all or any part of the Shares, for cash or on credit for future delivery. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any 2. 13 part of the Shares being sold, free from, and discharged of, all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Note, including collection costs and expenses of sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such Shares, or the part thereof to be sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 8 hereof, Pledgee, in its sole and absolute discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effect such sale or restrict such sale to a purchaser or purchasers who will represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any such sale shall be deemed to be a sale made in a commercially reasonable manner within the meaning of the California Uniform commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the Shares regardless of notice of sale having been given. Pledgee may adjourn any-public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. REDEMPTION OF COLLATERAL. Notwithstanding any other provision of this Pledge Agreement, upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other disposition is to be made at least ten days before the date fixed for any public sale or the day on or after which any private sale or other disposition is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such ten days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding monetary obligations of Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such ten-day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 9. EVENTS OF DEFAULT. At the option of Pledgee, the principal balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set out below ("Events of Default"): 3. 14 (a) Pledgor shall fail to make complete payment or prepayment of principal or interest when due in accordance with the terms of the Note; or (b) Pledgor shall commit a breach or default of any of his obligations under this Pledge Agreement. 10. TERMINATION. This Pledge Agreement shall terminate upon the payment in full of the principal amount and all accrued interest thereon under the Note. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates and any other collateral security then held by Pledgee pursuant to Section 4 or Section 5 of this Pledge Agreement. 11. CUMULATION OF REMEDIES; WAIVER OF RIGHTS. The remedies provided herein in favor of Pledgee shall not be deemed exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. EXECUTION OF ENDORSEMENTS, ASSIGNMENTS, ETC. Upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to Section 4 or Section 5 of this Pledge Agreement. 13. MISCELLANEOUS. (a) FURTHER DOCUMENTS. Pledgor agrees to execute, acknowledge and deliver any documents or instruments which Pledgee may request in order to better evidence or effectuate this Pledge Agreement and the transactions contemplated hereby. (b) BINDING AGREEMENT. This Pledge Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, personal representatives, heirs and legatees. Notwithstanding the foregoing, Pledgor may not assign any of his rights or delegate any of his duties hereunder without the prior written consent of Pledgee. The parties hereto acknowledge that Pledgee shall have the right to assign, with absolute discretion, any or all of its rights and obligations under this Pledge Agreement to any bank(s) or lending institution(s) as collateral security. (c) NOTICE. Any notice required or permitted to be given pursuant to this Pledge Agreement shall be in writing and shall be deemed given upon personal delivery, or if mailed, upon the expiration of 48 hours after mailing by any form of United States mail 4. 15 requiring a return receipt, addressed (i) to Pledgor, at the address set forth on the signature page hereof and (ii) to Pledgee at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other party setting forth the new address for the giving of notices pursuant to this Pledge Agreement. (d) AMENDMENTS. This Pledge Agreement may be amended only by-the written agreement and consent of the parties hereto. (e) GOVERNING LAW. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the conflicts of laws rules thereof. (f) DISPUTES. In the event of any dispute between the parties arising out of this Pledge Agreement, the prevailing party shall be entitled to receive from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (g) ENTIRE AGREEMENT. This Pledge Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (h) HEADINGS. Introductory headings at the beginning of each section of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section and shall not affect the meanings or construction of the terms and provisions of this Pledge Agreement. 5. 16 IN WITNESS WHEREOF,the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGOR: /s/ Sirjang Lal Tandon ---------------------------------------------- Sirjang Lal Tandon Address: c/o JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 PLEDGEE: JT Storage, Inc. a Delaware corporation By: /s/ D.T. Mitchell ---------------------------------------------- David T. Mitchell President and Chief Executive Officer 166 Baypointe Parkway San Jose, California 95134 6. 17 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary March 6, 1996 JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 Dear Sir or Madame: As Escrow Agent for both JT Storage, Inc., a Delaware corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents, including stock certificates and stock assignments, delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (the "Agreement"), dated as of even date, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Corporation and/or any nominee or assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the Repurchase Option set forth in the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed to (a) date the stock assignments necessary for the transfer in question, (b) fill in the number of shares being transferred and (c) deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Repurchase Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Corporation while the shares of stock are held by you. 4. From time to time upon written request of the Purchaser you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Corporation's Repurchase Option and are not required to remain pledged with JT Storage pursuant to the Pledge Agreement. Within 30 days after the expiration of the 60-day period 7. 18 referred to in paragraph 3 of the Agreement, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares sold and issued pursuant to the Agreement and not purchased by the Corporation or its assignees pursuant to exercise of the Repurchase Option. 5. Notwithstanding the foregoing paragraphs 1, 2, 3 and 4, your duties and obligations as Escrow Agent shall not commence until such time as the certificates representing the shares of stock of the Corporation subject to these instructions pursuant to the Agreement together with two duly executed stock assignments separate from certificate are delivered to you. It is also understood and agreed that you may, on behalf of the Corporation, concurrent with your duties hereunder, hold such certificates and stock assignments as collateral for Purchaser's obligations pursuant to a Secured Promissory Note of even date herewith in the aggregate principal amount of $1,000,000. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding-any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary to advise you properly in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be obligated to reimburse you for your expenses in this connection. 8. 19 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the shares of stock held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said shares until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of arbitrators or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given upon personal delivery, if mailed, or upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 PURCHASER: Sirjang Lal Tandon Address: c/o JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 ESCROW AGENT: Secretary of JT Storage 166 Baypointe Parkway San Jose, California 95134 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 9. 20 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, JT Storage, Inc., a Delaware corporation By: /s/ D.T. Mitchell ----------------------------------- David T. Mitchell President and Chief Executive Officer PURCHASER: /s/ Sirjang Lal Tandon -------------------------------------- Sirjang Lal Tandon ESCROW AGENT: /s/ W. Virginia Walker - ----------------------------- W. Virginia Walker, Secretary 10. 21 EXHIBIT D ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement and Stock Pledge Agreement, each dated as of March ___, 1996 by and between JT Storage, Inc., a Delaware corporation (the "Corporation"), and the undersigned, Sirjang Lal Tandon hereby sells, assigns and transfers unto (_________________________) Shares of the common stock of the Corporation standing in the undersigned's name on the books of the Corporation represented by Certificate No. ______ herewith, and does hereby irrevocably constitute and appoint ____________________ attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ___________________ [do not date] /s/ Sirjang Lal Tandon ------------------------------------ Sirjang Lal Tandon 11. EX-10.10 30 RESTRICTED STK PUR AGREE/KENNETH D. WING 1/2/96 1 EXHIBIT 10.10 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of January 2, 1996 (the "Effective Date") by and between JT Storage, Inc., a Delaware corporation ("JT Storage"), and Kenneth D. Wing ("Purchaser"), with reference to the following: RECITALS: A. JT Storage desires to advance its growth, development and financial success by providing additional incentives to its key executive personnel by assisting them to acquire shares of JT Storage's common stock (the "Common Stock"), and to benefit directly from JT Storage's growth, development and financial success. B. JT Storage desires to sell to Purchaser on the Effective Date, and Purchaser desires to subscribe for and purchase from JT Storage at such time, certain shares of Common Stock as set forth in this Agreement. C. In order to induce JT Storage to sell such shares, Purchaser desires to have such shares subject to the restrictions and interests created by this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants and conditions contained herein, the parties agree as follows: 1. Sale and Purchase of Stock. JT Storage hereby agrees to sell to Purchaser, subject to the conditions and restrictions contained in this Agreement, and Purchaser hereby agrees to purchase from JT Storage, 300,000 shares (the "Shares") of Common Stock at a price of $.25 per Share for an aggregate purchase price of $75,000 (the "Purchase Price"). Purchaser shall pay $15,000 of the Purchase Price by personal check payable to JT Storage and shall issue a secured promissory note attached hereto as Exhibit A (the "Note") to JT Storage for $60,000, constituting the balance of the Purchase Price. The Note shall be secured by a pledge of the Shares, in conjunction with which Purchaser shall execute a Stock Pledge Agreement (the "Pledge Agreement") attached hereto as Exhibit B. The check, Note and Pledge Agreement, Joint Escrow Instructions attached hereto as Exhibit C (the "Escrow Instructions"), and two copies of a Stock Assignment Separate from Certificate (the "Stock Assignment") 2 attached hereto as Exhibit D shall be delivered to JT Storage on the Effective Date. 2. Vesting. The Shares purchased pursuant to Section 1 hereof will vest over a four-year period from Purchaser's July 5, 1995 commencement of employment (the "Vesting Commencement Date"), with 37,500 Shares vesting in one lump sum on January 5, 1996 and with the balance vesting in 42 successive monthly installments of 6,250 shares each commencing February 5, 1996 and thereafter on the fifth day of each successive month through and until July 5, 1999. JT Storage's repurchase option as described in Section 4 hereof shall be limited to those Shares which have not so vested (herein referred to as "Unvested Shares") in accordance with this Section 2 at the time of termination of the Purchaser's employment with JT Storage. Accordingly, such repurchase right shall not apply to any Shares which have vested (herein referred to as "Vested Shares") as of the time of termination of Purchaser's employment with JT Storage. 3. Restriction on Transfer of the Unvested Shares. Except as otherwise specifically provided herein, Purchaser may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Unvested Shares, or any right or interest therein. Any purported sale, transfer (including involuntary transfers initiated by operation of legal process), hypothecation or disposition of any of the Unvested Shares or any right or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 3. 4. Repurchase Option Upon Termination. (a) JT Storage's Repurchase Option. In the event that Purchaser's employment by JT Storage terminates for any reason (including, without limitation, death, disability, retirement, voluntary or involuntary resignation or dismissal, with or without cause) prior to the fifth anniversary of the Vesting Commencement Date, JT Storage or its nominee(s) shall have the right and option (the "Repurchase Option") to purchase from Purchaser all or any portion of the Unvested Shares for a period of 60 days after the date of such termination (the "Termination Date"). The amount of Unvested Shares shall be determined as of the Termination Date. (b) Repurchase Price Under Repurchase Option. The purchase price for each Share to be purchased pursuant to the Repurchase Option (the "Repurchase Price") shall be $.25 per 2. 3 Share. The Company may apply unpaid amounts owing under the Note against the Repurchase Price. (c) Exercise of Repurchase Option. The Repurchase Option shall be exercised by JT Storage or its nominee(s) by delivery, within the 60-day period specified in Section 4(a) above, to Purchaser of (i) a written notice specifying the number of Shares to be purchased and (ii) a check in the amount of the Repurchase Price, calculated as provided in this Section 4, for all Shares to be purchased. 5. Dividends, Splits and Certain Reorganizations. If, from time to time during the term of this Agreement: (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of JT Storage; or (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of JT Storage; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Shares shall be immediately subject to this Agreement and be included in the word "Shares" (as either Vested Shares or Unvested Shares, as appropriate) for all purposes with the same force and effect as the Shares presently subject to this Agreement. All such securities or other property so included in the word "Shares" shall be delivered to the Escrow Agent (as hereinafter defined) and held pursuant to the Escrow Instructions in accordance with Section 7 hereof. While the total Repurchase Price pursuant to the Repurchase Option shall remain the same after each such event, the Repurchase Price per Share upon exercise of the Repurchase Option shall be appropriately adjusted, as necessary. 6. Change of Control. Notwithstanding the foregoing provisions of Section 2 of this Agreement, in the event there occurs a Change of Control (as defined below) and within three (3) years thereafter any one or more of the following events occurs: (a) JT Storage terminates Purchaser's employment with JT Storage, other than by reason of Purchaser's willful failure to discharge his duties of employment to JT Storage; or 3. 4 (b) Purchaser is assigned a different employment position with JT Storage involving a significant reduction in responsibility, stature or compensation compared to Purchaser's position immediately preceding such Change of Control; or (c) Purchaser's continuation of employment with JT Storage is conditioned on Purchaser's place of principal employment being relocated by more than fifty (50) miles from such place of principal employment immediately preceding such Change of Control; then, in any such event, any Unvested Shares shall automatically become Vested Shares and JT Storage's repurchase right with respect thereto shall accordingly terminate. For purposes of this paragraph, "Change of Control" shall mean either of the following events: (i) Any "person" (as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of JT Storage representing more than 50% of the total voting power represented by the then outstanding voting securities of JT Storage; provided, however, that the foregoing shall not apply with respect to any such "person" who, at the date of this Agreement, is such "beneficial owner" of securities of JT Storage representing at least 20% of the total voting power represented by the presently outstanding voting securities of JT Storage; or (ii) The stockholders of JT Storage shall approve a merger or consolidation of JT Storage with any other corporation other than a merger or consolidation which would result in the voting securities of JT Storage outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of JT Storage or such surviving entity outstanding immediately after such merger or consolidation, as applicable, or the stockholders of JT Storage approve a plan of complete liquidation of JT Storage or an agreement for the sale or disposition by JT Storage of all or substantially all of the assets of JT Storage. 7. Limitation on Payments. In the event that the automatic vesting of all Unvested Shares provided for under Section 6 of this Agreement (i) constitutes a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 7 would be subject to the excise tax imposed by Section 4999 of the 4. 5 Code, then the Unvested Shares shall become automatically vested either: (a) as to all of the Unvested Shares, or (b) such lesser number of Unvested Shares which would result in no portion of value of such acceleration being subject to excise tax under Section 4999 of the Code, whichever of the foregoing, taking into account the applicable federal, state, and local employment taxes, income taxes, and the excise tax imposed by Section 4999 of the Code, results in the receipt by the Purchaser, on an after-tax basis, of the greatest benefit of such acceleration, notwithstanding that the value of all or some portion of such benefit may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 7 shall be made in writing by JT Storage's independent public accountants (the "Accounting Firm"). JT Storage shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Purchaser. Notice must be given to the Accounting Firm within fifteen (15) business days after an event causing automatic vesting of Unvested Shares under Section 6 of this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by JT Storage. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). 8. Escrow. In the event the Note is repaid prior to the termination of the Repurchase Option and the certificates representing Unvested Shares are released pursuant to the Pledge Agreement, as security for the faithful performance of the terms of this Agreement and to insure the availability for delivery of the Unvested Shares upon exercise of the Repurchase Option herein provided for, Purchaser agrees to deliver to, and deposit with, the Secretary of JT Storage, or such other person designated by JT Storage (the "Escrow Agent"), as the Escrow Agent in this transaction, two copies of the Stock Assignment duly endorsed (with date and number of shares blank), together with the certificate or certificates evidencing the Unvested Shares. Said documents are to held by the Escrow Agent and delivered by the Escrow Agent pursuant to the Escrow Instructions. 9. Permitted Transfers. Purchaser may, at any time or times, transfer any or all of the Unvested Shares only: (a) inter vivos to Purchaser's spouse or issue, or to a trust for their benefit, (b) upon Purchaser's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) 5. 6 hereof are collectively referred to herein as "Permitted Transferee"), provided, however, that such Unvested Shares shall not be transferred until the Permitted Transferee executes a valid undertaking to JT Storage to the effect that the Unvested Shares so transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option in the event Purchaser's employment with JT Storage is terminated for any reason prior to the fifth anniversary of the Vesting Commencement Date) as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Purchaser. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 9. 10. Rights as Shareholder. Subject to compliance with the provisions of this Agreement and of the Pledge Agreement, Purchaser shall exercise all rights and privileges of the registered holder of the Shares while they are held by JT Storage pursuant to the Pledge Agreement or the Escrow Instructions, and shall be entitled to receive any dividend or other distribution thereof; provided, however, that any dividends or distributions with respect to the Shares in the form of shares of capital stock of JT Storage (whether by way of stock dividend, stock split or recapitalization) shall be subject to this Agreement, the Pledge Agreement and the Escrow Instructions. 11. Investment Representations. Purchaser represents and warrants to JT Storage as follows: (a) Purchaser's Own Account. Purchaser is acquiring the Shares for Purchaser's own account and not with a view to or for sale in connection with any distribution of the Shares. (b) Access to Information. Purchaser (i) is familiar with the business of JT Storage, (ii) has had an opportunity to discuss with representatives of JT Storage the condition of any prospects for the continued operation and financing of JT Storage and such other matters as Purchaser has deemed appropriate in considering whether to invest in the Shares and (iii) has been provided access to all available information about JT Storage requested by Purchaser. (c) Shares Not Registered. Purchaser understands that the Shares have not been registered under the Act or registered or qualified under the securities laws of any state and that Purchaser may not sell or otherwise transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, 6. 7 or unless an exemption is available which permits sale or other transfer without such registration and qualification. 12. Underwriters' Lock-Up. The Purchaser agrees that, in connection with any underwritten offering of Common Stock of JT Storage pursuant to a registration statement under the Securities Act of 1933, the Purchaser shall withhold from the market any or all of the Shares for a period, not to exceed one hundred and eighty (180) days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 13. No Contract of Employment. Purchaser acknowledges and agrees that this Agreement shall not be construed to give Purchaser any right to be retained in the employ of JT Storage, and that the right and power of JT Storage to dismiss or discharge Purchaser (with or without cause) is strictly reserved. 14. Miscellaneous. (a) Legends on Certificates. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND A PURCHASE OPTION IN FAVOR OF THE ISSUER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN RESTRICTED STOCK PURCHASE AGREEMENT DATED AS OF JANUARY 2, 1996 BY AND BETWEEN JT STORAGE, INC., A DELAWARE CORPORATION, AND KENNETH D. WING, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF JT STORAGE." Such certificates shall also bear such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. (b) Further Assurances. Each party hereto agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the intent of this Agreement. (c) Binding Agreement. This Agreement shall bind and inure to the benefit of the successors and assigns of JT 7. 8 Storage and the personal representatives, heirs and legatees of Purchaser. (d) Other Restrictions on Transfers. The restrictions on transfer set forth in this Agreement are in addition to any and all restrictions imposed pursuant to any applicable state or federal law or regulation. (e) Notices. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Purchaser at the address set forth on the signature page hereof and (ii) to JT Storage, Inc. at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. (f) Amendments. This Agreement may be amended only by the written agreement and consent of the parties hereof. (g) Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of laws rules thereof. (h) Disputes. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. (i) Entire Agreement. This Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (j) Headings. Introductory headings at the beginning of each section of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section. (k) Counterparts. This Agreement may be executed in counterparts, both of which, when taken together, shall constitute one and the same instrument. 8. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. JT STORAGE: JT STORAGE, INC., a Delaware corporation By: /s/ D. T. Mitchell ----------------------------------- David T. Mitchell, President and Chief Executive Officer PURCHASER: /s/ Kenneth D. Wing -------------------------------------- Kenneth D. Wing Address: 325 Kamaur Lane Santa Cruz, CA 95060 9. 10 EXHIBIT A SECURED PROMISSORY NOTE $60,000 January 2, 1996 FOR VALUE RECEIVED, the undersigned ("Borrower") hereby promises to pay to JT Storage, Inc., a Delaware corporation ("Payee"), the principal sum of Sixty Thousand Dollars ($60,000), together with interest at 5.91% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. Principal payments of $15,000 plus all accrued interest hereon shall be paid in four installments on each of the first four anniversary dates hereof. Payments of principal and interest on this Secured Promissory Note (this "Promissory Note") shall be made in legal tender of the United States of America and shall be made at the office of Payee at 166 Baypointe Parkway, San Jose, California 95134 or at such other place as Payee shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 300,000 shares (the "Shares") of the common stock of Payee, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of January 2, 1996 by and between Borrower and Payee. This Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Payee and Borrower. The principal of, and accrued interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. In the event Borrower shall (i) fail to make complete payment of any installment of principal or accrued interest when due under this Promissory Note or (ii) commit a breach of, or default under, the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this 11 Promissory Note or breach of or default under the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce payment of this Promissory Note, Borrower agrees to pay such attorneys' fees and court costs as Payee may incur as a result thereof, whether or not suit is commenced. IN WITNESS WHEREOF, this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER: /s/ Kenneth D. Wing -------------------------------------- Kenneth D. Wing 2. 12 EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of January 2, 1996 by and between Kenneth D. Wing, as pledgor ("Pledgor"), and JT Storage, Inc., a Delaware corporation, as pledgee ("Pledgee"), with reference to the following: RECITALS: A. Pursuant to that certain Restricted Stock Purchase Agreement (the "Purchase Agreement") of even date herewith, by and between Pledgor and Pledgee, Pledgor has agreed to purchase 300,000 shares (the "Shares") of the common stock of Pledgee. B. Pursuant to the terms of that certain Secured Promissory Note in the original principal amount of $60,000 (the "Note") of even date herewith delivered by Pledgor to Pledgee, Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Note, Pledgor shall execute this Pledge Agreement to assure compliance with the terms and conditions of the Note. D. In order to induce Pledgee to make the loan evidenced by the Note, Pledgor desires to have the Shares held subject to this Pledge Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. Grant of Security Interest. Pledgor hereby grants to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of the Note and the full, faithful and timely performance by Pledgor of all of its other obligations under the Note and this Pledge Agreement. The Certificates, together with a stock assignment duly executed in blank with signatures appropriately guaranteed or witnessed, are being retained by Pledgee, as the pledgeholder for the Shares. Notwithstanding the foregoing, the Pledgee shall, from time to time at the request of the Pledgor, cause to be delivered to the Pledgor one or more certificates which, together with all other such certificates theretofore delivered pursuant to this sentence, evidences that portion of the Shares which is equal to the portion of the full purchase price for all of the Shares then 13 actually paid to the Pledgee by the Pledgor (i.e., the portion determined by adding the cash payment amount set forth in Section 1 of the Purchase Agreement to all principal payments on the Note which have theretofore been made by the Pledgor at the time of such request), subject in all cases to the provisions of Section 7 of the Purchase Agreement requiring the continued escrow of Unvested Shares. 2. Representations and Warranties of Pledgor. Pledgor represents and warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except any restriction upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and by the Subscription Agreement. 3. Voting of Shares in the Absence of Default. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgor shall not be entitled to vote the Shares at any time that there exists an Event of Default as provided in Section 9 hereof. 4. Dividends and Other Distributions. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to receive any dividend or other distribution with respect to the Shares except as provided in Section 5 of this Pledge Agreement. If there exists an Event of Default, such dividend or distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. Stock Dividends. In the event of any distribution in shares of capital stock of Pledgee (whether by way of stock dividend, stock split, recapitalization or otherwise) with respect to the Shares, the shares to be distributed to Pledgor shall be delivered to Pledgee, together with an appropriately executed stock certificate and an appropriately executed stock power, to be held as additional collateral security under this Pledge Agreement. 6. Pledgee's Duties. So long as Pledgee exercises reasonable care with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding 2. 14 sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 7. Sale of Collateral. Upon the occurrence of any Event of Default as provided in Section 9 hereof, Pledgee shall have all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of California at that time and also may, without notice, except as specified below, at its option, sell, resell, assign, transfer and deliver all or any part of the Shares, for cash or on credit for future delivery. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any part of the Shares being sold, free from, and discharged of, all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Note, including collection costs and expenses of sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such Shares, or the part thereof to be sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 8 hereof, Pledgee, in its sole and absolute discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effect such sale or restrict such sale to a purchaser or purchasers who will represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any such sale shall be deemed to be a sale made in a commercially reasonable manner within the meaning of the California Uniform Commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the 3. 15 Shares regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. Redemption of Collateral. Notwithstanding any other provision of this Pledge Agreement, upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other disposition is to be made at least ten days before the date fixed for any public sale or the day on or after which any private sale or other disposition is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such ten days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding monetary obligations of Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such ten-day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 9. Events of Default. At the option of Pledgee, the principal balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set out below ("Events of Default"): (a) Pledgor shall fail to make complete payment or prepayment of principal or interest when due in accordance with the terms of the Note; or (b) Pledgor shall commit a breach or default of any of his obligations under this Pledge Agreement. 10. Termination. This Pledge Agreement shall terminate upon the payment in full of the principal amount and all accrued interest thereon under the Note. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates and any other collateral security then held by Pledgee pursuant to Section 4 or Section 5 of this Pledge Agreement. 11. Cumulation of Remedies; Waiver of Rights. The remedies provided herein in favor of Pledgee shall not be deemed 4. 16 exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. Execution of Endorsements, Assignments, Etc. Upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to Section 4 or Section 5 of this Pledge Agreement. 13. Miscellaneous. (a) Further Documents. Pledgor agrees to execute, acknowledge and deliver any documents or instruments which Pledgee may request in order to better evidence or effectuate this Pledge Agreement and the transactions contemplated hereby. (b) Binding Agreement. This Pledge Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, personal representatives, heirs and legatees. Notwithstanding the foregoing, Pledgor may not assign any of his rights or delegate any of his duties hereunder without the prior written consent of Pledgee. The parties hereto acknowledge that Pledgee shall have the right to assign, with absolute discretion, any or all of its rights and obligations under this Pledge Agreement to any bank(s) or lending institution(s) as collateral security. (c) Notice. Any notice required or permitted to be given pursuant to this Pledge Agreement shall be in writing and shall be deemed given upon personal delivery, or if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Pledgor, at the address set forth on the signature page hereof and (ii) to Pledgee at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other party setting forth the new address for the giving of notices pursuant to this Pledge Agreement. 5. 17 (d) Amendments. This Pledge Agreement may be amended only by the written agreement and consent of the parties hereto. (e) Governing Law. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the conflicts of laws rules thereof. (f) Disputes. In the event of any dispute between the parties arising out of this Pledge Agreement, the prevailing party shall be entitled to receive from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (g) Entire Agreement. This Pledge Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (h) Headings. Introductory headings at the beginning of each section of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section and shall not affect the meanings or construction of the terms and provisions of this Pledge Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGOR: /s/ Kenneth D. Wing -------------------------------------- Kenneth D. Wing Address: 325 Kamaur Lane Santa Cruz, CA 95060 PLEDGEE: JT STORAGE, INC., a Delaware corporation By: /s/ D. T. Mitchell ----------------------------------- David T. Mitchell, President and Chief Executive Officer 166 Baypointe Parkway San Jose, California 95134 6. 18 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary January 2, 1996 JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 Dear Sir: As Escrow Agent for both JT Storage, Inc., a Delaware corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents, including stock certificates and stock assignments, delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (the "Agreement"), dated as of even date, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Corporation and/or any nominee or assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the Repurchase Option set forth in the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed to (a) date the stock assignments necessary for the transfer in question, (b) fill in the number of shares being transferred and (c) deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Repurchase Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does 1. 19 hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Corporation while the shares of stock are held by you. 4. From time to time upon written request of the Purchaser, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Corporation's Repurchase Option and are not required to remain pledged with JT Storage pursuant to the Pledge Agreement. Within 30 days after the expiration of the 60-day period referred to in paragraph 3 of the Agreement, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares sold and issued pursuant to the Agreement and not purchased by the Corporation or its assignees pursuant to exercise of the Repurchase Option. 5. Notwithstanding the foregoing paragraphs 1, 2, 3 and 4, your duties and obligations as Escrow Agent shall not commence until such time as the certificates representing the shares of stock of the Corporation subject to these instructions pursuant to the Agreement together with two duly executed stock assignments separate from certificate are delivered to you. It is also understood and agreed that you may, on behalf of the Corporation, concurrent with your duties hereunder, hold such certificates and stock assignments as collateral for Purchaser's obligations pursuant to a Secured Promissory Note of even date herewith in the aggregate principal amount of $60,000. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall 2. 20 not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary to advise you properly in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be obligated to reimburse you for your expenses in this connection. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the shares of stock held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said shares until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of arbitrators or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given upon personal delivery, if mailed, or upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed to each of the other parties thereunto 3. 21 entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 PURCHASER: Kenneth D. Wing Address: 325 Kamaur Lane Santa Cruz, CA 95060 ESCROW AGENT: Secretary of JT Storage 166 Baypointe Parkway San Jose, California 95134 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, JT Storage, Inc., a Delaware corporation By: /s/ D. T. Mitchell ----------------------------------- David T. Mitchell, President and Chief Executive Officer PURCHASER: /s/ Kenneth D. Wing -------------------------------------- Kenneth D. Wing ESCROW AGENT: /s/ W. Virginia Walker - ----------------------------- W. Virginia Walker, Secretary 4. 22 EXHIBIT D ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement and Stock Pledge Agreement, each dated as of January 2, 1996 by and between JT Storage, Inc., a Delaware corporation (the "Corporation"), and the undersigned, Kenneth D. Wing hereby sells, assigns and transfers unto ______________________________ ___________________________________________________________ (______________) shares of the common stock of the Corporation standing in the undersigned's name on the books of the Corporation represented by Certificate No. ___ herewith, and does hereby irrevocably constitute and appoint ____________________________ ___________________________________ attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ____________________ [do not date] /s/ Kenneth D. Wing ---------------------------------------- Kenneth D. Wing EX-10.11 31 RESTRICTED STK PUR AGREE/W. VIRGINIA WALKER 1/5/96 1 EXHIBIT 10.11 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of January 5, 1996 (the "Effective Date") by and between JT Storage, Inc., a Delaware corporation ("JT Storage"), and W. Virginia Walker ("Purchaser"), with reference to the following: R E C I T A L S: A. JT Storage desires to advance its growth, development and financial success by providing additional incentives to its key executive personnel by assisting them to acquire shares of JT Storage's common stock (the "Common Stock"), and to benefit directly from JT Storage's growth, development and financial success. B. JT Storage desires to sell to Purchaser on the Effective Date, and Purchaser desires to subscribe for and purchase from JT Storage at such time, certain shares of Common Stock as set forth in this Agreement. C. In order to induce JT Storage to sell such shares, Purchaser desires to have such shares subject to the restrictions and interests created by this Agreement. A G R E E M E N T: NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants and conditions contained herein, the parties agree as follows: 1. Sale and Purchase of Stock. JT Storage hereby agrees to sell to Purchaser, subject to the conditions and restrictions contained in this Agreement, and Purchaser hereby agrees to purchase from JT Storage, 250,000 shares (the "Shares") of Common Stock at a price of $.25 per Share for an aggregate purchase price of $62,500 (the "Purchase Price"). Purchaser shall pay $12,500 of the Purchase Price by personal check payable to JT Storage and shall issue a secured promissory note attached hereto as Exhibit A (the "Note") to JT Storage for $50,000, constituting the balance of the Purchase Price. The Note shall be secured by a pledge of the Shares, in conjunction with which Purchaser shall execute a Stock Pledge Agreement (the "Pledge Agreement") attached hereto as Exhibit B. The check, Note and Pledge Agreement, Joint Escrow Instructions attached hereto as Exhibit C (the "Escrow Instructions"), and two copies of a Stock 2 Assignment Separate from Certificate (the "Stock Assignment") attached hereto as Exhibit D shall be delivered to JT Storage on the Effective Date. 2. Vesting. The Shares purchased pursuant to Section 1 hereof will vest over a four-year period from Purchaser's November 9, 1995 commencement of employment (the "Vesting Commencement Date"), with 31,250 Shares vesting in one lump sum on May 9, 1996 and with the balance vesting in 42 successive monthly installments of 5,208-1/3 shares each commencing June 9, 1996 and thereafter on the ninth day of each successive month through and until November 9, 1999. JT Storage's repurchase option as described in Section 4 hereof shall be limited to those Shares which have not so vested (herein referred to as "Unvested Shares") in accordance with this Section 2 at the time of termination of the Purchaser's employment with JT Storage. Accordingly, such repurchase right shall not apply to any Shares which have vested (herein referred to as "Vested Shares") as of the time of termination of Purchaser's employment with JT Storage. 3. Restriction on Transfer of the Unvested Shares. Except as otherwise specifically provided herein, Purchaser may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Unvested Shares, or any right or interest therein. Any purported sale, transfer (including involuntary transfers initiated by operation of legal process), hypothecation or disposition of any of the Unvested Shares or any right or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 3. 4. Repurchase Option Upon Termination. (a) JT Storage's Repurchase Option. In the event that Purchaser's employment by JT Storage terminates for any reason (including, without limitation, death, disability, retirement, voluntary or involuntary resignation or dismissal, with or without cause) prior to the fifth anniversary of the Vesting Commencement Date, JT Storage or its nominee(s) shall have the right and option (the "Repurchase Option") to purchase from Purchaser all or any portion of the Unvested Shares for a period of 60 days after the date of such termination (the "Termination Date"). The amount of Unvested Shares shall be determined as of the Termination Date. (b) Repurchase Price Under Repurchase Option. The purchase price for each Share to be purchased pursuant to the 2. 3 Repurchase Option (the "Repurchase Price") shall be $.25 per Share. The Company may apply unpaid amounts owing under the Note against the Repurchase Price. (c) Exercise of Repurchase Option. The Repurchase Option shall be exercised by JT Storage or its nominee(s) by delivery, within the 60-day period specified in Section 4(a) above, to Purchaser of (i) a written notice specifying the number of Shares to be purchased and (ii) a check in the amount of the Repurchase Price, calculated as provided in this Section 4, for all Shares to be purchased. 5. Dividends, Splits and Certain Reorganizations. If, from time to time during the term of this Agreement: (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of JT Storage; or (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of JT Storage; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Shares shall be immediately subject to this Agreement and be included in the word "Shares" (as either Vested Shares or Unvested Shares, as appropriate) for all purposes with the same force and effect as the Shares presently subject to this Agreement. All such securities or other property so included in the word "Shares" shall be delivered to the Escrow Agent (as hereinafter defined) and held pursuant to the Escrow Instructions in accordance with Section 7 hereof. While the total Repurchase Price pursuant to the Repurchase Option shall remain the same after each such event, the Repurchase Price per Share upon exercise of the Repurchase Option shall be appropriately adjusted, as necessary. 6. Change of Control. Notwithstanding the foregoing provisions of Section 2 of this Agreement, in the event there occurs a Change of Control (as defined below) and within three (3) years thereafter any one or more of the following events occurs: (a) JT Storage terminates Purchaser's employment with JT Storage, other than by reason of Purchaser's willful failure to discharge his duties of employment to JT Storage; or 3. 4 (b) Purchaser is assigned a different employment position with JT Storage involving a significant reduction in responsibility, stature or compensation compared to Purchaser's position immediately preceding such Change of Control; or (c) Purchaser's continuation of employment with JT Storage is conditioned on Purchaser's place of principal employment being relocated by more than fifty (50) miles from such place of principal employment immediately preceding such Change of Control; then, in any such event, any Unvested Shares shall automatically become Vested Shares and JT Storage's repurchase right with respect thereto shall accordingly terminate. For purposes of this paragraph, "Change of Control" shall mean either of the following events: (i) Any "person" (as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under such Act), directly or indirectly, of securities of JT Storage representing more than 50% of the total voting power represented by the then outstanding voting securities of JT Storage; provided, however, that the foregoing shall not apply with respect to any such "person" who, at the date of this Agreement, is such "beneficial owner" of securities of JT Storage representing at least 20% of the total voting power represented by the presently outstanding voting securities of JT Storage; or (ii) The stockholders of JT Storage shall approve a merger or consolidation of JT Storage with any other corporation other than a merger or consolidation which would result in the voting securities of JT Storage outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of JT Storage or such surviving entity outstanding immediately after such merger or consolidation, as applicable, or the stockholders of JT Storage approve a plan of complete liquidation of JT Storage or an agreement for the sale or disposition by JT Storage of all or substantially all of the assets of JT Storage. 7. Limitation on Payments. In the event that the automatic vesting of all Unvested Shares provided for under Section 6 of this Agreement (i) constitutes a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 7 would be subject to the excise tax imposed by Section 4999 of the 4. 5 Code, then the Unvested Shares shall become automatically vested either: (a) as to all of the Unvested Shares, or (b) such lesser number of Unvested Shares which would result in no portion of value of such acceleration being subject to excise tax under Section 4999 of the Code, whichever of the foregoing, taking into account the applicable federal, state, and local employment taxes, income taxes, and the excise tax imposed by Section 4999 of the Code, results in the receipt by the Purchaser, on an after-tax basis, of the greatest benefit of such acceleration, notwithstanding that the value of all or some portion of such benefit may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 7 shall be made in writing by JT Storage's independent public accountants (the "Accounting Firm"). JT Storage shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Purchaser. Notice must be given to the Accounting Firm within fifteen (15) business days after an event causing automatic vesting of Unvested Shares under Section 6 of this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by JT Storage. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). 8. Escrow. In the event the Note is repaid prior to the termination of the Repurchase Option and the certificates representing Unvested Shares are released pursuant to the Pledge Agreement, as security for the faithful performance of the terms of this Agreement and to insure the availability for delivery of the Unvested Shares upon exercise of the Repurchase Option herein provided for, Purchaser agrees to deliver to, and deposit with, the Secretary of JT Storage, or such other person designated by JT Storage (the "Escrow Agent"), as the Escrow Agent in this transaction, two copies of the Stock Assignment duly endorsed (with date and number of shares blank), together with the certificate or certificates evidencing the Unvested Shares. Said documents are to held by the Escrow Agent and delivered by the Escrow Agent pursuant to the Escrow Instructions. 9. Permitted Transfers. Purchaser may, at any time or times, transfer any or all of the Unvested Shares only: (a) inter vivos to Purchaser's spouse or issue, or to a trust for their benefit, (b) upon Purchaser's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) 5. 6 hereof are collectively referred to herein as "Permitted Transferee"), provided, however, that such Unvested Shares shall not be transferred until the Permitted Transferee executes a valid undertaking to JT Storage to the effect that the Unvested Shares so transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option in the event Purchaser's employment with JT Storage is terminated for any reason prior to the fifth anniversary of the Vesting Commencement Date) as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Purchaser. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 9. 10. Rights as Shareholder. Subject to compliance with the provisions of this Agreement and of the Pledge Agreement, Purchaser shall exercise all rights and privileges of the registered holder of the Shares while they are held by JT Storage pursuant to the Pledge Agreement or the Escrow Instructions, and shall be entitled to receive any dividend or other distribution thereof; provided, however, that any dividends or distributions with respect to the Shares in the form of shares of capital stock of JT Storage (whether by way of stock dividend, stock split or recapitalization) shall be subject to this Agreement, the Pledge Agreement and the Escrow Instructions. 11. Investment Representations. Purchaser represents and warrants to JT Storage as follows: (a) Purchaser's Own Account. Purchaser is acquiring the Shares for Purchaser's own account and not with a view to or for sale in connection with any distribution of the Shares. (b) Access to Information. Purchaser (i) is familiar with the business of JT Storage, (ii) has had an opportunity to discuss with representatives of JT Storage the condition of any prospects for the continued operation and financing of JT Storage and such other matters as Purchaser has deemed appropriate in considering whether to invest in the Shares and (iii) has been provided access to all available information about JT Storage requested by Purchaser. (c) Shares Not Registered. Purchaser understands that the Shares have not been registered under the Act or registered or qualified under the securities laws of any state and that Purchaser may not sell or otherwise transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, 6. 7 or unless an exemption is available which permits sale or other transfer without such registration and qualification. 12. Underwriters' Lock-Up. The Purchaser agrees that, in connection with any underwritten offering of Common Stock of JT Storage pursuant to a registration statement under the Securities Act of 1933, the Purchaser shall withhold from the market any or all of the Shares for a period, not to exceed one hundred and eighty (180) days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 13. No Contract of Employment. Purchaser acknowledges and agrees that this Agreement shall not be construed to give Purchaser any right to be retained in the employ of JT Storage, and that the right and power of JT Storage to dismiss or discharge Purchaser (with or without cause) is strictly reserved. 14. Miscellaneous. (a) Legends on Certificates. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND A PURCHASE OPTION IN FAVOR OF THE ISSUER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN RESTRICTED STOCK PURCHASE AGREEMENT DATED AS OF JANUARY 5, 1996 BY AND BETWEEN JT STORAGE, INC., A DELAWARE CORPORATION, AND W. VIRGINIA WALKER, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF JT STORAGE." Such certificates shall also bear such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. (b) Further Assurances. Each party hereto agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the intent of this Agreement. (c) Binding Agreement. This Agreement shall bind and inure to the benefit of the successors and assigns of JT 7. 8 Storage and the personal representatives, heirs and legatees of Purchaser. (d) Other Restrictions on Transfers. The restrictions on transfer set forth in this Agreement are in addition to any and all restrictions imposed pursuant to any applicable state or federal law or regulation. (e) Notices. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Purchaser at the address set forth on the signature page hereof and (ii) to JT Storage, Inc. at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. (f) Amendments. This Agreement may be amended only by the written agreement and consent of the parties hereof. (g) Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of laws rules thereof. (h) Disputes. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. (i) Entire Agreement. This Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (j) Headings. Introductory headings at the beginning of each section of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section. (k) Counterparts. This Agreement may be executed in counterparts, both of which, when taken together, shall constitute one and the same instrument. 8. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. JT STORAGE: JT STORAGE, INC., a Delaware corporation By: /s/ D. T. Mitchell -------------------------------------- David T. Mitchell, President and Chief Executive Officer PURCHASER: /s/ W. Virginia Walker ----------------------------------------- W. Virginia Walker Address: 3443 Clover Oak Dr. -------------------------------- San Jose, CA 95148 -------------------------------- 9. 10 EXHIBIT A SECURED PROMISSORY NOTE $50,000 January 5, 1996 FOR VALUE RECEIVED, the undersigned ("Borrower") hereby promises to pay to JT Storage, Inc., a Delaware corporation ("Payee"), the principal sum of Fifty Thousand Dollars ($50,000), together with interest at 5.91% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. Principal payments of $12,500 plus all accrued interest hereon shall be paid in four installments on each of the first four anniversary dates hereof. Payments of principal and interest on this Secured Promissory Note (this "Promissory Note") shall be made in legal tender of the United States of America and shall be made at the office of Payee at 166 Baypointe Parkway, San Jose, California 95134 or at such other place as Payee shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 250,000 shares (the "Shares") of the common stock of Payee, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of January 5, 1996 by and between Borrower and Payee. This Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Payee and Borrower. The principal of, and accrued interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. In the event Borrower shall (i) fail to make complete payment of any installment of principal or accrued interest when due under this Promissory Note or (ii) commit a breach of, or default under, the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this 11 Promissory Note or breach of or default under the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce payment of this Promissory Note, Borrower agrees to pay such attorneys' fees and court costs as Payee may incur as a result thereof, whether or not suit is commenced. IN WITNESS WHEREOF, this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER: /s/ W. Virginia Walker ----------------------------------------- W. Virginia Walker 2. 12 EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of January 5, 1996 by and between W. Virginia Walker, as pledgor ("Pledgor"), and JT Storage, Inc., a Delaware corporation, as pledgee ("Pledgee"), with reference to the following: R E C I T A L S: A. Pursuant to that certain Restricted Stock Purchase Agreement (the "Purchase Agreement") of even date herewith, by and between Pledgor and Pledgee, Pledgor has agreed to purchase 250,000 shares (the "Shares") of the common stock of Pledgee. B. Pursuant to the terms of that certain Secured Promissory Note in the original principal amount of $50,000 (the "Note") of even date herewith delivered by Pledgor to Pledgee, Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Note, Pledgor shall execute this Pledge Agreement to assure compliance with the terms and conditions of the Note. D. In order to induce Pledgee to make the loan evidenced by the Note, Pledgor desires to have the Shares held subject to this Pledge Agreement. A G R E E M E N T: NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. Grant of Security Interest. Pledgor hereby grants to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of the Note and the full, faithful and timely performance by Pledgor of all of its other obligations under the Note and this Pledge Agreement. The Certificates, together with a stock assignment duly executed in blank with signatures appropriately guaranteed or witnessed, are being retained by Pledgee, as the pledgeholder for the Shares. Notwithstanding the foregoing, the Pledgee shall, from time to time at the request of the Pledgor, cause to be delivered to the Pledgor one or more certificates which, together with all other such certificates theretofore delivered pursuant to this sentence, evidences that portion of the Shares which is equal to the portion of the full purchase price for all of the Shares then 13 actually paid to the Pledgee by the Pledgor (i.e., the portion determined by adding the cash payment amount set forth in Section 1 of the Purchase Agreement to all principal payments on the Note which have theretofore been made by the Pledgor at the time of such request), subject in all cases to the provisions of Section 7 of the Purchase Agreement requiring the continued escrow of Unvested Shares. 2. Representations and Warranties of Pledgor. Pledgor represents and warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except any restriction upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and by the Subscription Agreement. 3. Voting of Shares in the Absence of Default. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgor shall not be entitled to vote the Shares at any time that there exists an Event of Default as provided in Section 9 hereof. 4. Dividends and Other Distributions. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to receive any dividend or other distribution with respect to the Shares except as provided in Section 5 of this Pledge Agreement. If there exists an Event of Default, such dividend or distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. Stock Dividends. In the event of any distribution in shares of capital stock of Pledgee (whether by way of stock dividend, stock split, recapitalization or otherwise) with respect to the Shares, the shares to be distributed to Pledgor shall be delivered to Pledgee, together with an appropriately executed stock certificate and an appropriately executed stock power, to be held as additional collateral security under this Pledge Agreement. 6. Pledgee's Duties. So long as Pledgee exercises reasonable care with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding 2. 14 sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 7. Sale of Collateral. Upon the occurrence of any Event of Default as provided in Section 9 hereof, Pledgee shall have all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of California at that time and also may, without notice, except as specified below, at its option, sell, resell, assign, transfer and deliver all or any part of the Shares, for cash or on credit for future delivery. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any part of the Shares being sold, free from, and discharged of, all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Note, including collection costs and expenses of sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such Shares, or the part thereof to be sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 8 hereof, Pledgee, in its sole and absolute discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effect such sale or restrict such sale to a purchaser or purchasers who will represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any such sale shall be deemed to be a sale made in a commercially reasonable manner within the meaning of the California Uniform Commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the 3. 15 Shares regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. Redemption of Collateral. Notwithstanding any other provision of this Pledge Agreement, upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other disposition is to be made at least ten days before the date fixed for any public sale or the day on or after which any private sale or other disposition is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such ten days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding monetary obligations of Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such ten-day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 9. Events of Default. At the option of Pledgee, the principal balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set out below ("Events of Default"): (a) Pledgor shall fail to make complete payment or prepayment of principal or interest when due in accordance with the terms of the Note; or (b) Pledgor shall commit a breach or default of any of his obligations under this Pledge Agreement. 10. Termination. This Pledge Agreement shall terminate upon the payment in full of the principal amount and all accrued interest thereon under the Note. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates and any other collateral security then held by Pledgee pursuant to Section 4 or Section 5 of this Pledge Agreement. 11. Cumulation of Remedies; Waiver of Rights. The remedies provided herein in favor of Pledgee shall not be deemed 4. 16 exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. Execution of Endorsements, Assignments, Etc. Upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to Section 4 or Section 5 of this Pledge Agreement. 13. Miscellaneous. (a) Further Documents. Pledgor agrees to execute, acknowledge and deliver any documents or instruments which Pledgee may request in order to better evidence or effectuate this Pledge Agreement and the transactions contemplated hereby. (b) Binding Agreement. This Pledge Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, personal representatives, heirs and legatees. Notwithstanding the foregoing, Pledgor may not assign any of his rights or delegate any of his duties hereunder without the prior written consent of Pledgee. The parties hereto acknowledge that Pledgee shall have the right to assign, with absolute discretion, any or all of its rights and obligations under this Pledge Agreement to any bank(s) or lending institution(s) as collateral security. (c) Notice. Any notice required or permitted to be given pursuant to this Pledge Agreement shall be in writing and shall be deemed given upon personal delivery, or if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Pledgor, at the address set forth on the signature page hereof and (ii) to Pledgee at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other party setting forth the new address for the giving of notices pursuant to this Pledge Agreement. 5. 17 (d) Amendments. This Pledge Agreement may be amended only by the written agreement and consent of the parties hereto. (e) Governing Law. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the conflicts of laws rules thereof. (f) Disputes. In the event of any dispute between the parties arising out of this Pledge Agreement, the prevailing party shall be entitled to receive from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (g) Entire Agreement. This Pledge Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (h) Headings. Introductory headings at the beginning of each section of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section and shall not affect the meanings or construction of the terms and provisions of this Pledge Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGOR: /s/ W. Virginia Walker ----------------------------------------- W. Virginia Walker Address: 3443 Clover Oak Dr. --------------------------------- San Jose, CA 95148 --------------------------------- PLEDGEE: JT STORAGE, INC., a Delaware corporation By: /s/ D. T. Mitchell -------------------------------------- David T. Mitchell, President and Chief Executive Officer 166 Baypointe Parkway San Jose, California 95134 6. 18 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary January 5, 1996 JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 Dear Sir: As Escrow Agent for both JT Storage, Inc., a Delaware corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents, including stock certificates and stock assignments, delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (the "Agreement"), dated as of even date, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Corporation and/or any nominee or assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the Repurchase Option set forth in the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed to (a) date the stock assignments necessary for the transfer in question, (b) fill in the number of shares being transferred and (c) deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Repurchase Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions 19 of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Corporation while the shares of stock are held by you. 4. From time to time upon written request of the Purchaser, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Corporation's Repurchase Option and are not required to remain pledged with JT Storage pursuant to the Pledge Agreement. Within 30 days after the expiration of the 60-day period referred to in paragraph 3 of the Agreement, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares sold and issued pursuant to the Agreement and not purchased by the Corporation or its assignees pursuant to exercise of the Repurchase Option. 5. Notwithstanding the foregoing paragraphs 1, 2, 3 and 4, your duties and obligations as Escrow Agent shall not commence until such time as the certificates representing the shares of stock of the Corporation subject to these instructions pursuant to the Agreement together with two duly executed stock assignments separate from certificate are delivered to you. It is also understood and agreed that you may, on behalf of the Corporation, concurrent with your duties hereunder, hold such certificates and stock assignments as collateral for Purchaser's obligations pursuant to a Secured Promissory Note of even date herewith in the aggregate principal amount of $50,000. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other 2. 20 person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary to advise you properly in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be obligated to reimburse you for your expenses in this connection. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the shares of stock held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said shares until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of arbitrators or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given upon personal delivery, if mailed, or upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses 3. 21 as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 PURCHASER: W. Virginia Walker Address: 3443 Clover Oak Dr. --------------------------------- San Jose, CA 95148 --------------------------------- ESCROW AGENT: Secretary of JT Storage 166 Baypointe Parkway San Jose, California 95134 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, JT Storage, Inc., a Delaware corporation By: /s/ D. T. Mitchell -------------------------------------- David T. Mitchell, President and Chief Executive Officer PURCHASER: /s/ W. Virginia Walker ----------------------------------------- W. Virginia Walker ESCROW AGENT: /s/ W. Virginia Walker - ---------------------------------- W. Virginia Walker, Secretary 4. 22 EXHIBIT D ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement and Stock Pledge Agreement, each dated as of January 5, 1996 by and between JT Storage, Inc., a Delaware corporation (the "Corporation"), and the undersigned, W. Virginia Walker hereby sells, assigns and transfers unto _______________________________________________________________________________ __________________________________________________________________ (___________) shares of the common stock of the Corporation standing in the undersigned's name on the books of the Corporation represented by Certificate No._____ herewith, and does hereby irrevocably constitute and appoint _____________________________ ________________________________________________________________________________ ____________________ attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: __________________ [do not date] /s/ W. Virginia Walker ---------------------------------------- W. Virginia Walker EX-10.12 32 RESTRICTED STK PUR AGREE/DAVID B. PEARCE 1/2/96 1 EXHIBIT 10.12 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of January 2, 1996 (the "Effective Date") by and between JT Storage, Inc., a Delaware corporation ("JT Storage"), and David B. Pearce ("Purchaser"), with reference to the following: RECITALS: A. JT Storage desires to advance its growth, development and financial success by providing additional incentives to its key executive personnel by assisting them to acquire shares of JT Storage's common stock (the "Common Stock"), and to benefit directly from JT Storage's growth, development and financial success. B. JT Storage desires to sell to Purchaser on the Effective Date, and Purchaser desires to subscribe for and purchase from JT Storage at such time, certain shares of Common Stock as set forth in this Agreement. C. In order to induce JT Storage to sell such shares, Purchaser desires to have such shares subject to the restrictions and interests created by this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants and conditions contained herein, the parties agree as follows: 1. Sale and Purchase of Stock. JT Storage hereby agrees to sell to Purchaser, subject to the conditions and restrictions contained in this Agreement, and Purchaser hereby agrees to purchase from JT Storage, 450,000 shares (the "Shares") of Common Stock at a price of $.25 per Share for an aggregate purchase price of $112,500 (the "Purchase Price"). Purchaser shall pay $22,500 of the Purchase Price by personal check payable to JT Storage and shall issue a secured promissory note attached hereto as Exhibit A (the "Note") to JT Storage for $90,000, constituting the balance of the Purchase Price. The Note shall be secured by a pledge of the Shares, in conjunction with which Purchaser shall execute a Stock Pledge Agreement (the "Pledge Agreement") attached hereto as Exhibit B. The check, Note and Pledge Agreement, Joint Escrow Instructions attached hereto as Exhibit C (the "Escrow Instructions"), and two copies of a Stock Assignment Separate from Certificate (the "Stock Assignment") 2 attached hereto as Exhibit D shall be delivered to JT Storage on the Effective Date. 2. Vesting. 253,125 of the Shares purchased pursuant to Section 1 hereof shall be deemed vested immediately, with the 196,875 balance of the Shares vesting over a four-year period following June 15, 1995 (the "Vesting Commencement Date") in forty-two equal monthly installments of 4,687-1/2 shares per month as of January 15, 1996 and thereafter on the fifteenth day of each successive month through and until June 15, 1999. JT Storage's repurchase option as described in Section 4 hereof shall be limited to those Shares which have not so vested (herein referred to as "Unvested Shares") in accordance with this Section 2 at the time of termination of the Purchaser's employment with JT Storage. Accordingly, such repurchase right shall not apply to any Shares which have vested (herein referred to as "Vested Shares") as of the time of termination of Purchaser's employment with JT Storage. 3. Restriction on Transfer of the Unvested Shares. Except as otherwise specifically provided herein, Purchaser may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Unvested Shares, or any right or interest therein. Any purported sale, transfer (including involuntary transfers initiated by operation of legal process), hypothecation or disposition of any of the Unvested Shares or any right or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 3. 4. Repurchase Option Upon Termination. (a) JT Storage's Repurchase Option. In the event that Purchaser's employment by JT Storage terminates for any reason (including, without limitation, death, disability, retirement, voluntary or involuntary resignation or dismissal, with or without cause) prior to the fourth anniversary of the Vesting Commencement Date, JT Storage or its nominee(s) shall have the right and option (the "Repurchase Option") to purchase from Purchaser all or any portion of the Unvested Shares for a period of 60 days after the date of such termination (the "Termination Date"). The amount of Unvested Shares shall be determined as of the Termination Date. (b) Repurchase Price Under Repurchase Option. The purchase price for each Share to be purchased pursuant to the Repurchase Option (the "Repurchase Price") shall be $.25 per 2. 3 Share. The Company may apply unpaid amounts owing under the Note against the Repurchase Price. (c) Exercise of Repurchase Option. The Repurchase Option shall be exercised by JT Storage or its nominee(s) by delivery, within the 60-day period specified in Section 4(a) above, to Purchaser of (i) a written notice specifying the number of Shares to be purchased and (ii) a check in the amount of the Repurchase Price, calculated as provided in this Section 4, for all Shares to be purchased. 5. Dividends, Splits and Certain Reorganizations. If, from time to time during the term of this Agreement: (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of JT Storage; or (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of JT Storage; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Shares shall be immediately subject to this Agreement and be included in the word "Shares" (as either Vested Shares or Unvested Shares, as appropriate) for all purposes with the same force and effect as the Shares presently subject to this Agreement. All such securities or other property so included in the word "Shares" shall be delivered to the Escrow Agent (as hereinafter defined) and held pursuant to the Escrow Instructions in accordance with Section 6 hereof. While the total Repurchase Price pursuant to the Repurchase Option shall remain the same after each such event, the Repurchase Price per Share upon exercise of the Repurchase Option shall be appropriately adjusted, as necessary. 3. 4 6. Escrow. In the event the Note is repaid prior to the termination of the Repurchase Option and the certificates representing Unvested Shares are released pursuant to the Pledge Agreement, as security for the faithful performance of the terms of this Agreement and to insure the availability for delivery of the Unvested Shares upon exercise of the Repurchase Option herein provided for, Purchaser agrees to deliver to, and deposit with, the Secretary of JT Storage, or such other person designated by JT Storage (the "Escrow Agent"), as the Escrow Agent in this transaction, two copies of the Stock Assignment duly endorsed (with date and number of shares blank), together with the certificate or certificates evidencing the Unvested Shares. Said documents are to held by the Escrow Agent and delivered by the Escrow Agent pursuant to the Escrow Instructions. 7. Permitted Transfers. Purchaser may, at any time or times, transfer any or all of the Unvested Shares only: (a) inter vivos to Purchaser's spouse or issue, or to a trust for their benefit, (b) upon Purchaser's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) 4. 5 hereof are collectively referred to herein as "Permitted Transferee"), provided, however, that such Unvested Shares shall not be transferred until the Permitted Transferee executes a valid undertaking to JT Storage to the effect that the Unvested Shares so transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option in the event Purchaser's employment with JT Storage is terminated for any reason prior to the fifth anniversary of the Vesting Commencement Date) as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Purchaser. Vested Shares not required to remain pledged with JT Storage pursuant to the Pledge Agreement shall not be subject to the restrictions on transfer set forth in this Section 7. 8. Rights as Shareholder. Subject to compliance with the provisions of this Agreement and of the Pledge Agreement, Purchaser shall exercise all rights and privileges of the registered holder of the Shares while they are held by JT Storage pursuant to the Pledge Agreement or the Escrow Instructions, and shall be entitled to receive any dividend or other distribution thereof; provided, however, that any dividends or distributions with respect to the Shares in the form of shares of capital stock of JT Storage (whether by way of stock dividend, stock split or recapitalization) shall be subject to this Agreement, the Pledge Agreement and the Escrow Instructions. 9. Investment Representations. Purchaser represents and warrants to JT Storage as follows: (a) Purchaser's Own Account. Purchaser is acquiring the Shares for Purchaser's own account and not with a view to or for sale in connection with any distribution of the Shares. (b) Access to Information. Purchaser (i) is familiar with the business of JT Storage, (ii) has had an opportunity to discuss with representatives of JT Storage the condition of any prospects for the continued operation and financing of JT Storage and such other matters as Purchaser has deemed appropriate in considering whether to invest in the Shares and (iii) has been provided access to all available information about JT Storage requested by Purchaser. (c) Shares Not Registered. Purchaser understands that the Shares have not been registered under the Act or registered or qualified under the securities laws of any state and that Purchaser may not sell or otherwise transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, 5. 6 or unless an exemption is available which permits sale or other transfer without such registration and qualification. 10. Underwriters' Lock-Up. The Purchaser agrees that, in connection with any underwritten offering of Common Stock of JT Storage pursuant to a registration statement under the Securities Act of 1933, the Purchaser shall withhold from the market any or all of the Shares for a period, not to exceed one hundred and eighty (180) days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 11. No Contract of Employment. Purchaser acknowledges and agrees that this Agreement shall not be construed to give Purchaser any right to be retained in the employ of JT Storage, and that the right and power of JT Storage to dismiss or discharge Purchaser (with or without cause) is strictly reserved. 12. Miscellaneous. (a) Legends on Certificates. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND A PURCHASE OPTION IN FAVOR OF THE ISSUER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN RESTRICTED STOCK PURCHASE AGREEMENT DATED AS OF JANUARY 2, 1996 BY AND BETWEEN JT STORAGE, INC., A DELAWARE CORPORATION, AND DAVID B. PEARCE, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF JT STORAGE." Such certificates shall also bear such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. (b) Further Assurances. Each party hereto agrees to perform any further acts and execute and deliver any document which may be reasonably necessary to carry out the intent of this Agreement. (c) Binding Agreement. This Agreement shall bind and inure to the benefit of the successors and assigns of JT 6. 7 Storage and the personal representatives, heirs and legatees of Purchaser. (d) Other Restrictions on Transfers. The restrictions on transfer set forth in this Agreement are in addition to any and all restrictions imposed pursuant to any applicable state or federal law or regulation. (e) Notices. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Purchaser at the address set forth on the signature page hereof and (ii) to JT Storage, Inc. at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. (f) Amendments. This Agreement may be amended only by the written agreement and consent of the parties hereof. (g) Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of laws rules thereof. (h) Disputes. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. (i) Entire Agreement. This Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (j) Headings. Introductory headings at the beginning of each section of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section. (k) Counterparts. This Agreement may be executed in counterparts, both of which, when taken together, shall constitute one and the same instrument. 7. 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. JT STORAGE: JT STORAGE, INC., a Delaware corporation By: ----------------------------------- David T. Mitchell, President and Chief Executive Officer PURCHASER: /s/ David Pearce -------------------------------------- David B. Pearce Address: 20932 Hidden View Lane Saratoga, CA 95070 8. 9 EXHIBIT A SECURED PROMISSORY NOTE $90,000 January 2, 1996 FOR VALUE RECEIVED, the undersigned ("Borrower") hereby promises to pay to JT Storage, Inc., a Delaware corporation ("Payee"), the principal sum of Ninety Thousand Dollars ($90,000), together with interest at 5.91% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. Principal payments of $22,500 plus all accrued interest hereon shall be paid in four installments on each of the first four anniversary dates hereof. Payments of principal and interest on this Secured Promissory Note (this "Promissory Note") shall be made in legal tender of the United States of America and shall be made at the office of Payee at 166 Baypointe Parkway, San Jose, California 95134 or at such other place as Payee shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 450,000 shares (the "Shares") of the common stock of Payee, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of January 2, 1996 by and between Borrower and Payee. This Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Payee and Borrower. The principal of, and accrued interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. In the event Borrower shall (i) fail to make complete payment of any installment of principal or accrued interest when due under this Promissory Note or (ii) commit a breach of, or default under, the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this 10 Promissory Note or breach of or default under the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce payment of this Promissory Note, Borrower agrees to pay such attorneys' fees and court costs as Payee may incur as a result thereof, whether or not suit is commenced. IN WITNESS WHEREOF, this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER: /s/ David Pearce -------------------------------------- David B. Pearce 2. 11 EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of January 2, 1996 by and between David B. Pearce, as pledgor ("Pledgor"), and JT Storage, Inc., a Delaware corporation, as pledgee ("Pledgee"), with reference to the following: RECITALS: A. Pursuant to that certain Restricted Stock Purchase Agreement (the "Purchase Agreement") of even date herewith, by and between Pledgor and Pledgee, Pledgor has agreed to purchase 450,000 shares (the "Shares") of the common stock of Pledgee. B. Pursuant to the terms of that certain Secured Promissory Note in the original principal amount of $90,000 (the "Note") of even date herewith delivered by Pledgor to Pledgee, Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Note, Pledgor shall execute this Pledge Agreement to assure compliance with the terms and conditions of the Note. D. In order to induce Pledgee to make the loan evidenced by the Note, Pledgor desires to have the Shares held subject to this Pledge Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. Grant of Security Interest. Pledgor hereby grants to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of the Note and the full, faithful and timely performance by Pledgor of all of its other obligations under the Note and this Pledge Agreement. The Certificates, together with a stock assignment duly executed in blank with signatures appropriately guaranteed or witnessed, are being retained by Pledgee, as the pledgeholder for the Shares. Notwithstanding the foregoing, the Pledgee shall, from time to time at the request of the Pledgor, cause to be delivered to the Pledgor one or more certificates which, together with all other such certificates theretofore delivered pursuant to this sentence, evidences that portion of the Shares which is equal to the portion of the full purchase price for all of the Shares then 12 actually paid to the Pledgee by the Pledgor (i.e., the portion determined by adding the cash payment amount set forth in Section 1 of the Purchase Agreement to all principal payments on the Note which have theretofore been made by the Pledgor at the time of such request), subject in all cases to the provisions of Section 7 of the Purchase Agreement requiring the continued escrow of Unvested Shares. 2. Representations and Warranties of Pledgor. Pledgor represents and warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except any restriction upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and by the Subscription Agreement. 3. Voting of Shares in the Absence of Default. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgor shall not be entitled to vote the Shares at any time that there exists an Event of Default as provided in Section 9 hereof. 4. Dividends and Other Distributions. So long as there shall exist no Event of Default as provided in Section 9 hereof, Pledgor shall be entitled to receive any dividend or other distribution with respect to the Shares except as provided in Section 5 of this Pledge Agreement. If there exists an Event of Default, such dividend or distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. Stock Dividends. In the event of any distribution in shares of capital stock of Pledgee (whether by way of stock dividend, stock split, recapitalization or otherwise) with respect to the Shares, the shares to be distributed to Pledgor shall be delivered to Pledgee, together with an appropriately executed stock certificate and an appropriately executed stock power, to be held as additional collateral security under this Pledge Agreement. 6. Pledgee's Duties. So long as Pledgee exercises reasonable care with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding 2. 13 sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 7. Sale of Collateral. Upon the occurrence of any Event of Default as provided in Section 9 hereof, Pledgee shall have all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of California at that time and also may, without notice, except as specified below, at its option, sell, resell, assign, transfer and deliver all or any part of the Shares, for cash or on credit for future delivery. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any part of the Shares being sold, free from, and discharged of, all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Note, including collection costs and expenses of sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such Shares, or the part thereof to be sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 8 hereof, Pledgee, in its sole and absolute discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effected legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effect such sale or restrict such sale to a purchaser or purchasers who will represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any such sale shall be deemed to be a sale made in a commercially reasonable manner within the meaning of the California Uniform Commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the 3. 14 Shares regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. Redemption of Collateral. Notwithstanding any other provision of this Pledge Agreement, upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other disposition is to be made at least ten days before the date fixed for any public sale or the day on or after which any private sale or other disposition is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such ten days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding monetary obligations of Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such ten-day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 9. Events of Default. At the option of Pledgee, the principal balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set out below ("Events of Default"): (a) Pledgor shall fail to make complete payment or prepayment of principal or interest when due in accordance with the terms of the Note; or (b) Pledgor shall commit a breach or default of any of his obligations under this Pledge Agreement. 10. Termination. This Pledge Agreement shall terminate upon the payment in full of the principal amount and all accrued interest thereon under the Note. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates and any other collateral security then held by Pledgee pursuant to Section 4 or Section 5 of this Pledge Agreement. 11. Cumulation of Remedies; Waiver of Rights. The remedies provided herein in favor of Pledgee shall not be deemed 4. 15 exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. Execution of Endorsements, Assignments, Etc. Upon the occurrence of an Event of Default as provided in Section 9 hereof, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to Section 4 or Section 5 of this Pledge Agreement. 13. Miscellaneous. (a) Further Documents. Pledgor agrees to execute, acknowledge and deliver any documents or instruments which Pledgee may request in order to better evidence or effectuate this Pledge Agreement and the transactions contemplated hereby. (b) Binding Agreement. This Pledge Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, personal representatives, heirs and legatees. Notwithstanding the foregoing, Pledgor may not assign any of his rights or delegate any of his duties hereunder without the prior written consent of Pledgee. The parties hereto acknowledge that Pledgee shall have the right to assign, with absolute discretion, any or all of its rights and obligations under this Pledge Agreement to any bank(s) or lending institution(s) as collateral security. (c) Notice. Any notice required or permitted to be given pursuant to this Pledge Agreement shall be in writing and shall be deemed given upon personal delivery, or if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Pledgor, at the address set forth on the signature page hereof and (ii) to Pledgee at 166 Baypointe Parkway, San Jose, California 95134. A party may change its address by giving written notice to the other party setting forth the new address for the giving of notices pursuant to this Pledge Agreement. 5. 16 (d) Amendments. This Pledge Agreement may be amended only by the written agreement and consent of the parties hereto. (e) Governing Law. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to the conflicts of laws rules thereof. (f) Disputes. In the event of any dispute between the parties arising out of this Pledge Agreement, the prevailing party shall be entitled to receive from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (g) Entire Agreement. This Pledge Agreement, including the agreements referred to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. (h) Headings. Introductory headings at the beginning of each section of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon, or description of, the contents of any such section and shall not affect the meanings or construction of the terms and provisions of this Pledge Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGOR: /s/ David Pearce -------------------------------------- David B. Pearce Address: 20932 Hidden View Lane Saratoga, CA 95070 PLEDGEE: JT STORAGE, INC., a Delaware corporation By: ----------------------------------- David T. Mitchell, President and Chief Executive Officer 166 Baypointe Parkway San Jose, California 95134 6. 17 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary January 2, 1996 JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 Dear Sir: As Escrow Agent for both JT Storage, Inc., a Delaware corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents, including stock certificates and stock assignments, delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (the "Agreement"), dated as of even date, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Corporation and/or any nominee or assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the Repurchase Option set forth in the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed to (a) date the stock assignments necessary for the transfer in question, (b) fill in the number of shares being transferred and (c) deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Repurchase Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does 1. 18 hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Corporation while the shares of stock are held by you. 4. From time to time upon written request of the Purchaser, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Corporation's Repurchase Option and are not required to remain pledged with JT Storage pursuant to the Pledge Agreement. Within 30 days after the expiration of the 60-day period referred to in paragraph 3 of the Agreement, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares sold and issued pursuant to the Agreement and not purchased by the Corporation or its assignees pursuant to exercise of the Repurchase Option. 5. Notwithstanding the foregoing paragraphs 1, 2, 3 and 4, your duties and obligations as Escrow Agent shall not commence until such time as the certificates representing the shares of stock of the Corporation subject to these instructions pursuant to the Agreement together with two duly executed stock assignments separate from certificate are delivered to you. It is also understood and agreed that you may, on behalf of the Corporation, concurrent with your duties hereunder, hold such certificates and stock assignments as collateral for Purchaser's obligations pursuant to a Secured Promissory Note of even date herewith in the aggregate principal amount of $60,000. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall 2. 19 not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary to advise you properly in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be obligated to reimburse you for your expenses in this connection. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the shares of stock held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said shares until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of arbitrators or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given upon personal delivery, if mailed, or upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed to each of the other parties thereunto 3. 20 entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: JT Storage, Inc. 166 Baypointe Parkway San Jose, California 95134 PURCHASER: Kenneth D. Wing Address: 325 Kamaur Lane Santa Cruz, CA 95060 ESCROW AGENT: Secretary of JT Storage 166 Baypointe Parkway San Jose, California 95134 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, JT Storage, Inc., a Delaware corporation By: ----------------------------------- David T. Mitchell, President and Chief Executive Officer PURCHASER: /s/ David Pearce -------------------------------------- David B. Pearce ESCROW AGENT: /s/ W. Virginia Walker - ----------------------------- W. Virginia Walker, Secretary 4. 21 EXHIBIT D ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement and Stock Pledge Agreement, each dated as of January 2, 1996 by and between JT Storage, Inc., a Delaware corporation (the "Corporation"), and the undersigned, David B. Pearce hereby sells, assigns and transfers unto ______________________________ ___________________________________________________________ (______________) shares of the common stock of the Corporation standing in the undersigned's name on the books of the Corporation represented by Certificate No. ___ herewith, and does hereby irrevocably constitute and appoint ____________________________ ___________________________________ attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ____________________ [do not date] /s/ David Pearce -------------------------------------- David B. Pearce EX-10.13 33 CONVERTIBLE PROMISSORY NOTE 1 Exhibit 10.13 JTS borrowed funds from cerain JTS stockholders pursuant to convertible promissory notes in the form hereto as Exhibit A. The holders, date and principal amounts of such convertible notes are as follows: NAME DATE PRINCPAL 1. Entities affiliated with Burr Egan 10/11/94 $247,400 10/11/94 $2,600 10/26/94 $371,100 10/26/94 $3,900 12/29/94 $1,040 12/29/94 $98,960 1/18/95 $100,569 1/18/95 $1,057 6/22/95 $989,600 6/22/95 $10,400 2. Brentwood Associates VI, L.P. 11/1/94 $412,500 1/18/95 $67,073 6/22/95 $500,000 3. Entities affilated with Sofinnova 2/7/94 $107,000 10/25/94 $125,000 10/28/94 $125,000 1/18/95 $20,325 1/18/95 $8,885 1/18/95 $11,441 4. Entities affiliated with Advanced Technology Ventures 2/7/94 $214,000 10/26/94 $250,000 1/18/95 $40,650 5. Steven L. Kaczeus 6/22/95 $250,000 6. Entities affiliated with Western Digital 12/20/94 $400,000 1/4/95 $100,000 1/6/95 $300,000 7. David T. Mitchell 6/22/95 $1,000,000 2 Exhibit A 3 THIS NOTE AND THE SECURITIES THAT MAY BE PURCHASED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OF DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NEITHER SUCH NOTE NOR SUCH SECURITIES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY AND ITS LEGAL COUNSEL STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. $____________ _______ 1995 Palo Alto, California CONVERTIBLE PROMISSORY NOTE For value received, the undersigned, JT STORAGE, INC., a Delaware corporation ("Borrower"), promises to pay _______ ("Lender") the principal sum of _____________ dollars (_________), with interest from the date hereof at a rate of 8% per annum, compounded monthly. Said principal and interest shall be due and payable on demand after the first to occur of the following: (a) August 15, 1995, or (b) the closing of an additional sale by Borrower of its Series A Preferred Stock ("Stock") to investors ("Investors"). 1. Conversion. If at any time before this note is paid Borrower proposes to sell Stock to Investors, then Borrower shall prior to the proposed closing of such sale (the "Closing") provide Lender with notice of such proposed sale, together with any offering materials provided to such Investors. At its sole option, Lender may at such Closing, upon notice to the Company at least one (1) day prior to the Closing, exchange this Note at the Closing for shares of Stock, and receive the full amount of the principal and interest then due hereunder as credit against the purchase price of such Stock, which purchase price per share shall be equal to the per share price of, and which purchase shall be on terms no less favorable than, either the Stock offered to or purchased by the Investors. Lender shall exercise its conversion option by tendering this Note as full or partial payment of the purchase price of the Stock purchased by Lender. In the event that the amount of principal and interest then due hereunder shall be less than the aggregate purchase price of the Stock so purchased by Lender, Lender shall deliver to Borrower at the Closing a check in the amount of such difference. Lender may not acquire fractional shares. If Lender elects to convert part but not all of the principal and interest subject to this Note into Stock, Borrower shall deliver to Lender a check in the amount of all unconverted principal plus interest, if any, at the same time and place such conversion occurs. Payment of principal and interest not converted into Stock in accordance with this Agreement shall be made in lawful money of the United States to the holder of this Note at the Borrower's principal 4 offices or, at the option of the Lender, at such other place in the United States as such Lender shall have designated to the Borrower in writing. THIS NOTE SHALL NOT BE CONVERTIBLE INTO SECURITIES OF BORROWER IF SUCH CONVERSION WOULD VIOLATE FEDERAL SECURITIES LAWS OR APPLICABLE STATE SECURITIES LAWS. 2. Representations and Warranties. The Lender represents and warrants that: (a) It is familiar with Borrower, the nature of its business, its financial prospects and the merits and risks of an investment in Borrower, and has the capacity to protect its own interest; and (b) It is acquiring the Note and the securities that may be purchased thereby for investment for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with any distribution thereof. It understands that the Note and the securities that may be purchased thereby have not been, and will not be, registered under the Securities Act of 1933, as amended, by reason of a specific exemption from the registration provisions of such Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Lender's representations as expressed herein. 3. Waiver. Borrower hereby waives presentment, demand for payment, notice of dishonor and any and all other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of this Note, except such demands and notices expressly required hereunder, and hereby consents to any and all extensions of time, renewals, releases of liens, waivers or modifications that may be made or granted by the Lender to any party hereto. No delay by the Lender in exercising any power or right hereunder shall operate as a waiver of any power or right; nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any power or right hereunder or otherwise; and no waiver or modification of the terms hereof shall be valid unless in writing signed by Lender and then only to the extent therein set forth. 4. Transfer. This Note may not be sold, transferred or assigned without Borrower's prior written consent, which consent shall not be unreasonably withheld. 5. Notice. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to the Borrower, at the address of its principal corporate offices and (ii) if to the Lender, at the address of its principal corporate offices, or at 2 5 such other address as a party may designate by ten days' advance written notice to the other party pursuant to the provisions above. 6. Governing Law. This Note and the obligations of the Borrower hereunder shall be governed by and construed in accordance with the laws of the State of California. The parties expressly stipulate that any litigation under this Note shall be brought in the State courts of the County of Santa Clara, California and in the United States District Court for the Northern District of California. The parties agree to submit to the jurisdiction and venue of those courts. Issued this _________ day of ________ 1995. "BORROWER" JT STORAGE, INC. By:____________________________________ Title:_________________________________ "LENDER" AGREED TO AND ACCEPTED: By:_____________________________ Title:__________________________ 3 EX-10.14 34 PROMISSORY NOTE/CERTAIN PRINCIPAL STKHLDRS 1/19/96 1 Exhibit 10.14 JTS Borrowed funds from certain JTS stockholders pursuant to promissory notes in the form attached hereto as Exhibit A. The holders, date and principal amounts of such notes are as follow: NAME DATE PRINCIPAL 1. Tantec 1/19/96 $1,000,000 2. Brentwood Associates VI, L.P. 1/31/96 $185,000 3. Entities affilated with the Walden Group of Venture Capital Funds 1/31/96 $47,000 1/31/96 $33,000 1/31/96 $26,667 1/31/96 $13,333 1/31/96 $13,000 1/31/96 $7,000 4. Entities affiliated with Sofinnova 1/31/96 $53,290 1/31/96 $46,700 5. Entities affiliated with Advance Technology Ventures 1/31/96 $107,116 1/31/96 $152,884 6. Entities affiliated with Burr Egan 1/31/96 $257,296 1/31/96 $2,704 2 Exhibit A 3 PROMISSORY NOTE _____________ San Jose, California January 19, 1996 FOR VALUE RECEIVED, the undersigned, JT Storage, Inc., a Delaware corporation, ("Borrower") promises to pay to the order of __________________, ("Lender"), without offset or deduction, at 166 Baypointe Parkway, San Jose, California, 95134, or such other place as the holder of this promissory note ("Note") may designate in writing from time to time, in lawful money of the United States, the principal sum of ___________ Dollars (____________) (the "Loan"), together with interest on the unpaid principal balance of this Note from time to time outstanding until paid in full at the rate hereinafter provided for. 1. Interest. Interest shall accrue on the unpaid principal balance of this Note commencing on the date hereof and continuing until repayment of this Note in full, at a fixed rate per annum equal to ten percent (10%). Interest shall be computed on the basis of a three hundred sixty-five (365) day year and the actual number of days elapsed. 2. Terms and Conditions of Payment The principal amount of this Note, or so much thereof as remains outstanding from time to time, together with all interest and other sums owed to the Lender pursuant to any other terms and conditions hereof, shall be due and payable, by Borrower, as follows: (a) The entire amount of principal and accrued interest shall be due and payable on July 15, 1996, (the "Maturity Date"). (b) All payments received by Lender shall be applied first to accrued but unpaid interest, next to other charges due with respect to this Note or any other document executed by Lender in connection herewith, and then to the unpaid principal balance of this Note. Principal, interest and any other sums payable under this Note shall be payable in lawful money of the United States. 4 3. Default. The unpaid principal balance of this Note, together with all accrued interest thereon, shall, at the option of the holder hereof, become immediately due and payable, without demand or notice, upon the failure of Borrower to perform or observe any other terms or provision of this Note. 4. Prepayment. Borrower shall have the right to prepay this Note in whole or in part, at any time, without penalty or premium. 5. Waiver of Demand. Borrower and all guarantors and endorsers of this Note hereby severally waive: presentment, demand, protest, notice of dishonor and all other notices, except as expressly provided herein; and any release or discharge arising from any extension of time, discharge of a prior party, release of any or all of the security for this Note, or other cause of release or discharge other than actual payment in full thereof. 6. Waiver, Amendment or Modification in Writing. The holder hereof shall not be deemed, by any act or omission, to have waived, amended or modified any of its rights or remedies hereunder unless such waiver, amendment or modification is in writing and signed by such holder and then only to the extent specifically set forth in such writing. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. No delay or omission of the holder hereof to exercise any right, whether before or after a default hereunder, shall impair any such right or shall be construed to be a waiver of any right or default, and the acceptance at any time by the holder hereof of any past-due amount shall not be deemed to be a waiver of the right to require prompt payment when due of any other amounts then or thereafter due and payable. 7. Time of the Essence. Time is of the essence for each and every obligation under this Note. Upon any default hereunder, the holder hereof may exercise all rights and remedies provided for herein and by law including, but not limited to, the right to immediate payment in full of this Note. 5 8. Remedies Cumulative. The remedies of the holder hereof as provided herein, or in law or in equity, shall be cumulative and concurrent and may be pursued singularly, successively, or together at the sole discretion of the holder hereof, and may be exercised as often as occasion therefor shall occur; and the failure to exercise any such right or remedy shall in no event be construed as a waiver or a release thereof. 9. Attorneys' Fees. It is expressly agreed that in the event of any dispute over the construction or interpretation of this Note, or any action to enforce or protect any rights conferred upon Lender by this Note or any other document evidencing or securing this Note, Borrower promises and agrees to pay all costs, including reasonable attorneys' fees, incurred by Lender if Lender prevails in such endeavor. 10. Successors and Assigns. The terms, covenants and conditions contained herein shall be binding upon the heirs, successors and assigns of Borrower and shall inure to the benefit of the successors and assigns of Lender. 11. Choice of Law. This Note shall be construed in accordance with and governed by the laws of the State of California. 12. Interest Rate Limitation. This Note is hereby limited so that in no contingency, whether by reason of acceleration of the Maturity Date or otherwise, shall the interest exceed the maximum amount permissible under applicable law. If, from any circumstances whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to the Lender shall be reduced to the maximum amount permitted under applicable law; and if from any circumstance, Lender shall ever have received anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the unpaid principal balance of this Note and not to the payment of interest herein, or if such excessive interest exceeds the unpaid principal balance of this Note, such excess shall be refunded to the Borrower. All interest paid, or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of the principal balance of this Note so that interest for such full period shall not exceed the maximum amount permitted by applicable law. 6 13. Severability. If the Borrower consists of more than one person or entity, their obligations under this Note shall be joint and several. 14. Headings. Headings at the beginning of each numbered paragraph of this Note are intended solely for convenience and are not to be deemed or construed to be a part of this Note. Borrower: JT Storage, Inc. By /s/ D. T. MITCHELL ----------------------------------- David T. Mitchell President & Chief Executive Officer EX-10.15 35 SUBORD SECURED CONVERTIBLE PROM NOTE/ATARI 2/13/96 1 EXHIBIT 10.15 THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTE $25,000,000.00 February 13, 1996 San Jose, California FOR VALUE RECEIVED, JT Storage, Inc., a Delaware corporation (the "Company"), promises to pay to Atari Corporation, a Nevada corporation (the "Holder"), or its assigns, the principal sum of Twenty Five Million Dollars ($25,000,000.00), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to eight and one-half percent (8.5%) per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the "Maturity Date" which date shall be the earlier of (i) September 30 , 1996, or (ii) when such amounts are declared due and payable by the Holder (or made automatically due and payable) upon or after the occurrence of an Event of Default (as defined below). THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT (THE "SECURITY AGREEMENT") DATED AS OF THE DATE HEREOF AND EXECUTED BY THE COMPANY IN FAVOR OF THE HOLDER. ADDITIONAL RIGHTS OF THE HOLDER ARE SET FORTH IN THE SECURITY AGREEMENT. The following is a statement of the rights of the Holder and the conditions to which this Note is subject, and to which the Holder, by the acceptance of this Note, agrees: 1. DEFINITIONS. As used in this Note, the following capitalized terms have the following meanings: (a) the "Company" includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note. (b) "Certificate" shall mean the Restated Certificate of Incorporation of Company as in effect on the date hereof. -1- 2 (c) "Equity Securities" of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing. (d) "Event of Default" has the meaning given in Section 7 hereof. (e) "Financial Statements" shall mean, with respect to any accounting period for any Person, statements of operations, retained earnings and cash flows of such Person for such period, and balance sheets of such Person as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year if such period is less than a full fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding fiscal year, all prepared in reasonable detail and in accordance with generally accepted accounting principles (except, with respect to monthly or quarterly financials, for footnotes and year end adjustments). Unless otherwise indicated, each reference to Financial Statements of any Person shall be deemed to refer to Financial Statements prepared on a consolidated basis. (f) "Holder" shall mean the Person specified in the introductory paragraph of this Note or any Person who shall at the time be the holder of this Note. (g) "Indebtedness" shall mean and include the aggregate amount of, without duplication (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations to pay the deferred purchase price of property or services (other than accounts payable incurred in the ordinary course of business determined in accordance with generally accepted accounting principals), (d) all obligations with respect to capital leases, (e) all guaranty obligations; (f) all obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (g) all reimbursement and other payment obligations, contingent or otherwise, in respect of letters of credit. (h) "Investment" of any Person shall mean any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expense, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person (including, without limitation, any Indebtedness incurred by such Person of the type described in clauses (a) and (b) of the definition of "Indebtedness" on behalf of any other Person); provided, however, that Investments shall not include accounts receivable or other indebtedness owed by customers of such Person which are current assets and arose from sales or non-exclusive licensing in the ordinary course of such Person's business. (i) "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing -2- 3 of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. (j) "Material Adverse Effect" shall mean a material adverse effect on (a) the business, assets, operations, or financial or other condition of the Company; (b) the ability of the Company to pay or perform the Obligations in accordance with the terms of this Note and the other Transaction Documents and to avoid a default or Event of Default under any Transaction Document; or (c) the rights and remedies of Holder under this Note, the other Transaction Documents or any related document, instrument or agreement. (k) "Merger Agreement" shall mean that certain Agreement and Plan of Reorganization dated as of February 12, 1996 by and between the Company and the Holder. (l) "Obligations" has the meaning given in Section 1 of the Security Agreement. (m) "Permitted Indebtedness" means: (i) Indebtedness of Company in favor of the Holder arising under this Note; (ii) The existing Indebtedness disclosed on the JTS Disclosure Schedule (as defined in the Merger Agreement) (the "Schedule"); (iii) Indebtedness to trade creditors, including, without limitation, affiliates of Company, incurred in the ordinary course of business, provided that the amount of such Indebtedness related to Moduler Electronics (India) Pvt. Ltd. shall not exceed $30.0 million at any time; (iv) Other Indebtedness of Company, not exceeding $1.0 million in the aggregate outstanding at any time; (v) Contingent obligations of Company consisting of guarantees (and other credit support) of the obligations of vendors and suppliers of Company in respect of transactions entered into in the ordinary course of business; (vi) Indebtedness with respect to capital lease obligations and Indebtedness secured by Permitted Liens; (vii) Extensions, renewals, refundings, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness (a) through (f) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Company. (n) "Permitted Investments" shall mean and include: (a) deposits with commercial banks organized under the laws of the United States or a state thereof to the extent such deposits are fully insured by the Federal Deposit Insurance Corporation; (b) Investments in marketable obligations issued -3- 4 or fully guaranteed by the United States and maturing not more than one (1) year from the date of issuance; (c) Investments in open market commercial paper rated at least "A1" or "P1" or higher by a national credit rating agency and maturing not more than one (1) year from the creation thereof; (d) Investments pursuant to or arising under currency agreements or interest rate agreements entered into in connection with bona fide hedging arrangements; (e) Investments consisting of deposit accounts of the Company in which the Holder has a perfected security interest and deposit accounts of its Subsidiaries maintained in the ordinary course of business; (f) Investments existing on the Closing Date disclosed in the Schedule; (g) Extensions of credit in the nature of accounts receivable or notes receivable arising from the same or lease of goods or services in the ordinary course of business; (h) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (i) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (j) Investments consisting of (i) compensation of employees, officers and directors of borrower so long as the Board of Directors of Company determines that such compensation is in the best interests of Company, (ii) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, (iii) loans to employees, officers or directors relating to the purchase of equity securities of Company, (iv) other loans to officers and employees approved by the Board of Directors; and (k) other Investments aggregating not in excess of $1,000,000 at any time. (o) "Permitted Liens" shall mean and include: (i) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith, provided provision is made to the reasonable satisfaction of Holder for the eventual payment thereof if subsequently found payable; (ii) Liens of carriers, warehousemen, mechanics, materialmen, vendors, and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith, provided provision is made to the reasonable satisfaction of Holder for the eventual payment thereof if subsequently found payable; (iii) deposits under workers' compensation, unemployment insurance and social security laws or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or to secure statutory obligations of surety or appeal bonds or to secure indemnity, performance or other similar bonds in the ordinary course of business; (iv) Liens securing obligations under a capital lease if such lease is permitted under the Security Agreement and such Liens do not extend to property other than the property leased under such capital lease; (v) Liens upon any equipment acquired or held by Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment; (vi) easements, reservations, rights of way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property in a manner not materially or adversely affecting the value or use of such property; (vii) Liens in favor of the Holder; (viii) Liens existing on the date hereof in favor of holders of Senior Indebtedness; (ix) any liens existing as of the date hereof and disclosed in the Schedule; (x) liens on equipment leased by Company pursuant to an operating lease in the ordinary course of business (including proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease of such equipment (including Liens arising from UCC financing statements regarding such leases); (xi) liens arising from judgements, decrees or attachments to the extent and only so long as such judgment, decree or attachment does not constitute an Event of Default under 7(h); (xii) liens in favor of customs and revenue authorities arising as a matter of law to secure payment -4- 5 of customs duties in connection with the importation of goods; (xiii) liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights off setoff or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; and (xiv) liens incurred in connection with the extension, renewal, refunding, refinancing, modification, amendment or restatement of the indebtedness secured by Liens of the type described in clauses (i) and (xiii) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. (p) "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority. (q) "Senior Indebtedness" shall mean the principal of, unpaid interest on and other amounts due in connection with the Company's Business Loan Agreement dated as of December 18, 1995 with Silicon Valley Bank in an amount not to exceed $5.0 million at any time. (r) "Series A Preferred" shall mean the Company's presently authorized Series A Preferred Stock. (s) "Subsidiary" shall mean (a) any corporation of which more than 50% of the issued and outstanding equity securities having ordinary voting power to elect a majority of the Board of Directors of such corporation is at the time directly or indirectly owned or controlled by Company, (b) any partnership, joint venture, or other association of which more than 50% of the equity interest having the power to vote, direct or control the management of such partnership, joint venture or other association is at the time directly or indirectly owned and controlled by Company (c) any other entity included in the financial statements of Company on a consolidated basis. (t) "Transaction Documents" shall mean this Note, the Security Agreement, the Warrant (as defined in Section 11 hereof) and the Merger Agreement. 2. REPRESENTATIONS AND WARRANTIES OF COMPANY. The Company represents and warrants to the Holder that except as disclosed in the JTS Disclosure Schedule (as defined in the Merger Agreement) delivered concurrently herewith: (a) Due Incorporation and Qualification. Each of Company and its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted and as proposed to be conducted; and (iii) is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed could reasonably be expected to have a Material Adverse Effect. (b) Authority. The execution, delivery and performance by Company of each Transaction Document to be executed by Company and the consummation of the transactions -5- 6 contemplated thereby (i) are within the power of Company and (ii) have been duly authorized by all necessary actions on the part of Company. (c) Enforceability. Each Transaction Document executed, or to be executed, by Company has been, or will be, duly executed and delivered by Company and constitutes, or will constitute, a legal, valid and binding obligation of Company, enforceable against Company in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally and general principles of equity. (d) Non-Contravention. The execution and delivery by Company of the Transaction Documents executed by Company and the performance and consummation of the transactions contemplated thereby do not and will not (i) violate the Certificate of Incorporation or Bylaws of the Company or any material judgment, order, writ, decree, statute, rule or regulation applicable to Company; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Person to accelerate (whether after the giving of notice or lapse of time or both), any material mortgage, indenture, agreement, instrument or contract to which Company is a party or by which it is bound; or (iii) result in the creation or imposition of any Lien upon any property, asset or revenue of Company (other than any Lien arising under the Transaction Documents) or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization or approval applicable to Company, its business or operations, or any of its assets or properties. (e) Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other Person (including, without limitation, the shareholders of any Person) is required in connection with the execution and delivery of the Transaction Documents executed by Company and the performance and consummation of the transactions contemplated thereby, except such as may be required pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, in connection with any conversion of the principal balance of this Note pursuant to Section 10 hereof. (f) No Violation or Default. None of the Company or the Company's Subsidiaries is in violation of or in default with respect to (i) its Certificate of Incorporation or Bylaws or equivalent charter document or any material judgment, order, writ, decree, statute, rule or regulation applicable to such Person; (ii) any material mortgage, indenture, agreement, instrument or contract to which such Person is a party or by which it is bound (nor is there any waiver in effect which, if not in effect, would result in such a violation or default), where, in each case, such violation or default, individually, or together with all such violations or defaults, could reasonably be expected to have a Material Adverse Effect. (g) Litigation. No actions (including, without limitation, derivative actions), suits, proceedings or investigations are pending or, to the knowledge of the Company, threatened against the Company or the Company's Subsidiaries at law or in equity in any court or before any other governmental authority which if adversely determined (i) would (alone or in the aggregate) have a Material Adverse Effect or (ii) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by the Company of the Transaction Documents or the transactions contemplated thereby. -6- 7 (h) Title. The Company and the Company's Subsidiaries own and have good and marketable title in fee simple absolute to, or a valid leasehold interest in, all their respective real properties and good title to their other respective assets and properties as reflected in the most recent Financial Statements delivered to Purchasers (except those assets and properties disposed of in the ordinary course of business since the date of such Financial Statements) and all respective assets and properties acquired by Company and Company's Subsidiaries since such date (except those disposed of in the ordinary course of business). Such assets and properties are subject to no Lien, except for Permitted Liens. (i) Equity Securities. The authorized capital stock of the Company consists of 90,000,000 shares of Common Stock, $.000001 par value, and 70,000,000 shares of Preferred Stock, $.000001 par value, all of which is designated Series A Preferred Stock, of which there are issued and outstanding, 7,466,729 shares of Common Stock and 28,696,370 shares of Series A Preferred. There are no other outstanding shares of capital stock or voting securities. Each outstanding share of the Company's Series A Preferred Stock is convertible into one (1) share of the Company's Common Stock. All outstanding shares of the Company's Common Stock and the Company's Series A Preferred Stock are duly authorized, validly issued, fully paid and non-assessable and are free of any Liens other than any Liens created by or imposed upon the holders thereof, and are not subject to preemptive rights or rights of first refusal created by statute, the Certificate of Incorporation or Bylaws of the Company or any agreement to which the Company is a party or by which it is bound. The Company has reserved (i) 4,300,000 shares of Common Stock for issuance to employees and consultants pursuant to the Company's 1995 Stock Option Plan, of which 16,729 shares have been issued pursuant to option exercises, and 3,885,747 shares are subject to outstanding, unexercised options, and (ii) 600,000 shares of Common Stock for issuance upon the exercise of outstanding, unexercised warrants. There are no other options, warrants, calls, rights, commitments or agreements of any character to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of capital stock of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. Except as set forth in the Registration Rights Agreement dated as of February 3, 1995 by and among the Company and certain other persons and as contemplated by Section 11(g) hereof, no Person has the right to demand or other rights to cause Company to file any registration statement under the Securities Act of 1933, as amended (the "Securities Act"), relating to any Equity Securities of Company presently outstanding or that may be subsequently issued, or any right to participate in any such registration statement. 3. REPRESENTATIONS AND WARRANTIES OF HOLDER. The Holder represents and warrants to the Company that such Holder has been advised that neither this Note nor the securities which may be issued upon the conversion hereof have been registered under the Securities Act, or any state securities laws and, therefore, cannot be resold unless registered under the Securities Act and applicable state securities laws or unless an exemption from such registration requirements is available. Such Holder is aware that the Company is under no obligation to effect any such registration with respect to the Note or to file for or comply with any exemption from registration. Such Holder has not been formed solely for the purpose of making this investment and is purchasing -7- 8 the Note to be acquired by such Holder hereunder for its own account for investment, not as a nominee or agent, and not with a view to, or for resale in connection with, the distribution thereof. Such Holder has such knowledge and experience in financial and business matters that such Purchaser is capable of evaluating the merits and risks of such investment, is able to incur a complete loss of such investment and is able to bear the economic risk of such investment for an indefinite period of time. Such Holder is an accredited investor as such term is defined in Rule 501 of Regulation D under the Securities Act. 4. INTEREST. Accrued interest on the outstanding principal balance on this Note shall be payable on the Maturity Date. 5. PREPAYMENT. Upon fifteen (15) days prior written notice to the Holder, the Company may prepay this Note in whole or in part; provided that any such prepayment will be applied first to the payment of expenses due under this Note, second to interest accrued on this Note and third, if the amount of prepayment exceeds the amount of all such expenses and accrued interest, to the payment of principal of this Note. 6. CERTAIN COVENANTS. While any amount is outstanding under the Note, without the prior written consent of the Holder: (a) Indebtedness. Neither Company nor any of its Subsidiaries shall create, incur, assume or permit to exist any Indebtedness except Senior Indebtedness and Permitted Indebtedness. (b) Liens. Neither the Company nor any of its Subsidiaries shall create, incur, assume or permit to exist any Lien on or with respect to any of its assets or property of any character, whether now owned or hereafter acquired, except for Permitted Liens. (c) Asset Dispositions. Neither the Company nor any of its Subsidiaries shall sell, lease, transfer, license or otherwise dispose of any of its assets or property (collectively, a "Transfer"), whether now owned or hereafter acquired, except (i) transfers in the ordinary course of its business consisting of the sale of inventory and sales of worn-out or obsolete equipment and (ii) transfers not in excess of $3.0 million for fair value and other than to any affiliate of the Company. (d) Mergers, Acquisitions, Etc. Neither the Company nor any of its Subsidiaries shall consolidate with or merge into any other Person or permit any other Person to merge into it, or acquire all or substantially all of the assets or capital stock of any other Person. (e) Investments. Neither the Company nor any of its Subsidiaries shall make any Investment except for Permitted Investments. (f) Dividends, Redemptions, Etc. Neither the Company nor any of its Subsidiaries shall (i) pay any dividends or make any distributions on its equity securities; (ii) purchase, redeem, -8- 9 retire, decease or otherwise acquire for value any of its equity securities; (iii) return any capital to any holder of its equity securities; (iv) make any distribution of assets, Equity Securities, obligations or securities to any holder of its Equity Securities; or (v) set apart any sum for any such purpose; other than payments of principal and interest on outstanding bridge loans and repurchases of shares from terminated employees pursuant to the terms of restricted stock purchase agreements, and provided, however, that any Subsidiary may pay cash dividends to Company. (g) Indebtedness Payments. Except as set forth on JTS Disclosure Schedule (as defined in the Merger Agreement), neither the Company nor any of its Subsidiaries shall (i) prepay, redeem, purchase, decrease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than (A) amounts due under this Note and (B) Senior Indebtedness) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money (other than (A) Obligations under this Note and (B) Senior Indebtedness) or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or stockholders. (h) Information Rights; Notices. The Company shall furnish to the Holder the following: (i) Monthly Financial Statements. Within thirty (30) days after the last day of each month, a copy of the Financial Statements of the Company for such quarter and for the fiscal year to date, certified by the chief financial officer or controller of the Company to present fairly the financial condition, results of operations and other information presented therein and to have been prepared in accordance with generally accepted accounting principals consistently applied, subject to normal year end adjustments and except that no footnotes need be included with such Financial Statements; (ii) Annual Financial Statements. Within ninety (90) days after the close of each fiscal year of the Company, (i) copies of the audited Financial Statements of Company for such year, audited by nationally recognized independent certified public accountants, (ii) copies of the unqualified opinions and management letters delivered by such accountants in connection with such Financial Statements, and (iii) a report containing a description of projected business prospects (including capital expenditures) and management's discussion and analysis of financial condition and results of operation of Company and its Subsidiaries; (iii) SEC Reports. At such time as the Company is subject to the reporting requirement of the Exchange Act, as soon as possible and in no event later than five (5) days after they are sent, made available or filed, copies of all registration statements and reports filed by Company with the Securities and Exchange Commission and all reports, proxy statements and financial statements sent or made available by Company to its stockholders generally; and -9- 10 (iv) Notice of Defaults. Promptly upon the occurrence thereof, written notice of the occurrence of any Event of Default hereunder or any event of default with respect to any Senior Indebtedness. (i) Inspection Rights. The Holder and its representatives shall have the right, at any time during normal business hours, upon reasonable prior notice, to visit and inspect the properties of the Company and its corporate, financial and operating records, and make abstracts therefrom, and to discuss the Company's affairs, finances and accounts with its directors, officers and independent public accountants. (j) Use of Proceeds. The Company shall use the proceeds from all borrowings under this Note solely for (A) interim financing for capital equipment prior to obtaining lease financing for such equipment, (B) leasehold improvements, tooling and other fixed assets in an aggregate amount not to exceed $5.3 million, (C) repayment of the Bridge Notes (as defined in the JTS Disclosure Schedule) in the aggregate principal amount of $2,005,000, and (D) working capital purposes. 7. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Note and the other Transaction Documents: (a) Failure to Pay. The Company shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest or other payment required under the terms of this Note or any other Transaction Document on the date due and such payment shall not have been made within five (5) days of Company's receipt of the Holder's written notice to Company of such failure to pay; or (b) Breaches of Certain Covenants. The Company or any of its Subsidiaries shall fail to observe or perform any covenant, obligation, condition or agreement set forth in Section 6(d), 6(f) or 6(j) of this Note; or (c) Breaches of Other Covenants. The Company or any of its Subsidiaries shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Note or the other Transaction Documents (other than those specified in Sections 7(a) and 7(b)) and (i) such failure shall continue for fifteen (15) days, or (ii) if such failure does not result from the payment of money or the failure to pay money and is not curable within such fifteen (15) day period, but is reasonably capable of cure within forty-five (45) days, either (A) such failure shall continue for forty-five (45) days or (B) the Company or its Subsidiary shall not have commenced a cure in a manner reasonably satisfactory to the Holder within the initial fifteen (15) day period; or (d) Representations and Warranties. Any representation, warranty, certificate, or other statement (financial or otherwise) made or furnished by or on behalf of the Company to the Holder in writing in connection with this Note or any of the other Transaction Documents, or as an inducement to the Holder to enter into this Note and the other Transaction Documents, shall be false, incorrect, -10- 11 incomplete or misleading in any respect when made or furnished, except any such false, incorrect, incomplete or misleading statement which will not result in a Material Adverse Effect on the Company; or (e) Other Payment Obligations. Except pursuant to the Company's Business Loan Agreement with Silicon Valley Bank and the capital equipment loan from Venture Lending and Leasing, Inc., each as described in the JTS Disclosure Schedule (as defined in the Merger Agreement), the Company or any of its Subsidiaries shall (i)(A) fail to make any payment when due under the terms of any bond, debenture, note or other evidence of Indebtedness, including the Senior Indebtedness, to be paid by such Person (excluding this Note and the other Transaction Documents but including any other evidence of Indebtedness of Company or any of its Subsidiaries to the Holder) and such failure shall continue beyond any period of grace provided with respect thereto, or (B) default in the observance or performance of any other agreement, term or condition contained in any such bond, debenture, note or other evidence of Indebtedness, and (ii) the effect of such failure or default is to cause, or permit the holder or holders thereof to cause, Indebtedness in an aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) or more to become due prior to its stated date of maturity, unless such acceleration shall have been rescinded and such failure to pay cured within thirty (30) days from the date of such acceleration; or (f) Voluntary Bankruptcy or Insolvency Proceedings. The Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing; or (g) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or any of its Subsidiaries or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or any of its Subsidiaries or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within sixty (60) days of commencement; or (h) Judgments. A final judgment or order for the payment of money in excess of Two Hundred Fifty Thousand Dollars ($250,000) (exclusive of amounts covered by insurance issued by an insurer not an affiliate of Company) shall be rendered against the Company or any of its Subsidiaries and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of the Company or any of its -11- 12 Subsidiaries and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy; or (i) Transaction Documents. Any Transaction Document (other than the Merger Agreement) or any material term thereof shall cease to be, or be asserted by the Company not to be, a legal, valid and binding obligation of Company enforceable in accordance with its terms or if the Liens of the Holder in any of the assets of Company or its Subsidiaries shall cease to be or shall not be valid and perfected Liens or the Company or any Subsidiary shall assert that such Liens are not valid and perfected Liens. 8. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in Sections 7(f) and 7(g)) and at any time thereafter during the continuance of such Event of Default, the Holder may, by written notice to the Company, declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence or existence of any Event of Default described in Sections 7(f) and 7(g), immediately and without notice, all outstanding Obligations payable by Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, the Holder may exercise any other right, power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both. 9. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of the Senior Indebtedness. (a) Insolvency Proceedings. If there shall occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, (i) no amount shall be paid by the Company in respect of the principal of, interest on or other amounts due with respect to this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of Holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. (b) Default on Senior Indebtedness. If there shall occur an event of default which has been declared in writing with respect to any Senior Indebtedness, as defined therein, or in the instrument under which it is outstanding, permitting the holder to accelerate the maturity thereof and the Holder shall have received written notice thereof from the holder of such Senior Indebtedness, then, unless and until -12- 13 such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note, unless within one hundred eighty (180) days after the happening of such event of default, the maturity of such Senior Indebtedness shall not have been accelerated. Not more than one notice may be given to Holder pursuant to the terms of this Section 9(b) during any 360 day period. (c) Further Assurances. By acceptance of this Note, the Holder agrees to execute and deliver customary forms of subordination agreement requested from time to time by holders of Senior Indebtedness, and as a condition to the Holder's rights hereunder, the Company may require that the Holder execute such forms of subordination agreement; provided that such forms shall not impose on the Holder terms less favorable than those provided herein and in the Security Agreement. (d) Other Indebtedness. No indebtedness which does not constitute Senior Indebtedness shall be senior in any respect to the indebtedness represented by this Note. (e) Subrogation. Subject to the payment in full of all Senior Indebtedness, the Holder shall be subrogated to the rights of the holder(s) of such Senior Indebtedness (to the extent of the payments or distributions made to the holder(s) of such Senior Indebtedness pursuant to the provisions of this Section 9) to receive payments and distributions of assets of the Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of this Note; and for purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the Holder would be entitled except for the provisions of this Section 9 shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. (f) No Impairment. Subject to the rights, if any, of the holders of Senior Indebtedness under this Section 9 to receive cash, securities or other properties otherwise payable or deliverable to the Holder, nothing contained in this Section 9 shall impair, as between the Company and the Holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to the Holder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent the Holder, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law. (g) Lien Subordination. Any Lien of the Holder, whether now or hereafter existing in connection with the amounts due under this Note, on any assets or property of the Company or any proceeds or revenues therefrom which the Holder may have at any time as security for any amounts due and obligations under this Note shall be subordinate to all Liens now or hereafter granted to a holder of Senior Indebtedness by Company or by law, notwithstanding the date, order or method of attachment or perfection of any such Lien or the provisions of any applicable law. (h) Reliance of Holders of Senior Indebtedness. The Holder, by its acceptance hereof, shall be deemed to acknowledge and agree that the foregoing subordination provisions are, and are -13- 14 intended to be, an inducement to and a consideration of each holder of Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the creation of the indebtedness evidenced by this Note, and each such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and holding, or in continuing to hold, such Senior Indebtedness. 10. CONVERSION. (a) Conversion by Holder. In the event that the Merger Agreement is terminated pursuant to Section 8(a), 8(b) or 8(d) (i) through 8(d)(iv) thereof or upon the occurrence of an Event of Default hereunder, then from and after such date, the Holder shall have the right, at such Holder's option, at any time prior to payment in full of the principal balance of this Note, to convert this Note, in accordance with the provisions of Section 10(c) hereof, in whole or in part, into fully paid and nonassessable shares of Series A Preferred, provided that the Holder shall provide at least thirty (30) days notice to the Company of Holder's election to convert this Note into shares of Series A Preferred upon the occurrence of an Event of Default. The number of shares of Series A Preferred into which this Note may be converted shall be determined by dividing the aggregate amount of this Note to be converted by the Conversion Price (as defined below) in effect at the time of such conversion. The initial "Conversion Price" shall be equal to $1.00 per share. The Conversion Price shall be subject to adjustment from time to time pursuant to Section 12 hereof and the terms of the Company's Certificate. (b) Conversion by the Company. In the event that the Merger Agreement is terminated pursuant to Section 8(c), 8(d)(v) or 8(d)(vi) thereof, the Company shall have the right, at the Company's option, to convert this Note, in accordance with the provisions of Section 10(c) hereof, in whole or in part, into fully paid and nonassessable shares of Series A Preferred. The number of shares of Series A Preferred into which this Note may be converted shall be determined by dividing the aggregate amount of this Note to be converted by the Conversion Price in effect at the time of such conversion. (c) Conversion Procedure. (i) Conversion Pursuant to Section 10(a). Before the Holder shall be entitled to convert this Note into shares of Series A Preferred, it shall surrender this Note, duly endorsed, at the office of the Company and shall give written notice, postage prepaid, to the Company at its principal corporate office, of the election to convert the same pursuant to Section 10(a), and shall state therein the amount of the unpaid principal amount of this Note to be converted and the name or names in which the certificate or certificates for shares of Series A Preferred are to be issued. The Company shall, as soon as practicable thereafter (but in any event within ten (10) days thereafter), issue and deliver to the Holder of this Note a certificate or certificates for the number of shares of Series A Preferred to which the Holder shall be entitled upon conversion (bearing such legends as are required by applicable state and federal securities laws), together with a replacement Note (if any principal amount is not converted) and any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note, including a check payable to Holder for any cash amounts payable as described in Section 10(d). The conversion shall be deemed to have been made immediately prior to the close of business on the date -14- 15 of the surrender of this Note, and the Person or Persons entitled to receive the shares of Series A Preferred upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Series A Preferred as of such date. (ii) Conversion Pursuant to Section 10(b). If this Note is converted by the Company pursuant to Section 10(b), written notice shall be delivered to the Holder notifying the Holder of the conversion to be effected, specifying the Conversion Price, the principal amount of the Note to be converted, the date on which such conversion is expected to occur and calling upon such Holder to surrender to Company, in the manner and at the place designated, the Note. Upon such conversion of this Note, the Holder shall surrender this Note, duly endorsed, at the principal office of Company. At its expense, the Company shall, as soon as practicable thereafter (but in any event within ten (10) days thereafter), issue and deliver to such Holder a certificate or certificates for the number of shares to which Holder shall be entitled upon such conversion (bearing such legends as are required by applicable state and federal securities laws), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note, including a check payable to the Holder for any cash amounts payable as described in Section 10(d). Any conversion of this Note pursuant to Section 10(b) shall be deemed to have been made immediately prior to the closing of the issuance and sale of shares as described in Section 10(b) and on and after such date the Person entitled to receive the shares issuable upon such conversion shall be treated for all purpose as the record Holder of such shares as of such date. (d) Fractional Shares; Interest; Effect of Conversion. No fractional shares shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to the Holder upon the conversion of this Note, the Company shall pay to the Holder an amount equal to the product obtained by multiplying the Conversion Price by the fraction of a share not issued pursuant to the previous sentence. In addition, the Company shall pay to the Holder any interest accrued on the amount converted and on the amount to be paid to the Company pursuant to the previous sentence. Upon conversion of this Note in full and the payment of the amounts specified in this Section 10(d), the Company shall be forever released from all its obligations and liabilities under this Note. 11. ISSUANCES OF WARRANTS. In the event that the Holder elects to convert all or any portion of this Note into shares of Series A Preferred pursuant to Section 10(a) hereof, or in the event the Company elects to convert all or any portion of this Note into shares of Series A Preferred pursuant to Section 10(b) hereof the Company hereby agrees to issue to the Holder warrants to purchase shares of Series A Preferred (the "Warrant") as set forth below: (a) No Warrant shall be issued if the principal amount of this Note to be converted together with any principal amount of this Note previously converted is less than $5,000,001. (b) If the principal amount of this Note to be converted together with any principal amount of this Note previously converted is more than $5,000,000, the Company shall issue to the Holder concurrent with the issuance of the shares of Series A Preferred to be issued upon such conversion, a Warrant to purchase up to 7,500,000 shares of Series A Preferred. The number of shares subject to the first Warrant to be issued shall be determined by multiplying 7,500,000 times a fraction, the numerator -15- 16 of which is the amount by which the aggregate principal amount to be converted exceeds $5,000,000 and the denominator of which is $20,000,000. The number of shares subject to any subsequent Warrant to be issued shall be determined by multiplying 7,500,000 times a fraction, the numerator of which is the aggregate principal amount to be converted and the denominator of which is $20,000,000. (c) Each Warrant to be issued by the Company pursuant to this Section 11 shall have an exercise price of $2.00 per share, a term of five (5) years and such other terms as are set forth in the form of Warrant attached hereto as Exhibit A. (d) The shares of Series A Preferred issuable upon the exercise of any Warrants issued pursuant to this Section 11 shall be entitled to registration rights which are pari passu with the registration rights held by the holders of the Company's Series A Preferred Stock. 12. CONVERSION PRICE ADJUSTMENTS. (a) Adjustments for Stock Splits and Subdivisions. In the event the Company should at any time or from time to time after the date of issuance hereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Series A Preferred or the determination of holders of Series A Preferred entitled to receive a dividend or other distribution payable in additional shares of Series A Preferred or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Series A Preferred (hereinafter referred to as "Series A Preferred Equivalents") without payment of any consideration by such holder for the additional shares of Series A Preferred or the Series A Preferred Equivalents (including the additional shares of Series A Preferred issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of this Note shall be appropriately decreased so that the number of shares of Series A Preferred issuable upon conversion of this Note shall be increased in proportion to such increase of outstanding shares. (b) Adjustments for Reverse Stock Splits. If the number of shares of Series A Preferred outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Series A Preferred, then, following the record date of such combination, the Conversion Price for this Note shall be appropriately increased so that the number of shares of Series A Preferred issuable on conversion hereof shall be decreased in proportion to such decrease in outstanding shares. (c) Conversion or Redemption of Series A Preferred Stock. Should all of Company's Series A Preferred Stock be, or if outstanding would be, at any time prior to full payment of this Note, redeemed or converted into shares of Company's Common Stock in accordance with the Certificate, then this Note shall immediately become convertible into that number of shares of Company's Common Stock equal to the number of shares of the Common Stock that would have been received if this Note had been converted in full and the Series A Preferred Stock received thereupon had been simultaneously converted immediately prior to such event, and the Conversion Price shall be immediately adjusted to equal the quotient obtained by dividing (x) the aggregate Conversion Price of the maximum number of shares of Series A Preferred Stock into which this Note was convertible immediately prior to such conversion or -16- 17 redemption, by (y) the number of shares of Common Stock for which this Note is convertible immediately after such conversion or redemption. (d) Notices of Record Date, etc. In the event of: (i) Any taking by the Company of a record of the holders of any class of securities of the Company for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate as that of the last such cash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or (ii) Any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to any other Person or any consolidation or merger involving the Company; or (iii) Any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will mail to Holder of this Note at least ten (10) days prior to the earliest date specified therein, a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right; and (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to become effective and the record date for determining stockholders entitled to vote thereon. (e) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Series A Preferred solely for the purpose of effecting the conversion of this Note such number of its shares of Series A Preferred (and shares of its Common Stock for issuance on conversion of such Series A Preferred) as shall from time to time be sufficient to effect the conversion of the Note; and if at any time the number of authorized but unissued shares of Series A Preferred (and shares of its Common Stock for issuance on conversion of such Series A Preferred) shall not be sufficient to effect the conversion of the entire outstanding principal amount of this Note, without limitation of such other remedies as shall be available to the holder of this Note, the Company will use its best efforts to take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized but unissued shares of Series A Preferred (and shares of its Common Stock for issuance on conversion of such Series A Preferred) to such number of shares as shall be sufficient for such purposes. 13. Successors and Assigns. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Holder or, prior to the termination of the Merger Agreement, by the Holder without the prior written consent of the Company. Subject to the foregoing and the -17- 18 restrictions on transfer described in Section 15 below, the rights and obligations of the Company and the Holder shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties. 14. WAIVER AND AMENDMENT. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the Holder. 15. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION HEREOF. With respect to any offer, sale or other disposition of this Note or any securities into which this Note may be converted, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of the Holder's counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification under any federal or state law then in effect. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested and subject to Section 13, the Company, as promptly as practicable, shall notify the Holder that the Holder may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 15 that the opinion of counsel for the Holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 16. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier or personal delivery, addressed (i) if to the Holder, at such Holder's address set forth at the end of this Agreement, or at such other address as such Holder shall have furnished the Company in writing, or (ii) if to the Company, at its address set forth at the end of this Agreement, or at such other address as the Company shall have furnished to the Holder in writing. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when received. 17. PAYMENT. Payment shall be made in lawful tender of the United States. 18. DEFAULT RATE; Usury. During any period in which an Event of Default has occurred and is continuing, the Company shall pay interest on the unpaid principal balance hereof at a rate per annum equal to the rate otherwise applicable hereunder plus two percent (2%). In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note. -18- 19 19. EXPENSES; WAIVERS. If action is instituted to collect this Note, the Company promises to pay all costs and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred in connection with such action. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. The Company shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by the Holder with respect to the enforcement or attempted enforcement of any of the obligations of the Company to the Holder under the Transaction Documents or in preserving any of the Holder's rights and remedies (including, without limitation, all such fees and expenses incurred in connection with any "workout" or restructuring affecting the Transaction Documents or the obligations thereunder or any bankruptcy or similar proceeding involving Company or any of its Subsidiaries). 20. FINANCING STATEMENTS. The Company agrees to execute all UCC-1 financing statements and other documents and instruments which the Holder may reasonably request to perfect its security interest in the collateral described in the Security Agreement. 21. REPLACEMENT NOTE. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it; or (b) in the case of mutilation, upon surrender thereof; the Company, at its expense, will execute and deliver in lieu thereof a new Note executed in the same manner as the Note being replaced, in the same principal amount as the unpaid principal amount of such Note and dated the date to which interest shall have been paid on such Note or, if no interest shall have yet been so paid, dated the date of such Note. 22. GOVERNING LAW. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California or of any other state. IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above. JT STORAGE, INC. a Delaware corporation By: /s/ D.T. Mitchell ----------------------------- Title: -------------------------- Accepted and Agreed to: -19- 20 ATARI CORPORATION a Nevada corporation By: /s/ Sam Tramiel ------------------------------- Title: President ---------------------------- -20- 21 SECURITY AGREEMENT This SECURITY AGREEMENT, dated as of February 12, 1996, is executed by JT Storage, Inc., a Delaware corporation ("Debtor"), in favor of Atari Corporation, a Nevada corporation ("Secured Party"). RECITALS A. Debtor has executed a Subordinated Secured Convertible Promissory Note (the "Note") in favor of Secured Party. Terms not otherwise defined herein shall have the meanings given to such terms in the Note. B. In order to induce Secured Party to extend the credit evidenced by the Note, Debtor has agreed to enter into this Security Agreement and to grant Secured Party the security interest in the Collateral described below. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor hereby agrees with Secured Party as follows: 1. Definitions and Interpretation. When used in this Security Agreement, the following terms shall have the following respective meanings: "Account Debtor" shall have the meaning given to that term in Section 3 hereof. "Collateral" shall have the meaning given to that term in Section 2 hereof. "Equipment" shall have the meaning given to that term in Attachment 1 hereto. "Inventory" shall have the meaning given to that term in Attachment 1 hereto. "Obligations" shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Debtor to the Secured Party of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of the Note and the other Transaction Documents, including, all interest, fees, charges, expenses, reasonable attorneys' fees and costs and accountants' fees and costs chargeable to and payable by Debtor hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. "Receivables" shall have the meaning given to that term in Attachment 1 hereto. 22 "UCC" shall mean the Uniform Commercial Code as in effect in the State of California from time to time. All capitalized terms not otherwise defined herein shall have the respective meanings given in the Note. Unless otherwise defined herein, all terms defined in the UCC shall have the respective meanings given to those terms in the UCC. 2. Grant of Security Interest. As security for the Obligations, Debtor hereby pledges and assigns to Secured Party and grants to Secured Party a security interest in all right, title and interests of Debtor in and to the property described in Attachment 1 hereto (collectively and severally, the "Collateral"), which Attachment 1 is incorporated herein by this reference. 3. Representations and Warranties. Debtor represents and warrants to Secured Party that (a) Debtor is the owner of the Collateral (or, in the case of after-acquired Collateral, at the time Debtor acquires rights in the Collateral, will be the owner thereof) and that no other Person has (or, in the case of after-acquired Collateral, at the time Debtor acquires rights therein, will have) any right, title, claim or interest (by way of Lien or otherwise) in, against or to the Collateral, other than Permitted Liens; (b) Secured Party has (or in the case of after-acquired Collateral, at the time Debtor acquires rights therein, will have) a perfected security interest in the Collateral to the extent that Lien can be perfected by the filing of a UCC-1 financing statement, except for Permitted Liens; (c) all Inventory has been (or, in the case of hereafter produced Inventory, will be) produced in compliance with applicable laws, including the Fair Labor Standards Act; (d) each Receivable is genuine and enforceable against the party obligated to pay the same (an "Account Debtor"); and (e) all information set forth in Attachment 2 hereto, when delivered, shall be true and correct. 4. Covenants Relating to Collateral. Debtor hereby agrees from time to time (a) to perform all acts that may be necessary to maintain, preserve, protect and perfect the Collateral, the Lien granted to Secured Party therein and the first priority of such Lien, except for Permitted Liens; (b) not to use or permit any Collateral to be used (i) in violation of any provision of any Transaction Document, (ii) in violation of any applicable law, rule or regulation, or (iii) in violation of any policy of insurance covering the Collateral; (c) to pay promptly when due all taxes and other governmental charges, all Liens and all other charges now or hereafter imposed upon or affecting any Collateral except for the Permitted Liens; (d) without prior written notice to Secured Party, (i) not to change Debtor's name or place of business (or, if Debtor has more than one place of business, its chief executive office), or the office in which Debtor's records relating to Receivables are kept, (ii) not to keep Collateral consisting of chattel paper at any location other than its chief executive office set forth in item 1 of Attachment 2 hereto, and (iii) not to keep Collateral consisting of Equipment or Inventory at any location other than the locations set forth in item 6 of Attachment 2 hereto, (e) to deposit, or cause to be deposited, all remittances and checks received with respect to Receivables to an account of Debtor at a bank or other depository institution which has been given notice of Secured Party's security interest in such account in substantially the form of the Notice of Security Interest which is attached hereto as Attachment 3, and in which account Secured Party has a perfected security interest; (f) to procure, execute and deliver from time to time any endorsements, assignments, financing statements and other writings reasonably deemed necessary or appropriate by Secured Party to perfect, maintain and protect its Lien hereunder and the priority thereof and, at Secured Party's request, to deliver promptly to Secured Party all originals of Collateral consisting of instruments other than negotiable instruments received in the ordinary course of business; (g) to appear in and defend any action or proceeding which may affect its title to or Secured Party's interest in the Collateral; (h) if Secured Party gives value to enable Debtor to acquire rights in or the use of any Collateral, to use such value for such purpose; (i) to keep separate, accurate and complete records of the Collateral and to provide Secured Party with such records and such other reports and information relating to the Collateral as Secured Party may -2- 23 reasonably request from time to time; (j) except as permitted under the terms of the Note, not to surrender or lose possession of (other than to Secured Party), sell, encumber, lease, rent, or otherwise dispose of or transfer any Collateral or right or interest therein, and to keep the Collateral free of all Liens except Permitted Liens; (k) upon request by Secured Party, to type, print or stamp conspicuously on the face of all original copies of all Collateral consisting of chattel paper a legend satisfactory to Secured Party indicating that such chattel paper is subject to the security interest granted hereby; (m) to collect, enforce and receive delivery of the Receivables in accordance with past practice until otherwise notified by Secured Party; (n) to comply with all material requirements of law relating to the production, possession, operation, maintenance and control of the Collateral (including the Fair Labor Standards Act); and (o) to complete and deliver Attachment 2 to Secured Party as promptly as practicable after the date hereof, and in any event within ten (10) days following the date hereof. 5. Authorized Action by Agent. Debtor hereby irrevocably appoints Secured Party as its attorney-in-fact and agrees that Secured Party may perform (but Secured Party shall not be obligated to and shall incur no liability to Debtor or any third party for failure so to do) any act which Debtor is obligated by this Security Agreement to perform, and to exercise such rights and powers as Debtor might exercise with respect to the Collateral, including the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) insure, process and preserve the Collateral; (d) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; (e) pay any Indebtedness of Debtor relating to the Collateral; and (f) execute UCC financing statements and other documents, instruments and agreements required hereunder; provided, however, that Secured Party shall not exercise any such powers prior to the occurrence of an Event of Default and shall only exercise such powers during the continuance of an Event of Default. Debtor agrees to reimburse Secured Party upon demand for any reasonable costs and expenses, including reasonable attorneys' fees, Secured Party may incur while acting as Debtor's attorney-in-fact hereunder, all of which costs and expenses are included in the Obligations. It is further agreed and understood between the parties hereto that such care as Secured Party gives to the safekeeping of its own property of like kind shall constitute reasonable care of the Collateral when in Secured Party's possession; provided, however, that Secured Party shall not be required to make any presentment, demand or protest, or give any notice and need not take any action to preserve any rights against any prior party or any other person in connection with the Obligations or with respect to the Collateral. 6. Default and Remedies. Debtor shall be deemed in default under this Security Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the Note). Upon the occurrence and during the continuance of any such Event of Default, Secured Party shall have the rights of a secured creditor under the UCC, all rights granted by this Security Agreement and by law, including the right to: (a) require Debtor to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party; and (b) prior to the disposition of the Collateral, store, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent Secured Party deems appropriate and in connection with such preparation and disposition, without charge, use any trademark, trade name, copyright, patent or technical process used by Debtor. Debtor hereby agrees that ten (10) days' notice of any intended sale or disposition of any Collateral is reasonable. In furtherance of Secured Party's rights hereunder, Debtor hereby grants to Secured Party an irrevocable, non-exclusive license (exercisable without royalty or other payment by Secured Party, but only in connection with the exercise of remedies hereunder) to use, license or sublicense any patent, trademark, trade name, copyright or other intellectual property in which -3- 24 Debtor now or hereafter has any right, title or interest together with the right of access to all media in which any of the foregoing may be recorded or stored. 7. Miscellaneous. (a) Notices. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Debtor or Secured Party under this Security Agreement shall be by telecopy or in writing and telecopied, mailed or delivered to each party at telecopier number or its address set forth below (or to such other telecopy number or address as the recipient of any notice shall have notified the other in writing). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the Business Day following the deposit with such service; (b) when mailed, by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of receipt. Secured Party: Atari Corporation 1196 Borregas Avenue Sunnyvale, CA 94089-1302 Attn: Jack Tramiel Telephone No.: (408) 745-2000 Telecopier No.: (408) 745-8800 Debtor: JT Storage, Inc. 166 Baypointe Parkway San Jose, CA 95134 Attn: David T. Mitchell Telephone No.: (408) 468-1800 Telecopier No.: (408) 468-1619 (b) Nonwaiver. No failure or delay on Secured Party's part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) Amendments and Waivers. This Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Debtor and Secured Party. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) Assignments. This Security Agreement shall be binding upon and inure to the benefit of Secured Party and Debtor and their respective successors and assigns; provided, however, that Debtor may not sell, assign or delegate its rights and obligations hereunder without the prior written consent of Secured Party, and prior to the termination of the Merger Agreement, Secured Party may not sell, assign, or delegate its rights and obligations hereunder without the written consent of Debtor. (e) Cumulative Rights, etc. The rights, powers and remedies of Secured Party under this Security Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any applicable law, rule or regulation of any Governmental Authority, any Transaction Document or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or -4- 25 concurrently without impairing Secured Party's rights hereunder. Debtor waives any right to require Secured Party to proceed against any Person or to exhaust any Collateral or to pursue any remedy in Secured Party's power. (f) Payments Free of Taxes, Etc. All payments made by Debtor under this Security Agreement shall be made by Debtor free and clear of and without deduction for any and all present and future taxes, levies, charges, deductions and withholdings. In addition, Debtor shall pay upon demand any stamp or other taxes, levies or charges of any jurisdiction with respect to the execution, delivery, registration, performance and enforcement of this Security Agreement. Upon request by Secured Party, Debtor shall furnish evidence satisfactory to Secured Party that all requisite authorizations and approvals by, and notices to and filings with, governmental authorities and regulatory bodies have been obtained and made and that all requisite taxes, levies and charges have been paid. (g) Partial Invalidity. If at any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (h) Expenses. Debtor shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Secured Party in connection with custody, preservation or sale of, or other realization on, any of the Collateral or the enforcement or attempt to enforce any of the Obligations which is not performed as and when required by this Security Agreement. (i) Headings. Headings in this Security Agreement and each of the other Transaction Documents are for convenience of reference only and are not part of the substance hereof or thereof. (j) Plural Terms. All terms defined in this Security Agreement or any other Transaction Document in the singular form shall have comparable meanings when used in the plural form and vice versa. (k) Construction. Each of this Security Agreement and the other Transaction Documents is the result of negotiations among, and has been reviewed by, Debtor, Secured Party and their respective counsel. Accordingly, this Security Agreement and the other Transaction Documents shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Debtor or Secured Party. (l) Entire Agreement. This Security Agreement and each of the other Transaction Documents, taken together, constitute and contain the entire agreement of Debtor and Secured Party and supersede any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof. (m) Other Interpretive Provisions. References in this Security Agreement and each of the other Transaction Documents to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Security Agreement or any other Transaction Document shall refer to this Security Agreement or such other -5- 26 Transaction Document, as the case may be, as a whole and not to any particular provision of this Security Agreement or such other Transaction Document, as the case may be. The words "include" and "including" and words of similar import when used in this Security Agreement or any other Transaction Document shall not be construed to be limiting or exclusive. (n) Governing Law. This Security Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules (except to the extent governed by the UCC). (o) Jury Trial. EACH OF DEBTOR AND SECURED PARTY, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT. IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be executed as of the day and year first above written. JT STORAGE, INC., a Delaware corporation By: /s/ D. T. Mitchell ------------------------- Name: Title: AGREED: ATARI CORPORATION, a Nevada corporation By: /s/ Sam Tramiel -------------------------- Name: Title: -6- 27 ATTACHMENT 1 TO SECURITY AGREEMENT All right, title and interest of Debtor now owned or hereafter acquired in and to the following: (a) All equipment and fixtures (including, without limitation, furniture, vehicles and other machinery and office equipment), together with all additions and accessions thereto and replacements therefor (collectively, the "Equipment"); (b) All inventory (including, without limitation, (i) all raw materials, work in process and finished goods and (ii) all such goods which are returned to or repossessed by Debtor), together with all additions and accessions thereto, replacements therefor, products thereof and documents therefor (collectively, the "Inventory"); (c) All accounts, chattel paper, contract rights and rights to the payment of money (collectively, the "Receivables"); (d) All general intangibles, including, without limitation, (i) customer and supplier lists and contracts, books and records, insurance policies, tax refunds, contracts for the purchase of real or personal property; (ii) all patents, copyrights, trademarks, trade names, service marks and other intellectual property rights, (iii) all licenses to use, applications for, and other rights to, such patents, copyrights, trademarks, trade names and service marks, and (iv) all goodwill of Debtor; (e) All deposit accounts, money, certificated securities (but excluding securities of foreign Subsidiaries), uncertificated securities, instruments and documents; and (f) All proceeds of the foregoing (including, without limitation, whatever is receivable or received when Collateral or proceeds is sold, collected, exchanged, returned, substituted or otherwise disposed of, whether such disposition is voluntary or involuntary, including rights to payment and return premiums and insurance proceeds under insurance with respect to any Collateral, and all rights to payment with respect to any cause of action affecting or relating to the Collateral). 28 ATTACHMENT 2 TO SECURITY AGREEMENT DEBTOR PROFILE 1. The legal name of Debtor is and its the address of its chief executive office is: JT Storage, Inc.. 2. Debtor was incorporated on _____________, 19__ in the state of Delaware. Since its incorporation Debtor has had the following legal names (other than its current legal name): Date Debtor's Name Prior Name Was Changed From Such Name ---------- -------------------------- 3. Debtor does business under the following trade names: Trade Name Is This Name Registered? Registration No. Registration Date ---------- ------------------------ ---------------- ----------------- 4. Since Debtor's incorporation the following companies have been merged into Debtor (provide names, dates and brief description of transactions): 5. The following assets of Debtor were acquired in a bulk sale or another transaction not in the ordinary course of business of the seller (provide description of collateral, date and description of transaction, and name of seller): 29 6. Debtor has the following places of business: Brief Description Address Owner of Location of Assets and Value ------- ----------------- ------------------- 7. Debtor has assets at the following other locations that are not places of business of Debtor: Brief Description Address Owner of Location of Assets and Value ------- ----------------- ------------------- 8. The following locations listed in items 6 and 7 are public warehouses issuing warehouse receipts: Brief Description Address Owner of Location of Assets and Value ------- ----------------- ------------------- 9. Debtor had the following other locations within the past four months: Brief Description Address Owner of Location of Assets and Value ------- ----------------- ------------------- 2-2 30 10. Debtor imports assets from outside the United States through the following ports of entry (list location by state and county): 11. The following Persons have possession of inventory of Debtor for the purpose of processing or finishing it: Name and Address Processing Services Description of Inventory ---------------- ------------------- ------------------------ 12. Debtor is qualified to do business in the following states: 13. Does Debtor regularly receive letters of credit from customers to secure payments of sums owed to Debtor? Yes ____. No ____ . 14. Debtor holds notes payable from the following persons: Name of Obligor Amount --------------- ------ 15. Does Debtor regularly have accounts receivable due from, or contracts with, the United States government or any agency or department thereof? Yes ____. No ____. 2-3 31 If yes, indicate the percentage of Debtor's total outstanding accounts receivable that are due from the United States government or such agency or department: _____% 16. Does Debtor regularly receive advance deposits from customers for goods not yet delivered to such customers? Yes ____. No ____. 17. Debtor's federal employer identification number is: _________________ 18. Debtor's assets are subject to the following security interest of Persons other than the Secured Party: Assets Name of Secured Party ------ --------------------- 19. The following tax assessments are currently outstanding and unpaid: Assessing Amount and Description --------- ---------------------- 20. Debtor has directly or indirectly guaranteed the following obligations of third parties: Secured Party Amount Debtor ------------- ------ ------ 21. Debtor owns the following material intellectual property rights (including patents, trademarks and copyrights, whether or not registered): 2-4 32 22. The following is a list of all software or other copyrighted material which is licensed to third parties and generates accounts receivable: 23. Debtor has the following subsidiaries (list jurisdiction and date of incorporation, federal employer identification number, type and value of assets): 2-5 33 ATTACHMENT 3 TO SECURITY AGREEMENT NOTICE OF SECURITY INTEREST IN DEPOSIT ACCOUNT February __, 1996 [Name of Depositary Bank] [Address of Depositary Bank] ____________________________ ____________________________ JT Storage, Inc. ("Debtor") and Atari Corporation ("Secured Party"), under that certain Security Agreement dated as of February __, 1996, executed by Debtor in favor of Secured Party, hereby notify you that Debtor has granted to Secured Party a security interest in all deposit accounts maintained by Debtor with you including, without limitation, the deposit accounts described below: Account Number Depositor's Name Account Type -------------- ---------------- ------------ Debtor and Secured Party authorize you to continue to allow Debtor to make deposits to, draw checks upon and otherwise withdraw funds from such deposit accounts (the "Deposit Accounts") without the consent of Secured Party until Secured Party shall instruct you otherwise. Debtor has authorized Secured Party to inform you when an Event of Default has occurred and is continuing and at such time instruct you to cease to permit any further payments or withdrawals from the Deposit Accounts by Debtor and/or to pay any or all amounts in the Deposit Accounts to Secured Party. 34 Debtor authorizes and directs you to comply with all such instructions received by you from Secured Party without further inquiry on your part and hereby agrees to indemnify and hold harmless you and your officers, directors and employees from and for any compliance by you with such instructions. JT STORAGE, INC. By: _____________________________ Name: Title: ATARI CORPORATION By: _____________________________ Name: Title: 3-2 35 ACKNOWLEDGMENT AND AGREEMENT OF DEPOSITARY BANK The undersigned depositary bank hereby acknowledges receipt of the above notice and agrees with Debtor and Secured Party to comply with any instruction it may receive from Secured Party in accordance therewith. The undersigned confirms to Secured Party that the information set forth above regarding the Deposit Accounts is accurate, that such Deposit Accounts are currently open and that the undersigned has no prior notice of any other security interest, lien or interest in such Deposit Accounts. _________________________________ By: _____________________________ Name: ___________________________ Title: __________________________ EX-10.16 36 STOCK PURCHASE AGREEMENT/LUNENBURG 4/4/96 1 EXHIBIT 10.16 STOCK PURCHASE AGREEMENT DATED AS OF APRIL 4, 1996 BETWEEN LUNENBURG S.A. AND JT STORAGE, INC. 2 TABLE OF CONTENTS
PAGE ARTICLE I PURCHASE AND SALE OF HOLDING COMPANY STOCK . . . . . . . . . . . . . . . 1 1.1 Purchase and Sale of Holding Company Stock . . . . . . . . . . . . 1 1.2 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER RELATING TO THE HOLDING COMPANY STOCK AND MODULER SHARES . . . . . . . . 2 2.1 Due Authorization and Execution . . . . . . . . . . . . . . . . . 2 2.2 Ownership of Stock . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Capitalization and Corporate Records. . . . . . . . . . . . . . . 2 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER RELATING TO THE PANAMA HOLDING COMPANIES AND MODULER . . . . . . . . . . 3 3.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2 Dividends and Distributions. . . . . . . . . . . . . . . . . . . . 3 3.3 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 3 3.4 Financial Condition of the Panama Holding Companies. . . . . . . . 4 3.5 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . 4 3.6 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . 4 3.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.9 Consents, Violations and Authorizations . . . . . . . . . . . . . 5 3.10 Agreements, Contracts, Commitments and Leases . . . . . . . . . . 6 3.11 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.12 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.13 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . 8 3.14 Proprietary Property . . . . . . . . . . . . . . . . . . . . . . . 8 3.15 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.16 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . 9 3.17 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . 9 3.18 Employees and Labor Contracts . . . . . . . . . . . . . . . . . . 9 3.19 Fees, Commissions and Expenses . . . . . . . . . . . . . . . . . . 10 3.20 Environmental Laws and Regulations. . . . . . . . . . . . . . . . 10 3.21 Product Warranties . . . . . . . . . . . . . . . . . . . . . . . . 11 3.22 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . 11 3.23 Conditions Affecting Moduler . . . . . . . . . . . . . . . . . . . 11 3.24 Acquisition for Investment . . . . . . . . . . . . . . . . . . . . 11 3.25 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 12
i 3 TABLE OF CONTENTS (CONT'D)
PAGE ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 Due Authorization and Execution . . . . . . . . . . . . . . . . . 12 4.2 Organization and Capitalization of the Buyer. . . . . . . . . . . 12 4.3 Financial Information . . . . . . . . . . . . . . . . . . . . . . 13 4.4 Consents, Violations and Authorizations . . . . . . . . . . . . . 13 4.5 Fees, Commissions and Expenses . . . . . . . . . . . . . . . . . . 14 4.6 Purchase for Investment . . . . . . . . . . . . . . . . . . . . . 14 4.7 Shareholder Agreements . . . . . . . . . . . . . . . . . . . . . . 14 4.8 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.9 Known Operations. . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE V CONDUCT OF BUSINESS PENDING CLOSING . . . . . . . . . . . . . . . . . . . 14 5.1 Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.2 No Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.3 No Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.4 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.5 Mortgages, Liens and Other Encumbrances . . . . . . . . . . . . . 15 5.6 Waiver of Rights . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.7 Material Agreements . . . . . . . . . . . . . . . . . . . . . . . 15 5.8 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . 15 5.9 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.10 No Stock Issuances . . . . . . . . . . . . . . . . . . . . . . . . 15 5.11 No Charter Amendments . . . . . . . . . . . . . . . . . . . . . . 15 5.12 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.13 Actions Taken at the Direction of Buyer . . . . . . . . . . . . . 16 ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF THE BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.1 Representations and Warranties of the Seller . . . . . . . . . . . 16 6.2 Opinion of Counsel for the Seller . . . . . . . . . . . . . . . . 16 6.3 Absence of Litigation or Investigation . . . . . . . . . . . . . . 16 6.4 Requisite Approvals . . . . . . . . . . . . . . . . . . . . . . . 16 6.5 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . 16
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PAGE ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7.1 Representations and Warranties of the Buyer . . . . . . . . . . . 17 7.2 Opinion of Counsel for the Buyer . . . . . . . . . . . . . . . . . 17 7.3 Absence of Litigation or Investigation . . . . . . . . . . . . . . 17 7.4 Requisite Approvals . . . . . . . . . . . . . . . . . . . . . . . 17 7.5 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . 17 7.6 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VIII SURVIVAL; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . 17 8.1 Survival of Representations and Warranties and Related Agreements 17 8.2 General Indemnification . . . . . . . . . . . . . . . . . . . . . 18 8.3 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.4 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE IX ADDITIONAL COVENANTS OF THE PARTIES . . . . . . . . . . . . . . . . . . . 19 9.1 Noncompetition . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.2 Access by Buyer and Agents . . . . . . . . . . . . . . . . . . . . 19 9.3 Availability of Records to the Seller . . . . . . . . . . . . . . 19 ARTICLE X CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.2 Deliveries at Closing . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE XI TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 11.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 11.2 Procedure Upon Termination . . . . . . . . . . . . . . . . . . . . 20 ARTICLE XII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 12.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 12.2 Certain Filings and Consents . . . . . . . . . . . . . . . . . . . 21 12.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 21 12.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 12.5 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PAGE 12.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 22 12.7 Amendment and Modification . . . . . . . . . . . . . . . . . . . 22 12.8 Waiver of Compliance . . . . . . . . . . . . . . . . . . . . . . 22 12.9 Gender; Number . . . . . . . . . . . . . . . . . . . . . . . . . 22 12.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 23 12.11 Arbitration of Disputes . . . . . . . . . . . . . . . . . . . . 23 12.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 23
iv 6 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of April 4, 1996, is entered into between LUNENBURG S.A., a Panama corporation (the "Seller"), and JT STORAGE, INC., a Delaware corporation (the "Buyer"). This Agreement sets forth the terms and conditions upon which the Seller will sell to the Buyer, and the Buyer will purchase from the Seller, all of the outstanding shares of capital stock of (1) Asperal Holdings, Inc., a Panama corporation ("Asperal"), consisting of an aggregate of 500 shares of capital stock (such shares of Asperal being sold pursuant to this Agreement being sometimes herein referred to as the "Asperal Stock"), and (2) Dexar Holdings Inc., a Panama corporation ("Dexar"), consisting of 500 shares of capital stock (such shares of Dexar being sold pursuant to this Agreement being sometimes herein referred to as the "Dexar Stock"). Asperal and Dexar are sometimes herein collectively referred to as the "Panama Holding Companies," and the Asperal Stock and Dexar Stock is sometimes herein referred to collectively as the "Holding Company Stock." In consideration of the mutual agreements contained herein, intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF HOLDING COMPANY STOCK 1.1 PURCHASE AND SALE OF HOLDING COMPANY STOCK. Subject to the terms and conditions of this Agreement, at the Closing (as defined in Section 10.1), the Seller agrees to sell, transfer, and deliver the Holding Company Stock to the Buyer, and the Buyer agrees to purchase the Holding Company Stock from the Seller. 1.2 CONSIDERATION. The consideration for the sale, assignment, transfer and delivery of the Holding Company Stock to Buyer (the "Purchase Price") shall be: (a) 1,911,673 shares (the "JTS Shares") of the Series A Preferred Stock, par value $.000001 per share (the "JTS Preferred"), of the Buyer; (b) a warrant to purchase 750,000 shares of the Common Stock of the Buyer (the "JTS Common Stock"), par value $.000001 per share, at an exercise price of $0.25 per share, in the form of Exhibit A hereto and subject to the terms and conditions thereof (the "JTS Warrant"); and (c) Buyer's agreement not to compete set forth in Section 9.1 below. 1 7 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER RELATING TO THE HOLDING COMPANY STOCK AND MODULER SHARES The Seller represents and warrants to and agrees with the Buyer that: 2.1 DUE AUTHORIZATION AND EXECUTION. The Seller has the necessary power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Seller and, assuming due execution and delivery by the Buyer, constitutes a valid and binding obligation of the Seller enforceable against Seller in accordance with its terms. 2.2 OWNERSHIP OF STOCK. The Seller is the lawful record and beneficial owner of the Holding Company Stock. Asperal and Dexar are each the lawful record and beneficial owner of 90,000 shares, rsp. 10/-, of Moduler Electronics (India) Pvt. Ltd. ("Moduler"). Such shares of outstanding capital stock of Moduler (being 180,000 shares in the aggregate and sometimes herein referred to as the "Moduler Shares") presently constitute 90% of the outstanding capital stock of Moduler, with the balance of the outstanding capital stock of Moduler consisting of 20,000 shares of capital stock, rsp. 10/-, owned of record by the persons identified in a schedule delivered by Seller to the Buyer prior to the date hereof. All of the Holding Company Stock and the Moduler Shares are duly and validly issued, fully paid and nonassessable, are free and clear of all liens, encumbrances, security agreements, equities, options, charges, restrictions and claims of every kind, and the Seller has full legal right, power and authority to sell, transfer and deliver the Holding Company Stock in accordance with the terms and subject to the conditions of this Agreement. The delivery to the Buyer of the Holding Company Stock pursuant to this Agreement will transfer to the Buyer valid title thereto, free and clear of any and all liens and adverse claims. 2.3 CAPITALIZATION AND CORPORATE RECORDS. The authorized capitalization of Asperal consists of 500 shares of capital stock, of which all 500 shares are issued and outstanding consisting solely of the Asperal Stock held by the Seller. The authorized capitalization of Dexar consists of 500 shares of capital stock, of which all 500 shares are issued and outstanding consisting solely of the Dexar Stock held by the Seller. The authorized capitalization of Moduler consists of 200,000 shares of capital stock, rsp. 10/-, of which all 200,000 shares are issued and outstanding and held as described herein. There are no outstanding rights, options, warrants, subscription rights, conversion rights or other agreements or commitments for the purchase or acquisition from either of the Panama Holding Companies or Moduler of any shares of their respective capital stock or otherwise obligating either of the Panama Holding Companies or Moduler to issue any additional shares of its capital stock of any class. There are no preemptive rights to purchase new issuances of the capital stock of either of the Panama Holding Companies or Moduler nor are there any options or rights to purchase, or any rights of first refusal, with respect to the Holding Company Stock or the Moduler Shares. The Seller has delivered to the Buyer true and complete copies of the Articles of Incorporation (or equivalent charter document) and Bylaws (collectively, the "Charter Documents") of each of the Panama Holding Companies and Moduler, as currently in effect, all stock issuance and transfer records 2 8 of each of the Panama Holding Companies and Moduler, and all written records reflecting proceedings of the Board of Directors and shareholders of each of the Panama Holding Companies and Moduler, including actions taken by written consent (such Charter Documents, stock records and written records of corporate proceedings are herein referred to as the "Corporate Records"). ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER RELATING TO THE PANAMA HOLDING COMPANIES AND MODULER The Seller represents and warrants to and agrees with the Buyer that: 3.1 ORGANIZATION. Each of the Panama Holding Companies is a corporation duly incorporated, validly existing and in good standing under the laws of Panama. Moduler is a corporation duly incorporated, validly existing and in good standing under the laws of India. Each of the Panama Holding Companies has all requisite corporate power and authority to own and hold the Moduler Shares held by it. Moduler has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. Neither of the Panama Holding Companies nor Moduler is required to be qualified or licensed to do business as a foreign corporation in any jurisdiction. Except solely for the ownership of the Moduler Shares by the Panama Holding Companies, neither of the Panama Holding Companies nor Moduler has any subsidiaries nor any interest as a shareholder, partner, or joint venturer in any corporation, partnership or other business entity. 3.2 DIVIDENDS AND DISTRIBUTIONS. There has never been, and prior to the Closing there will not be (a) any declaration, setting aside or payment of a dividend or other distribution in respect of any of the Holding Company Stock or the Moduler Shares (except for the divestiture by Moduler prior to the Closing of the headstack manufacturing business), or (b) any direct or indirect redemption, purchase or other acquisition of any of the capital stock of either of the Panama Holding Companies or Moduler or any action constituting a constructive dividend to the shareholders of either of the Panama Holding Companies or Moduler. 3.3 FINANCIAL STATEMENTS. (a) The audited balance sheet of Moduler (the "Balance Sheet") as of January 28, 1996 (the "Balance Sheet Date"), and the related audited statements of operation, stockholders' equity and cash flow for the one-year period then ended, are attached hereto as Schedule 3.3(a). (b) The financial statements referred to in subparagraph (a) above present fairly the financial position of Moduler as of the dates indicated and the results of operations for the periods indicated and have been prepared in accordance with generally accepted accounting principles consistently applied. The Balance Sheet contains all adjustments, which are solely of 3 9 a normal recurring nature, necessary to present fairly the financial position of Moduler at the Balance Sheet Date. 3.4 FINANCIAL CONDITION OF THE PANAMA HOLDING COMPANIES. Neither of the Panama Holding Companies has engaged in any transaction of any nature whatsoever nor incurred any liabilities or acquired any assets of any nature whatsoever, except solely the transactions pursuant to which the Panama Holding Companies acquired the Moduler Shares and except solely as incident to the passive ownership of the Moduler Shares. Neither of the Panama Holding Companies now has or at the Closing will have, nor has either of the Panama Holding Companies ever incurred, any liability or obligation of any nature, whether absolute, accrued, contingent or otherwise and except as otherwise set forth in Schedule 3.4. 3.5 NO UNDISCLOSED LIABILITIES. As of the Balance Sheet Date, there was no liability or obligation of Moduler of any nature, whether absolute, accrued, contingent or otherwise, which, individually or in the aggregate, is material to Moduler, other than liabilities and obligations reflected on the Balance Sheet and liabilities and obligations relating to contracts not yet required to be performed as of the Balance Sheet Date. Since the Balance Sheet Date, Moduler has not assumed or incurred any liabilities or obligations, except liabilities or obligations assumed or incurred in the ordinary course of business and consistent with prior practices. 3.6 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date and except as disclosed in Schedule 3.6 or as otherwise consented to by an authorized officer of the Buyer, there has not occurred: (i) any material adverse change in Moduler's business or financial condition, results of operations, properties or assets; (ii) any damage, destruction or loss, which is not adequately covered by insurance, which could materially and adversely affect Moduler or its assets or properties; (iii) any adoption or material modification of any Employee Benefit Plan (as defined in Section 3.17(a)) made to, for or with any employees of Moduler; (iv) any increase in compensation payable or to become payable by Moduler to its employees, or increase in benefits under any Employee Benefit Plan, in each case other than increases made in the ordinary course of business and consistent with prior practice; (v) any sale or other disposition of any assets of Moduler, other than sales or dispositions made in the ordinary course of business and consistent with prior practice; (vi) any creation of a mortgage, pledge, security interest, encumbrance, lien or charge of any kind upon any properties or assets of Moduler except in the ordinary course of business and consistent with prior practice; (vii) any material write-offs or write-downs of inventories or accounts receivable of Moduler; (viii) any material amendment, termination, waiver or cancellation of any substantial right relating to Moduler; (ix) any discharge or payment of any material obligation or liability of Moduler other than in the ordinary course of business and consistent with prior practice; (x) any material borrowings by Moduler; (xi) any capital expenditures or commitments by Moduler for any addition to property, plant or equipment; (xii) any material cancellation or waiver of any debts or any claims of Moduler except in the ordinary course of business and in accordance with prior practice, or (xiii) any agreement to take any action described in this Section 3.6. For purposes of this Agreement, only David T. Mitchell, W. Virginia Walker and Kenneth Wing shall constitute "authorized officers" of the Buyer. Since the Balance Sheet Date, Moduler's business has been conducted 4 10 in the ordinary course including, without limitation, the payment of trade payables consistent with prior practices. 3.7 TAXES. Except as set forth in Schedule 3.7, each of the Panama Holding Companies and Moduler has filed when due all federal, state, local and foreign tax returns required by applicable law to be filed by it and paid all amounts set forth thereon; there is no action, suit, proceeding, investigation, audit or claim now pending against, or with respect to, either of the Panama Holding Companies or Moduler in respect of any tax or assessment, nor is any claim for additional tax or assessment asserted or, to the Seller's knowledge, threatened by any such authority; all tax liabilities with respect to each of the Panama Holding Companies and Moduler (including, without limitation, national, local, foreign, and other income, franchise, capital stock, employee's income withholding, foreign pension withholding, social security, unemployment, disability, payroll, real property, personal property, sales, use, transfer, or other tax, plus any interest, penalties or other charges in respect of the foregoing) have been paid for all periods up to and including the Balance Sheet Date or have been accrued or reflected in the Balance Sheet or are disclosed accurately in Schedule 3.7 hereto; and all such tax liabilities shall, as of the Closing, be fully paid for all periods up to and including the Closing Date. 3.8 LITIGATION. Except as may be set forth and accurately described in Schedule 3.8, there is no action, suit, proceeding or investigation pending or, to the Seller's knowledge, threatened against either of the Panama Holding Companies or Moduler, at law or in equity, before any national, local, municipal or other governmental court, department, commission, board, bureau, agency or instrumentality; nor does the Seller know of any reasonably likely basis for any such action, suit, proceeding or investigation, the result of which could materially and adversely affect either of the Panama Holding Companies or Moduler or the transactions contemplated hereby; nor is there any judgment, decree, injunction, rule or order of any public body or governmental authority outstanding against either of the Panama Holding Companies or Moduler. 3.9 CONSENTS, VIOLATIONS AND AUTHORIZATIONS. (a) Except as set forth in Schedule 3.9, neither of the Panama Holding Companies nor Moduler is a party to or bound by any mortgage, indenture, lien, deed of trust, lease, agreement, permit, concession, franchise, license, instrument, order, judgment or decree which would require the consent of another to the execution of this Agreement or the consummation of the transactions contemplated hereby. (b) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby will (i) violate any provision of the Charter Documents of either of the Panama Holding Companies or Moduler or (ii) conflict with, or result (immediately or upon the giving of notice or the passage of time or both) in any violation of or default under, or give rise to a right of modification, termination, cancellation or acceleration of any obligation or to a loss of a benefit under, any mortgage, indenture, lease, instrument, permit, concession, franchise, license or other agreement which either of the Panama Holding Companies or Moduler or their respective properties or assets are parties to, 5 11 beneficiaries of, or bound by, or violate any judgment, order, decree, statue, law, ordinance, rule or regulation applicable to either of the Panama Holding Companies or Moduler or their respective properties or assets. 3.10 AGREEMENTS, CONTRACTS, COMMITMENTS AND LEASES. Except as set forth in Schedule 3.10 (which indicates the applicable paragraph below to which the disclosed agreement, contract, commitment or lease relates), Moduler is not a party to any written or oral: (a) agreement, contract or commitment with any present or former employee or consultant or for the employment of any person, including any consultant, other than oral contracts of employment entered into in the ordinary course of business and terminable at any time by Moduler without any payment required to be made to any such employee or consultant by reason of such termination; (b) agreement, contract or commitment for the future purchase of, or payment for, supplies, products or services; (c) agreement, contract or commitment to sell or supply products or to perform services except for agreements, contracts or commitments with the Buyer; (d) agreement, contract or commitment not otherwise required to be listed on Schedule 3.10 and continuing over a period of more than six months from the date hereof or exceeding $25,000 in value; (e) distribution, dealer, representative or sales agency agreement, contract or commitment with any party other than the Buyer; (f) lease under which Moduler is either lessor or lessee of real or personal property; (g) note, debenture, bond, equipment trust agreement, letter of credit agreement, loan agreement or other contract or commitment for the borrowing or lending of money or agreement or arrangement for a line of credit or guarantee, pledge or undertaking of the indebtedness of any other person; (h) agreement, contract or commitment for any capital expenditure or leasehold improvement not consented to by an authorized officer of the Buyer; (i) agreement, contract or commitment limiting or restraining Moduler or any successor thereto from engaging or competing in any manner or in any business, nor, to the Seller's knowledge, is any employee of Moduler subject to any such agreement, contract or commitment; (j) material agreement, contract or commitment not made in the ordinary course of business. 6 12 The Seller has delivered to the Buyer true and complete copies of all agreements, contracts and commitments identified on Schedule 3.10. Each of the agreements, contracts, commitments and other instruments listed in Schedule 3.10, or not required to be listed because of the amount thereof, is valid and enforceable in accordance with its terms; Moduler is, and to Seller's knowledge all other parties thereto are, in compliance with the provisions thereof in all material respects; Moduler is not, and to the Seller's knowledge no other party thereto is, in default in the performance, observance or fulfillment of any material obligation, covenant or condition contained therein; and no event has occurred which with or without the giving of notice or lapse of time, or both, would constitute a default thereunder. Furthermore, no such agreement, contract, commitment or other instrument, in the reasonable opinion of the Seller, contains any contractual requirement with which there is a reasonable likelihood that Moduler or any other party thereto will be unable to comply in all material respects. 3.11 ASSETS. (a) All buildings, structures, facilities, equipment and other material items of tangible property and assets of Moduler are in good operating condition and repair, subject to normal wear and maintenance, are useable in the regular and ordinary course of business and conform to all applicable laws, ordinances, codes, rules, regulations and authorization relating to their construction, use and operation. No person other than Moduler owns any equipment or other tangible assets or property situated on the premises of Moduler or necessary to the operation of its business, except for leased items disclosed in Schedule 3.10, items owned or leased by the Buyer and provided for Moduler's use, and items of immaterial value. (b) Schedule 3.11 contains accurate lists and summary descriptions of all inventory, equipment, furniture, fixtures and leasehold improvements of Moduler as of the Balance Sheet Date, specifying such items as are owned and such as are leased and, with respect to the owned property, specifying its aggregate cost or original value and the net book value as of the Balance Sheet Date and, with respect to the leased property as to which Moduler is lessee, specifying the identity of the lessor, the rental rate and the unexpired term of the lease. (c) Moduler owns and has good and marketable title to, or has valid leasehold interests in, all of its assets and except (i) as disclosed on the Balance Sheet or in Schedule 3.9, and (ii) for liens for the payment of national and local taxes not yet due or payable, all such assets (including without limitation all leasehold interests included in such assets) are free and clear of any conditions or restrictions on transfer or assignment and of any liens, pledges, charges, encumbrances, claims, security interests, easements, covenants or restrictions which could to any material extent interfere with the present use of such properties or assets or impair the operations of Moduler's business. 3.12 INVENTORY. All inventory of Moduler, including without limitation raw materials, work in process and finished goods, reflected on the Balance Sheet or acquired since the date thereof was acquired and has been maintained in the ordinary course of business; is of good and 7 13 merchantable quality; consists substantially of a quality, quantity and condition useable, leasable or saleable in the ordinary course of business; is valued at reasonable amounts based on the ordinary course of business and consistent with past practice; and is not subject to any write-down or write-off. Moduler is not under any liability or obligation with respect to the return of inventory in the possession of wholesalers, retailers or other customers. 3.13 ACCOUNTS RECEIVABLE. Except with respect to accounts receivable owed by the Buyer: all of the accounts receivable of Moduler which are reflected on the Balance Sheet and all accounts receivable of Moduler which have arisen since the Balance Sheet Date (except such accounts receivable as have been collected since the Balance Sheet Date) are valid and enforceable claims; the goods and services sold and delivered which gave rise to such accounts were sold and delivered in conformity in all material respects with the applicable purchase orders, agreements and specifications; there are no material rights of set-off or claims against such accounts receivable possessed by the account debtors of Moduler; and such accounts receivable are collectible within 90 days after billing at the full recorded amount thereof less the recorded allowance for collection losses. The allowance for collection losses reflected on the Balance Sheet is adequate. 3.14 PROPRIETARY PROPERTY. Moduler owns, free and clear of all liens, claims, charges or encumbrances, all patents, trademarks, trade names, service marks, copyrights, software, trade secrets or know-how used in or necessary for the conduct of its business (collectively, "Proprietary Property"). Schedule 3.14 contains a list of all Proprietary Property which Moduler has registered, or otherwise by filing with governmental agencies sought to protect or preserve its right to use, under federal, state or foreign law. Schedule 3.14 also contains a list of all licenses or other agreements pursuant to which Moduler has obtained or licensed rights to any Proprietary Property. Moduler does not infringe upon or unlawfully or wrongfully use any patent, trademark, trade name, service mark, copyright or trade secret owned or claimed by another, and Moduler has not received any notice of any claim of such infringement or any solicitation or similar request that Moduler enter into a license or similar agreement in respect of any such patent, trademark, trade name, service mark, copyright or trade secret owned or claimed by another. No present or former employee of Moduler and no other person owns or has any proprietary, financial or other interest, direct or indirect, in whole or in part, in any patent, trademark, trade name, service mark or copyright, or in any application therefor, or in any trade secret, which Moduler owns, possesses or uses in the operations of its business as now or heretofore conducted. 3.15 INSURANCE. Moduler maintains policies of property, fire, public liability, worker's compensation and other forms of insurance covering its assets, operations and employees to the extent, and with coverage amounts, customary in its business. All such insurance policies are in full force and effect and all premiums with respect thereto covering all periods up to and including the date of the Closing have been or will be paid. Moduler has not been refused any insurance, nor has its coverage been limited, by any insurance carrier to which it has applied for insurance or with which it has carried insurance during the past five years. 8 14 3.16 COMPLIANCE WITH LAW. Moduler (i) is not in violation of any national or local laws, ordinances, regulations and orders, including without limitation any applicable building, zoning, health, sanitation, safety, labor relations or similar laws, ordinances, regulations or orders, except for possible violations which in the aggregate do not have a material adverse effect on the financial condition or results of operations of Moduler, (ii) has not received any complaint from any governmental authority and, to the Seller's knowledge, none is threatened alleging that Moduler has violated any such law, ordinance, regulation or order, and (iii) has not received any notice from any governmental authority of any pending proceeding to take all or any part of Moduler's real properties (whether leased or owned) by condemnation or right of eminent domain and, to Seller's knowledge, no such proceeding is threatened. Moduler owns and possesses all licenses, permits and other authorizations required by law. 3.17 EMPLOYEE BENEFIT PLANS. (a) Schedule 3.17 contains a complete list of all employee benefit plans, whether formal or informal, whether or not set forth in writing, and whether covering one person or more than one person, sponsored or maintained by Moduler, and complete copies of all such plans have been provided to Buyer. For the purposes hereof, the term "Employee Benefit Plan" includes any plan, fund, program, policy, arrangement, practice, custom or understanding providing benefits of economic value to any employee, former employee, or present or former beneficiary, dependent or assignee of any such employee or former employee other than regular salary, wages or commissions paid substantially concurrently with the performance of the services for which paid. Each plan providing benefits which are funded through a policy of insurance is indicated by the word "insured" placed by the listing of such plan in Schedule 3.17. The Seller has furnished to the Buyer complete and correct copies of each material Employee Benefit Plan. (b) Moduler has timely made all contributions which it was required to make for each Employee Benefit Plan under the terms of such plan and applicable law, and all benefit payments due and payable to plan participants under each Employee Benefit Plan have been made or are being appropriately processed. As of the Balance Sheet Date, Moduler had no material liability under any such Employee Benefit Plan which was not reflected on the Balance Sheet or in the notes thereto. 3.18 EMPLOYEES AND LABOR CONTRACTS. (a) Schedule 3.18 sets forth the names and titles of, and current annual base salary or hourly rates for, all employees of Moduler, together with a statement of the full amount and nature of any other remuneration, whether in cash or kind, paid to each such person during the past or current fiscal year or payable to each such person in the future, the bonuses accrued for each such person, and the vacation and severance benefits to which each such person is entitled. (b) Moduler is not a party to any collective bargaining agreement or other labor contract. The Seller knows of no activity or proceedings of any labor union (or 9 15 representatives thereof) to organize any employees of Moduler, or of any strikes, slowdowns, work stoppages, lockouts or threats thereof, by or with respect to any of such employees. During the one-year period preceding the date hereof, there have been no significant labor troubles involving employees of Moduler nor are there any current union representation questions involving such employees. 3.19 FEES, COMMISSIONS AND EXPENSES. Neither the Seller, the Panama Holding Companies nor Moduler is liable for or obligated to pay any brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement. 3.20 ENVIRONMENTAL LAWS AND REGULATIONS. Schedule 3.20 discloses all information relating to the following items: (a) the nature and quantities of any Hazardous Materials (as defined below) released, used, manufactured, handled, stored, treated, discharged, buried, generated, transported or disposed of by Moduler during the past six years, together with a description of the location of each such activity; (b) a summary of the nature and quantities of any Hazardous Materials that have been released, placed, used, manufactured, handled, generated, stored, treated, discharged, buried or disposed on, under or about any site or facility owned or operated presently or at any previous time by Moduler (a "Site"); (c) copies of all environmental audits or other studies or reports prepared by third parties to assess Hazardous Material risks at any Site; (d) all communications and agreements with any governmental authority or agency (national or local) or any private entity or individual, including, but not limited to, any prior owners of any Site, relating in any way to the presence, release, threat of release, placement on, under or about any Site, or the use, manufacture, handling, generation, storage, treatment, discharge, burial or disposal on, under or about any Site, or the transportation to or from any Site, of any Hazardous Materials. Moduler is in compliance with all, and has no liability under, applicable national and local laws and regulations relating to product registration, pollution control and environmental contamination including, but not limited to, all laws and regulations governing the generation, use, collection, discharge, or disposal of Hazardous Materials and all laws and regulations with regard to record keeping, notification and reporting requirements respecting Hazardous Materials. Except as disclosed on Schedule 3.20, (a) there are no underground or other storage tanks containing Hazardous Materials at any Site, (b) Moduler has not been alleged to be in violation of, or has been subject to any administrative or judicial proceeding pursuant to, such laws or regulations either now or any time during the past three years, and (c) there are no facts or circumstances which Moduler reasonably expects could form the basis for the assertion of any Claim (as defined below) against Moduler relating to environmental matters including, but not limited to, any Claim arising from past or present environmental practices asserted under any Environmental Laws (as defined below), which may have a Material Adverse Effect. For purposes of this Section 3.20, the following terms shall have the following meanings: (A) "Hazardous Materials" shall mean asbestos, petroleum products, underground tanks of any type and all other materials now or hereafter defined as "hazardous substances," "hazardous wastes," "toxic substances" or "solid wastes," or otherwise now or hereafter listed 10 16 or regulated pursuant to any national or local statute, regulation, ordinance, order, decree, or any other law, common law theory or reported decision of any state or federal court, as now or at any time hereafter in effect, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material (collectively, the "Environmental Laws"). (B) "Claim" shall mean any and all claims, demands, causes of actions, suits, proceedings, administrative proceedings, losses, judgments, decrees, debts, damages, liabilities, court costs, attorneys' fees and any other expense incurred, assessed or sustained by or against Moduler or any of its subsidiaries. 3.21 PRODUCT WARRANTIES. There are no product warranty claims nor express warranties applicable to products sold by Moduler except the express warranties which are set forth in Schedule 3.21. The reserve for warranty claims reflected on the Balance Sheet is adequate. Moduler has furnished no other warranties or guarantees in connection with the products produced or manufactured by it and no claims for breach of product warranty to customers, whether or not attributable to Moduler's form of warranty, relating to the products and services manufactured or provided by Moduler, have been filed against Moduler and remain pending except as set forth on Schedule 3.21. Except as set forth in Schedule 3.21, to Seller's knowledge no events have occurred since the Balance Sheet Date or facts exist as of the date hereof which would result in a material increase in product warranty expenses or claims. 3.22 TRANSACTIONS WITH AFFILIATES. No shareholder, director, officer or employee of the Seller, the Panama Holding Companies or Moduler, or any member of his or her immediate family or any other of its, his or her affiliates, owns or has a five percent or more ownership interest in any corporation or other entity that is or was during the last three years a party to, or in any property which is or was during the last three years the subject of, any material contract, agreement or understanding, business arrangement or relationship with Moduler, except as disclosed in Schedule 3.22. 3.23 CONDITIONS AFFECTING MODULER. There is no fact, development or threatened development with respect to the markets, products, services, clients, customers, facilities, computer software, data bases, personnel, vendors, suppliers, operations, assets or prospects of Moduler which are known to Moduler or Seller which would materially adversely affect the business, operations or prospects of Moduler, other than such conditions as may affect as a whole the economy generally. Moduler has used its best efforts to keep available to Moduler after the Closing the services of the employees, agents, customers and suppliers of Moduler. Neither Moduler nor the Seller has any reason to believe that any loss of any employee, agent, customer or supplier or other advantageous arrangement will result because of the consummation of the transactions contemplated hereby. 3.24 ACQUISITION FOR INVESTMENT. The Seller will acquire and receive the JTS Shares, the JTS Warrant, and any and all JTS Common Stock issuable upon conversion of the JTS Shares or upon exercise of the JTS Warrant, in each case for its own account for investment only, and not with a view toward any resale or distribution thereof. The Seller agrees that the 11 17 JTS Shares, the JTS Warrant and all such JTS Common Stock shall not be transferable except in full compliance with the provisions of all applicable laws, including without limitation the U.S. Securities Act of 1933, as amended, and that each certificate representing such securities shall bear a legend to ensure compliance with the foregoing. 3.25 FULL DISCLOSURE. No representation or warranty by the Seller in this Article III or in any other Article of this Agreement or any schedule, exhibit, certificate or other document furnished or to be furnished by the Seller to the Buyer pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements made herein or therein not misleading. Buyer acknowledges that Buyer has conducted the day to day operations of the disk drive manufacturing operations of Moduler since February 3, 1995 (the "Known Operations"), and has gained substantial information regarding such operations of Moduler. To the extent that any of the foregoing representations and warranties cover or are affected by the Known Operations, such representations and warranties are made to the knowledge of Seller. In respect of any statements made in this Article III to the knowledge or best knowledge of Seller, there shall not be attributed to Seller any knowledge regarding such operations of Moduler that is gained by Buyer as a result of its conducting the Known Operations. Further, no representation or warranty is made by Seller in this Article III as to any act, or failure to act, by Moduler which occurred under the direction of Buyer and which would otherwise constitute a violation of this Article III. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants to and agrees with the Seller as follows: 4.1 DUE AUTHORIZATION AND EXECUTION. The Buyer has the necessary corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The Board of Directors of the Buyer has duly authorized and approved the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. No other corporate proceedings on the part of the Buyer are necessary to authorize this Agreement and the consummation of such transactions. This Agreement has been duly and validly executed and delivered by the Buyer and, assuming due execution and delivery by the Seller, constitutes a valid and binding obligation of the Buyer enforceable against it in accordance with its terms. 4.2 ORGANIZATION AND CAPITALIZATION OF THE BUYER. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The authorized capital stock of the Buyer consists of 90,000,000 shares of common stock, $0.000001 par value 12 18 of which 9,283,916 shares are issued and outstanding, and 70,000,000 shares of Preferred Stock, $0.000001 par value, all of which have been designated "Series A Preferred Stock," of which 27,784,697 shares are issued and outstanding. Schedule 4.2 hereto contains a list of all outstanding options, warrants, agreements, conversion privileges and other rights to purchase any of the Buyer's authorized and unissued capital stock. The Buyer has full legal right, power and authority to issue, sell, and deliver the JTS Shares and the JTS Warrant to the Seller in accordance with the terms and subject to the conditions of this Agreement. The delivery to the Seller of the JTS Shares and the JTS Warrant pursuant to this Agreement will transfer to the Seller valid title thereto free and clear of any and all liens and adverse claims. The JTS Shares, and all JTS Common Stock issuable upon conversion of the JTS Shares or upon exercise of the JTS Warrant will be, upon issuance in accordance with the terms thereof (and, in the case of the exercise of the JTS Warrant, upon payment of the exercise price therefor), duly and validly issued, fully paid and nonassessable. 4.3 FINANCIAL INFORMATION. Attached as Schedule 4.3 is the consolidated audited balance sheet of the Buyer and its subsidiaries at January 28, 1996 and the related audited statement of operations for the one-year period then ended. Such financial statements (a) are in accordance with the books and records of the Buyer, (b) present fairly the financial condition of the Buyer at such date and the results of its operations for the period therein specified, and (c) have been prepared in accordance with generally accepted accounting principles. Specifically, but not by way of limitation, and except with respect to (i) liabilities incurred in the ordinary course of the business of the Buyer subsequent to January 28, 1996 and (ii) obligations incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the financial statements, such balance sheet discloses all of the debts, liabilities and obligations of the Buyer of any nature (whether absolute, accrued, contingent (including guarantees of indebtedness) or otherwise, and whether due or to become due) to the extent required by generally accepted accounting principles and includes appropriate reserves, to the extent required by generally accepted accounting principles, for all taxes and other liabilities accrued or due at such date but not then payable. At all times up to and including the Closing, there has not been any event or condition of any character which has adversely affected the business of the Buyer in a material manner, other than continuing operating losses incurred in the ordinary course of business, including but not limited to any material change in, or condition affecting, the condition or prospects (financial or otherwise) of, or rights or obligations respecting, the properties, assets, liabilities, business or operations of the Buyer other than changes, events or conditions, in the ordinary course of its business. 4.4 CONSENTS, VIOLATIONS AND AUTHORIZATIONS. (a) The Buyer is not a party to or bound by any mortgage, indenture, lien, deed of trust, lease, agreement, permit, concession, franchise, license, instrument, order, judgment or decree which would require the consent of another to the execution of this Agreement or the transactions contemplated hereby. (b) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) violate any provision of the 13 19 Charter Documents of the Buyer or (ii) conflict with, or result (immediately or upon the giving of notice or the passage of time or both) in any violation of or any default under, or give rise to a right of modification, termination, cancellation or acceleration of any obligation or to a loss of a benefit under, any mortgage, indenture, lease, instrument, permit, concession, franchise, license or other agreement which the Buyer or its properties or assets are parties to, beneficiaries of, or bound by, or violate any judgment, order, decree, statue, law, ordinance, rule or regulation applicable to the Buyer or its properties or assets, other than such conflicts, violations or defaults or possible modifications, terminations, cancellations or accelerations which individually or in the aggregate do not and will not have a material adverse effect on the Buyer. (c) No authorization, consent or approval of, or filing with, any public body or governmental authority is necessary for the consummation by the Buyer of the transactions contemplated by this Agreement. 4.5 FEES, COMMISSIONS AND EXPENSES. The Buyer has not paid and is not required to pay any brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement. 4.6 PURCHASE FOR INVESTMENT. The Buyer will acquire the Holding Company Stock for its own account for investment only, and not with a view toward any resale or distribution thereof. 4.7 SHAREHOLDER AGREEMENTS. Attached hereto as Schedule 4.7 is a list of all agreements between Buyer and one or more of its shareholders relating to voting agreements, co-sale rights, rights of first refusal, registration rights or other similar matters relating to the ownership, transfer and voting of capital stock of Buyer. Buyer has delivered true and complete copies of its certificate of incorporation and bylaws and of all such agreements to Seller. 4.8 FULL DISCLOSURE. No representation or warranty of the Buyer in this Article IV or in any other Article of this Agreement or any schedule, exhibit, certificate or other document furnished or to be furnished by the Buyer to the Seller pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements made herein or therein not misleading. 4.9 KNOWN OPERATIONS. Buyer represents that, to the best of Buyer's knowledge, Seller's representations in Article III as they relate to the Known Operations are correct in all material respects. ARTICLE V CONDUCT OF BUSINESS PENDING CLOSING From the date of this Agreement until the Closing, the Seller covenants that, except as otherwise consented to in writing by the Buyer (which consent shall not be unreasonably withheld), it shall cause to be satisfied the following: 14 20 5.1 ORDINARY COURSE. Moduler shall carry on its business in the ordinary course in substantially the same manner as heretofore conducted. 5.2 NO ACQUISITIONS. Moduler shall not acquire or agree to acquire a substantial portion of the assets of any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets which are material in the aggregate to its business. 5.3 NO DISPOSITIONS. Moduler shall not sell, lease or otherwise dispose of any its assets except in the ordinary course of business consistent with prior practice. 5.4 EMPLOYEES. Moduler shall not grant any material increase in the compensation payable to any of its employees or any material benefit increase in any Employee Benefit Plan, except for increases made in the ordinary course of business consistent with prior practice. 5.5 MORTGAGES, LIENS AND OTHER ENCUMBRANCES. Moduler shall not create, assume or incur any mortgage, lien, pledge or other encumbrance of any kind other than immaterial mortgages, liens, pledges or other encumbrances incurred in the ordinary course of business consistent with prior practice. 5.6 WAIVER OF RIGHTS. Moduler shall not amend, terminate or waive any right of substantial value. 5.7 MATERIAL AGREEMENTS. Moduler shall not enter into any lease for property or equipment or any agreement, except in the ordinary course of business consistent with prior practice. 5.8 CAPITAL EXPENDITURES. Moduler shall not make or commit to any capital expenditures or commitments without the approval of an authorized officer of the Buyer. 5.9 DISTRIBUTIONS. Neither Moduler nor either of the Panama Holding Companies shall declare or pay any dividend or other distribution to its shareholders. 5.10 NO STOCK ISSUANCES. Neither Moduler nor either of the Panama Holding Companies shall issue, or agree to issue, any shares of its capital stock or any rights, options, warrants, subscription rights, conversion rights or other agreements or commitments for the purchase or acquisition of any shares of its capital stock. 5.11 NO CHARTER AMENDMENTS. Neither Moduler nor either of the Panama Holding Companies shall amend its Charter Documents. 5.12 AGREEMENTS. Neither Moduler nor either of the Panama Holding Companies shall commit or agree, whether in writing or otherwise, to take any action prohibited by this Article V. 15 21 5.13 ACTIONS TAKEN AT THE DIRECTION OF BUYER. No action taken by Moduler under the direction of Buyer shall constitute a violation of any provision of this Article V. ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF THE BUYER The obligations of the Buyer hereunder are subject to fulfillment or satisfaction at or prior to the Closing of each of the following conditions (any one or more of which may be waived by the Buyer but only in writing): 6.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER. All representations and warranties of the Seller contained in this Agreement shall be true and correct as of the date made and, except insofar as such representations and warranties are specifically made as of an earlier stated date or period of time, shall be true and correct in all material respects as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing; the Seller shall have performed and satisfied in all material respects all covenants, conditions and agreements required or contemplated by this Agreement. 6.2 OPINION OF COUNSEL FOR THE SELLER. The Buyer shall have received one or more opinions of counsel for the Seller reasonably acceptable to the Buyer, in form and substance reasonably satisfactory to the Buyer, dated as of the Closing covering the matters set forth in Exhibit B. 6.3 ABSENCE OF LITIGATION OR INVESTIGATION. No preliminary or permanent injunction or other order of any court or governmental agency or instrumentality shall have issued or been entered and remain in effect which prohibits the consummation of the transactions contemplated by this Agreement. 6.4 REQUISITE APPROVALS. All permits or authorizations as may be required by any regulatory authority having jurisdiction over the parties, Moduler, the subject matter hereof or actions herein proposed to be taken shall have been obtained and all consents contemplated by Schedule 3.9 shall have been obtained. 6.5 DELIVERY OF DOCUMENTS. The documents described in Section 10.2 of this Agreement shall have been delivered. 16 22 ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF THE SELLER The obligations of the Seller hereunder are subject to the fulfillment or satisfaction at or prior to the Closing of each of the following conditions (any one or more of which may be waived by the Seller, but only in writing): 7.1 REPRESENTATIONS AND WARRANTIES OF THE BUYER. All representations and warranties of the Buyer contained in this Agreement shall be true and correct as of the date made and shall be true and correct in all material respects as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing; the Buyer shall have performed and satisfied in all material respects all covenants, conditions and agreements required or contemplated by this Agreement to be performed and satisfied by it at or prior to the Closing. 7.2 OPINION OF COUNSEL FOR THE BUYER. The Seller shall have received from Cooley Godward Castro Huddleson & Tatum, counsel for the Buyer, an opinion in form and substance reasonably satisfactory to the Seller dated as of the Closing covering the matters set forth in Exhibit C. 7.3 ABSENCE OF LITIGATION OR INVESTIGATION. No preliminary or permanent injunction or other order of any court or governmental agency or instrumentality shall have issued or been entered and remain in effect which prohibits the consummation of the transactions contemplated by this Agreement. 7.4 REQUISITE APPROVALS. All permits or authorizations as may be required by any regulatory authority having jurisdiction over the parties, the subject matter hereof or the actions herein proposed to be taken shall have been obtained. 7.5 DELIVERY OF DOCUMENTS. The documents described in Section 10.2 of this Agreement shall have been delivered. 7.6 REGISTRATION RIGHTS. The Seller shall be added as a "Holder" to Buyer's Registration Rights Agreement as then amended and in effect in an amendment reasonably satisfactory to Seller. ARTICLE VIII SURVIVAL; INDEMNIFICATION 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND RELATED AGREEMENTS. The representations and warranties contained in Articles II, III and IV of this Agreement shall survive the Closing hereunder and shall continue in effect notwithstanding any investigation by or on behalf of the Buyer or the Seller. 17 23 8.2 GENERAL INDEMNIFICATION. (a) The Seller shall indemnify and hold harmless the Buyer from and against, and shall reimburse Buyer on demand for, any claim, loss, liability, damage or expense (including attorneys' fees and costs of appeals), resulting from any breach of any representation, warranty, agreement or covenant on the part of the Seller under or pursuant to this Agreement. (b) The Buyer shall indemnify and hold harmless the Seller from and against, and shall reimburse Seller on demand for, any claim, loss, liability, damage or expense (including attorneys' fees and costs of appeals) resulting from any breach of any representation, warranty, agreement or covenant on the part of the Buyer under or pursuant to this Agreement. (c) If a third party asserts a claim against any indemnified party for which indemnification would be available under this Section 8.2 hereof (a "Claim"), the indemnified party shall promptly give notice of such Claim, describing such Claim with reasonable specificity, to the indemnifying party; provided, however, that the failure to give such notice shall not affect the right of the indemnified party to indemnification hereunder except to the extent that such failure prejudices the ability of the indemnifying party to defend any Claim or take any other remedial action. The indemnifying party shall be entitled to assume the defense of such Claim, including the employment of counsel reasonably satisfactory to the indemnified party; provided, however, that in the event that the indemnified party reasonably determines in good faith that its interests with respect to such Claim cannot appropriately be represented by the indemnifying party, such indemnified party shall have the right to assume control of the defense of such Claim and to have its expenses reimbursed promptly with respect to such Claim. In addition, in the event that such indemnifying party, within a reasonable time after notice of any such Claim, fails to defend any indemnified party, such indemnified party will (upon further notice to such indemnifying party) have the right to undertake its defense of such Claim for the account of such indemnifying party and to have its expenses reimbursed promptly with respect to such Claim. Regardless of which party is controlling the defense of any Claim, (i) both the indemnifying party and the indemnified party shall act in good faith and (ii) no settlement of such Claim may be agreed to without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. The controlling party shall deliver, or cause to be delivered, to the other party copies of all correspondence, pleadings, motions, briefs, appeals or other written statements relating to or submitted in connection with the defense of any such Claim, and timely notices of any hearing or other court proceeding relating to such Claim. 8.3 LIMITATIONS. Except for claims for violations of the representations and warranties contained in Sections 2.1, 2.2, 2.3, 4.1 and 4.2, no claim for indemnification for breach of a representation or warranty contained herein may be made after March 31, 1997. 8.4 ESCROW AGREEMENT. Indemnification under Section 8.2(a) above shall be satisfied pursuant to the terms of the Escrow Agreement in the form attached hereto as Exhibit D. 18 24 ARTICLE IX ADDITIONAL COVENANTS OF THE PARTIES 9.1 NONCOMPETITION. By executing a counterpart of this Agreement, the Buyer agrees that for a period of five years following the Closing Date, neither it nor any of its affiliates will, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, any business, whether in corporate, proprietorship or partnership form or otherwise as more than a 5% owner in such business, where such business is competitive with the headstack manufacturing business which has been divested by Moduler prior to the Closing and which may during such five-year period be engaged in by M. L. Tandon, an individual, or any affiliate of M. L. Tandon, provided, however, that Buyer shall be permitted to manufacture headstacks for its own internal requirements. The noncompetition covenant contained in the foregoing sentence shall be limited to the country of India. The parties hereto specifically acknowledge and agree that the remedy at law for any breach of the foregoing will be inadequate and that M. L. Tandon or any of his affiliates, shall, in addition to any other relief available to it or them, be entitled to temporary and permanent injunctive relief without the necessity of proving actual damage. In the event that the provisions of this paragraph should ever be deemed to exceed the limitation provided by applicable law, then the parties hereby agree that such provisions shall be reformed to set forth the maximum limitations permitted. 9.2 ACCESS BY BUYER AND AGENTS. The Seller agrees that the Buyer, and its designated representatives, attorneys and auditors or agents, shall have reasonable access to the books of account, financial and corporate records, contracts, leases, tax returns, properties and other assets of the Panama Holding Companies and Moduler and to make copies of such corporate records, reports and other documents as they may request at any reasonable time during regular business hours prior to the Closing, and the Seller agrees to use its efforts to cooperate with such persons in conducting such examination. The Seller will cause officers, employees and accountants of the Panama Holding Companies and Moduler, as the case may be, to furnish such additional financial and operating data and other information as Buyer may from time to time reasonably request. 9.3 AVAILABILITY OF RECORDS TO THE SELLER. The Buyer shall make available to the Seller such documents, books, records or information relating to the Panama Holding Companies and Moduler as the Seller may reasonably require after the Closing in connection with any tax determination, defense of any claim against the Seller relating to the conduct of the business of the Panama Holding Companies and Moduler prior to the Closing or any governmental investigation of the Panama Holding Companies or Moduler. The Buyer agrees not to destroy any files or records which are subject to this Section 9.3 without giving reasonable notice to the Seller, and within 15 business days of receipt of such notice, the Buyer may cause to be delivered to Seller the records intended to be destroyed, at the Seller's expense. 19 25 ARTICLE X CLOSING 10.1 CLOSING. Unless this Agreement shall have been terminated pursuant to the provisions of Article XI hereof, the closing (the "Closing") will be held at the offices of the Buyer at 166 Baypointe Parkway, San Jose, California 95134 on April 4, 1996 (the "Scheduled Closing Date"); provided, however, that if any of the conditions provided for in Articles VI and VII shall not have been met or waived by the Scheduled Closing Date, then the Closing shall occur within three business days after such condition has been met or waived. The date on which the Closing shall occur is sometimes referred to herein as the "Closing Date." 10.2 DELIVERIES AT CLOSING. At the Closing, the Seller will deliver to Buyer (i) certificates representing the Holding Company Stock, duly endorsed in blank (or accompanied by stock powers duly executed in blank) by the Seller; (ii) executed copies of the consents referred to in Section 3.9 hereof; (iii) the opinion of counsel referred to in Section 6.2 hereof; (iv) the Corporate Records; (v) such written resignations, effective as of the Closing Date, of such of the directors and officers of the Panama Holding Companies as the Buyer may specify in writing to the Seller at least five business days prior to the Closing Date; (vi) such documents and instruments as are necessary to enable the Buyer to re-designate, effective as of the Closing, the individuals having signature or other withdrawal authority with respect to the bank and savings accounts and safety deposit boxes of the Panama Holding Companies; and (vii) such other previously undelivered documents required to be delivered by the Seller to the Buyer at or prior to the Closing in connection with the transactions contemplated by this Agreement. At the Closing, there will be delivered to the Seller by Buyer, (i) a certificate representing the JTS Shares, and the JTS Warrant, as referred to in Section 1.2 hereof; (ii) the opinion of counsel referred to in Section 7.2; and (iii) all previously undelivered documents required to be delivered by Buyer to the Seller at or prior to the Closing. ARTICLE XI TERMINATION 11.1 TERMINATION. This Agreement may be terminated and the transactions contemplated herein may be abandoned prior to the Closing Date only (a) by the mutual consent of the Seller and the Buyer; (b) by the Seller if events occur (other than events caused by the Seller) which render impossible the satisfaction of one or more of the conditions set forth in Article VII; (c) by the Buyer if events occur (other than events caused by the Buyer) which render impossible the satisfaction of one or more of the conditions set forth in Article VI; or (d) by Seller or Buyer if the Closing has not occurred on or prior to June 30, 1996. 11.2 PROCEDURE UPON TERMINATION. In the event of the termination of this Agreement by either party as provided in clauses (b) or (c) of Section 11.1, written notice thereof shall forthwith be given to the other party to this Agreement, this Agreement shall terminate and be abandoned without further action by the Seller or the Buyer, and there shall be no liability or obligation on the part of either Seller or Buyer; provided, however, that if such termination was 20 26 the result of the representations and warranties of a party being materially incorrect when made or the material breach by such party of a covenant hereunder, then the party whose representations and warranties were incorrect or who breached such covenant shall be liable to the other party for all costs and expenses of the other party in connection with the preparation, negotiation, execution and performance of this Agreement. ARTICLE XII GENERAL PROVISIONS 12.1 EXPENSES. Except as otherwise provided in this Agreement, all expenses incurred pursuant to this Agreement and the transactions contemplated hereby shall be paid by the party incurring the expense; provided, however, that Buyer agrees to reimburse Seller up to $30,000 to cover legal fees and expenses incurred in connection with the negotiation and completion of this Agreement. 12.2 CERTAIN FILINGS AND CONSENTS. The Seller and the Buyer will use their respective best efforts to comply with all legal requirements which may be imposed on them with respect to the transactions contemplated by this Agreement. The Seller and the Buyer will use their respective best efforts to obtain (and to cooperate with any other party in obtaining) any consent, authorization, order or approval of, or exemption by, any regulatory authority, or third party, required to be obtained in connection with the transactions contemplated by this Agreement. 12.3 FURTHER ASSURANCES. Each party hereto agrees to use such party's best efforts to cause the conditions to such party's obligations herein set forth to be satisfied at or prior to the Closing insofar as such matters are within its control. Each of the parties agrees to execute and deliver any and all further agreements, documents or instruments necessary to effectuate this Agreement and the transactions referred to herein or contemplated hereby or reasonably requested by the other party to perfect or evidence its rights hereunder. All parties will use their best efforts to complete all transactions contemplated by this Agreement as promptly as practicable. 12.4 NOTICES. Any notices hereunder shall be deemed sufficiently given by one party to another only if in writing and if and when delivered or tendered by personal delivery or as of three business days after deposit in the United States mail in a sealed envelope, registered or certified, with postage prepaid, addressed as follows: If to Lunenburg S.A. the Seller: 2125-B Madera Road Simi Valley, CA 93065 Attn: Jawahar L. Tandon 21 27 With a copy to: Howard Rice et. al. Three Embarcadero Center Seventh Floor San Francisco, CA 94111 Attn: Daniel J. Winnike, Esq. If to JT Storage, Inc. the Buyer: 166 Baypointe Parkway San Jose, CA 95134 Attn: W. Virginia Walker With a copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306 Attn: Andrei M. Manoliu, Esq. or to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 12.4. A notice not given as provided above shall, if it is in writing, be deemed given if and when actually received by the party to whom it is given. 12.5 SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of each of the parties hereto and their successors and assigns. Except as expressly provided herein, this Agreement shall not inure to the benefit of any persons or entities not a party hereto. 12.6 ENTIRE AGREEMENT. This Agreement, together with the exhibits and schedules hereto (which are all incorporated herein by this reference), constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection herewith. 12.7 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement may be amended, modified and supplemented by written agreement of the parties hereto, at any time prior to the Closing Date with respect to any of the terms contained herein. 12.8 WAIVER OF COMPLIANCE. The failure by any party hereto to comply with any obligation, covenant, agreement or condition contained herein may be expressly waived in writing by the party or parties hereto adversely affected by such failure, but such waiver or failure to insist upon strict compliance shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. 12.9 GENDER; NUMBER. Except where the context otherwise requires, words used in the masculine gender include the feminine and neuter; the singular number includes the plural, 22 28 and the plural the singular; and the word "person" includes a corporation or other entity or association as well as a natural person. 12.10 GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of California, U.S.A. 12.11 ARBITRATION OF DISPUTES. In the event of any dispute or difference of opinion in regard to the interpretation of any matter covered in this Agreement, the parties hereto shall seek to amicably settle the dispute through conciliation or mediation of a nominated party. If such mediation or conciliation fails, the dispute shall be referred to arbitration. The arbitration proceedings shall be carried out in such location, and shall be subject to the applicable arbitration rules and regulations of such location, as the parties may mutually agree upon; provided, however, that if the parties are unable to agree upon the location, rules and regulations for such arbitration, such arbitration shall be conducted in Geneva, Switzerland, under the arbitration laws, rules and regulations of the International Chamber of Commerce. The award or judgment arising under the arbitration shall be final and binding on all parties, and judgment upon the award or judgment resulting from such arbitration may be entered into by any court having jurisdiction over the parties. The fees and expenses of the arbitration shall be shared ratably by the parties. 12.12 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 23 29 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. LUNENBURG S.A. By: /s/ J. L. Tandon ------------------------------------ Name: J. L. Tandon ------------------------------------ Title: President ------------------------------------ JT STORAGE, INC. By: /s/ D. T. Mitchell ------------------------------------ Name: David T. Mitchell ------------------------------------ Title: Chief Executive Officer ------------------------------------ 24 EX-10.17 37 DRAFT/TECHNICAL KNOW HOW LICENSE AGREEMENT 1 EXHIBIT 10.17 TECHNICAL KNOW HOW LICENCE AGREEMENT This Agreement made this 14th day of June, One Thousand Nine Hundred and Ninety Six between JT Storage Corporation, Inc. U.S.A., a corporation duly created, organised and existing under and by virtue of the laws of the State of Delaware, U.S.A. having its principal office at 166 Bay Points Parkway, San Jose, CA 95134 in the United States of America (hereinafter referred to as "LICENSOR" which term shall unless repugnant to the subject or context mean and include its, successors and permitted assigns) of the First Part AND MODULER ELECTRONICS (INDIA) PVT. LTD., a company duly created, organised and existing under and by virtue of the Companies Act, 1956 and having its registered office at 406, Dalamal Towers, Nariman Point, Bombay - 400 021, India and having its Industrial Undertakings in Madras Export Processing Zone (NEPZ), Madras, India (hereinafter referred to as the "LICENSEE", which term unless repugnant to the context shall include its successors in interest and permitted assigns) of the Other Part. WHEREAS Licensor is in possession and has access to highly innovative Winchester Disk Drive technology which allows for Ultra high capacity Drives to be manufactured with simplified designs using fewer parts resulting in lower manufacturing costs. WHEREAS the LICENSOR owns and possesses valuable technical information and know-how relating to the manufacture of the Licensed Products (as defined below) which the LICENSOR is authorised, competent and willing to disclose and license to the LICENSEE. WHEREAS the LICENSEE has been incorporated with the main objects of manufacturing, producing, distributing, marketing and otherwise dealing in Winchester Drives. WHEREAS at the LICENSEE'S request, the LICENSOR has agreed to license to the LICENSEE certain technical know how and technical information on the terms and conditions as are hereinafter set out. NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AND THE MUTUAL COVENANTS AND CONDITIONS, HEREINAFTER CONTAINED, THE PARTIES HERETO AGREE AS FOLLOWS: 1. DEFINITIONS 1 2 In this Agreement, the following words and expression unless inconsistent with the context, shall bear the meanings assigned thereto: precedent has been fulfilled under Article 25. "GOVERNMENT" shall mean the Government of the Republic of India. "IMPROVEMENTS" means future modifications, improvements and upgradation relating to the LICENSED PRODUCTS and/or TECHNICAL KNOWHOW in so far as such modifications, improvements and upgradations have been commercially introduced by LICENSOR in the LICENSED PRODUCTS it being understood that LICENSOR shall be under no duty or obligation to include any improvements under this License Agreement. The term IMPROVEMENTS shall not include new product lines or ranges outside the LICENSED PRODUCTS or inventions and discoveries subject matter of Patent. "LICENSED PRODUCTS" shall mean Winchester Disk Drives and Sub-assemblies thereof. "PARTY" shall mean and refer to the LICENSOR or the LICENSEE, as the case may be. "PARTIES" shall mean and refer to the LICENSOR and the LICENSEE. "PLANT" shall mean and refer to the manufacturing facilities being established by the LICENSEE in India for manufacture of the LICENSED PRODUCTS. "TECHNICAL KNOW-HOW shall mean and include specifications of the LICENSED PRODUCTS and the parts and components thereof, general definitions and detailed lists of equipment, operating and quality control requirements, testing, procedures, rejection/acceptance norms. Technical know-how shall not include know-how or information for composers/parts level manufacturing in respect of components and/or parts manufactured by a third party and in relation to which the LICENSOR does not have the rights to manufacture and/or grant license. "TERRITORY" shall mean the geographical area under the jurisdiction of the Government of the Republic of India. 1.2 INTERPRETATION a. In this AGREEMENT headings are for convenience only and shall not affect interpretation except to the extent that the context otherwise requires. b. Where a word or phrase is defined, other parts of speech and grammatical forms of that word or phrase shall have corresponding meanings. 2.1 AUTHORISATION 2 3 a. LICENSOR hereby grants to the LICENSEE for the term of this Agreement and subject to the limitations and restrictions herein contained: (i) to the exclusive, non-transferable, non-assignable right to manufacture, assemble and sell the LICENSED PRODUCTS in the TERRITORY by utilising the TECHNICAL KNOW-HOW; (ii) the non-exclusive, non-transferable, non-assignable right to sell the LICENSED PRODUCTS in such other countries and the LICENSOR may agree upon from time to time. b. The LICENSOR shall disclose TECHNICAL KNOWHOW as is currently in use by or in possession of or within the access of by the LICENSOR. Such TECHNICAL KNOWHOW shall be complete and shall be sufficient to enable the LICENSEE to assemble and manufacture and the LICENSED PRODUCTS. THE TECHNICAL KNOWHOW shall be disclosed in such manner as is mutually agreed by the parties to enable the LICENSEE to undertake the manufacture of the Licensed product. c. Nothing contained in this AGREEMENT shall be construed to require the LICENSOR to disclose to the LICENSEE any TECHNICAL KNOW-HOW: (i) to which the LICENSOR does not have a free and unrestricted right to transfer to the LICENSEE; or (ii) which the LICENSOR has derived under an obligation to observe secrecy; or (iii) the disclosure of which would result in a violation of the laws of the U.S.A. and/or India. 2.2 By means of this AGREEMENT and the right and the license granted hereunder, the LICENSEE, acknowledges that the LICENSOR is the owner of the TECHNICAL KNOW-HOW and the LICENSEE shall under no circumstances use the same to manufacture the LICENSED PRODUCTS outside the TERRITORY or induce or assist any one else to do so either inside or outside the TERRITORY. The LICENSEE also undertakes not to challenge, directly or indirectly, LICENSOR'S ownership of its patents (if any). 2.3 Notwithstanding any provision contained in this AGREEMENT, should any TECHNICAL KNOW-HOW be disclosed or supplied by the LICENSOR, at its sole discretion and judgment, to the representatives of the LICENSEE prior to the EFFECTIVE DATE, the LICENSEE shall immediately become subject to, and obliged to comply with, the provisions of Article 11 hereof as if this AGREEMENT has become effective for the limited purpose of this Article. 3 4 2.4 LICENSOR may disclose and/or provide to LICENSEE, all such IMPROVEMENTS as have been commercially introduced by the LICENSOR in the LICENSED PRODUCTS. 2.5 LICENSEE agrees to make full disclosure promptly to LICENSOR of all modifications, improvements and upgradations relating to the LICENSED PRODUCTS, which LICENSEE may make to the LICENSED PRODUCTS or the TECHNICAL KNOW-HOW during the term of this AGREEMENT. The ownership of all such modifications, improvements and upgradations shall vest in the LICENSEE. However, the LICENSOR and its affiliates shall have the royalty free and unlimited duration license to use such modifications, improvements and upgradations throughout the world either for manufacturing or having manufactured any products. 3. UNDERTAKINGS BY PARTIES 3.1 UNDERTAKING BY LICENSEE Neither this AGREEMENT nor the disclosure of confidential information will be deemed by implication or otherwise to vest in the LICENSEE any rights in any patents, trade secrets, trade marks, trade names, know-how, or other property owned by or licensed to LICENSOR, other than those rights that are expressly set forth in this AGREEMENT or any other Agreements between the PARTIES. 3.2 UNDERTAKING BY LICENSOR The LICENSOR undertakes that they are the owner and possesses the Know-how under this agreement and they are entitled to grant exclusive license for the production of the licensed products and further undertakes to hold LICENSEE harmless and indemnify and keep indemnified by LICENSOR against any claim, action, demand or expenses that the LICENSEE may have to face or bear as a result of such representation on the part of LICENSOR. 4. TRAINING OR LICENSEE PERSONNEL 4.1 During the term of this AGREEMENT the LICENSOR shall receive the personnel of the LICENSEE for the purposes of educating the LICENSEE and imparting training to the personnel of the licensee in the use of the TECHNICAL KNOW-HOW, the number of personnel, the duration of their training and other terms and conditions shall be mutually agreed upon between the LICENSOR and the LICENSEE. The LICENSEE shall be responsible for and shall pay all costs and expenses (including traveling costs and living allowances and expenses of its personnel) involved in undertaking such training at a Plant or facility of the LICENSOR. 4 5 4.2 The personnel of the LICENSEE shall during their training observe all the Rules and Regulations of the LICENSOR which are applicable to the LICENSOR'S own employees. 5. MAKING AVAILABLE LICENSOR'S PERSONNEL The LICENSOR shall make available to the LICENSEE at the LICENSEE's PLANT the services of its technical personnel for such duration and on such terms as may be mutually agreed between the PARTIES. Such personnel will provide technical services including supervision of the installation and commissioning of the PLANT, training of the LICENSEE'S personnel in the use of the TECHNICAL KNOW-HOW and operation of the PLANT. The LICENSEE shall bear business class air fare to and from India and local traveling and living expenses in India of LICENSOR's personnel. 6. KNOW HOW FEES 6.1 In consideration for the grant of the license and this rights hereunder, the LICENSEE shall pay to the LICENSOR a lump sum know-how fees of US $2 million (US Dollar Two million) net of taxes to be remitted in three installments as under: 1. 1/3rd after the agreement is filed with the Reserve Bank of India /Authorised Foreign Exchange Dealer. 2. 1/3rd on delivery of technical documents; 3. and final 1/3rd on commencement of commercial production on four years after the agreement is filed with Reserve Bank of India / Authorised Foreign Exchange Dealer, whichever is earlier. 6.2 Notice of Production The LICENSEE shall notify the LICENSOR. LICENSEE's commencement of COMMERCIAL PRODUCTION of LICENSED PRODUCTS within seven (7) days of such commencement. 6.3 TAX The lump sum know-how fees payable to the LICENSOR shall be net of all Indian Taxes. Any such Taxes payable or deductible in respect thereof shall be exclusively to the account of LICENSEE who shall pay and bear the same. The LICENSEE shall provide to the LICENSOR along with each remittance a Certificate showing the Tax which the LICENSEE has paid to the relevant Tax Authorities. 5 6 6.4 REMITTANCE The lump sum know-how fees which are due shall, after conversion into United States Dollars at the market rate on the date of remittance be remitted to the LICENSOR, so as to arrive at LICENSOR'S Bank Account in the United States of America within thirty (30) days of its becoming due or such extended period as may be agreed by the LICENSOR. 7. QUALITY STANDARDS 7.1 The LICENSEE shall be responsible for manufacturing the LICENSED PRODUCTS in accordance with the TECHNICAL KNOW-HOW and all applicable standards of material and workmanship and processing conditions. 8. RIGHT OF INSPECTION & QUALITY CONTROL 8.1 The LICENSEE shall allow the LICENSOR or its authorised representatives at all reasonable times to enter the works, warehouses, offices or factories of the LICENSEE to inspect the PLANT, the raw material, parts and components lying thereat and the manufacturing, testing and quality control and other methods and processes currently in use for manufacturing the LICENSED PRODUCTS and to carry out quality checks on the LICENSES PRODUCTS. 8.2 The LICENSOR shall be entitled to cause the LICENSEE to withhold manufacture and/or dispatch of the LICENSED PRODUCTS until the LICENSOR is satisfied that the PLANT, the raw materials, parts and components the manufacturing methods and the LICENSED PRODUCTS meet the specifications, standards and quality stipulated by the LICENSOR under this AGREEMENT. 9. LIMITATION OF LIABILITY The LICENSOR shall not have any liabilities for claims of third parties or any consequential losses, direct or indirect, suffered by the LICENSEE or third parties with respect to the LICENSED PRODUCTS manufactured by the LICENSEE. Further, the LICENSEE agrees to wave and hold harmless the LICENSOR and each of its subsidiaries and affiliates from any claims by anyone arising out of the manufacture or sale of the LICENSED PRODUCTS by the LICENSEE. 10. LABELS & MARKINGS 10.1 The LICENSED PRODUCTS shall, if so desired by the LICENSOR, be marked with a designation and/or labels (layout to be provided by the LICENSOR) indicating that they are made under license of the LICENSOR. 6 7 10.2 Upon termination and/or expiry of this AGREEMENT, the LICENSEE shall forthwith cease using any name, marking or other terms of designation indicating that the LICENSED PRODUCTS are made according to the license provided for herein unless otherwise agreed to by and between the PARTIES hereto in writing. 11. SECRECY 11.1 The LICENSEE shall maintain the secrecy of the TECHNICAL KNOW-HOW furnished hereunder and shall take such necessary stops as may be required for this purpose. The steps to be taken by the LICENSEE shall include not making disclosure thereof to its employees, sub-contractors, associate companies and any other party, except and to the extent necessary for the performance of their duties. The employees and sub-contractor shall be bound to threat all such TECHNICAL KNOW-HOW as confidential and the LICENSEE shall get the employee and sub-contractor to sign an undertaking to this effect. 11.2 The LICENSEE shall not use or permit the use of any TECHNICAL KNOW-HOW in any manner inconsistent with the intention and spirit of this AGREEMENT. The LICENSEE acknowledges that the TECHNICAL KNOW-HOW is confidential and is delivered to the LICENSEE for the sole purpose of enabling the LICENSEE to manufacture, market and sell the LICENSED PRODUCTS. 11.3 The obligations cast upon the LICENSEE by this Article are extremely valuable to the LICENSOR and therefore adherence to the said obligations by the LICENSEE is critical to the performance of this AGREEMENT and forms the very substance of this AGREEMENT and goes to its very root and intent and any violation thereof would cause irreparable injury to the LICENSOR which injury cannot be adequately compensated by monetary reliefs alone and therefore the LICENSOR shall be entitled to seek injunctive relief from a Court of law in the event of the failure of the LICENSEE to adhere to the said obligations notwithstanding the Arbitration Article herein. 11.4 The obligation undertaken in these Articles shall remaining force indefinitely and shall survive termination or expiration of this AGREEMENT. Provided always that the provision of this Article 11 shall not apply to any information which is or enters the public domain due to no fault of the LICENSEE. 12. NON-COMPETITION The LICENSEE agrees that, since it is an exclusive licensee, it shall not, directly or indirectly, except with prior written consent of the LICENSOR have any business or commercial interest, either as a shareholder, employees, consultant, partner or otherwise, in any other company, whether incorporated or not, which is engaged in 7 8 the TERRITORY in the production, sale and distribution or marketing of any products which are similar to the LICENSED PRODUCTS and/or competitive with the same. Any violation of the undertaking(s) set forth in this Article is fundamental to this AGREEMENT and goes to the root of the AGREEMENT and shall be considered irreparable injury to the LICENSOR, thereby permitting it to seek remedy by way of injunction, stay order or other equitable remedies under India law, notwithstanding the arbitration clause herein. 13. TERM Unless earlier terminated as provided herein the terms of this AGREEMENT shall be for a period of seven (7) years from the Effective Date of this AGREEMENT. 14. TERMINATION 14.1 The LICENSOR shall have a right to terminate this AGREEMENT forthwith by written notice to the LICENSEE in any of the following events: a. if this AGREEMENT does not take effect under Article 15 within 180 days from the date of execution of this AGREEMENT; b. if any government shall confiscate, expropriate or nationalise all or part of the LICENSEE'S business or property or convert such business or property to purposes which affect the design, manufacture, sale or service of the LICENSED PRODUCTS; 14.2 This AGREEMENT may be terminated: i) By mutual agreement between the PARTIES; or ii) By either PARTY by giving written notice in the event of material breach or default or any of the obligations by the other PARTY and where such breach or default has not been rectified within thirty (30) days after written notice from the other PARTY specifying the nature of the default; or iii) By either PARTY if any authority of the GOVERNMENT should require directly or indirectly modification of any term or condition of this AGREEMENT. The PARTIES hereto will then mutually negotiate to arrive at a settlement and in case no such settlement can be arrive at within ninety (90) days of commencement of such negotiations, either PARTY may terminate this AGREEMENT; or iv) By either PARTY in case the other PARTY becomes insolvent or is declared bankrupt or goes into liquidation, voluntary or compulsory, except for the purpose of amalgamation or reconstruction effective immediately upon written notice to the other PARTY. 8 9 14.3. CONSEQUENCES OF TERMINATION a. It is expressly agreed and understood by the PARTIES hereto that in the event of termination pursuant to the terms of this AGREEMENT the PARTY electing to terminate this AGREEMENT shall incur no liability by the other PARTY hereto for damages arising solely from the exercise of the right to terminate this AGREEMENT. b. Under no circumstances will either PARTY be released from any liability or obligation accrued prior to the date of termination and the PARTY in breach shall in all events remain liable for the consequences of that breach. c. In the events of expiration or termination of this AGREEMENT for any reason whatsoever, the LICENSEE shall continue to be bound by the terms and conditions contained in Article 11 herein. d. In the event of LICENSOR terminating the Agreement, the LICENSEE shall cease to use all and any of the TECHNICAL KNOWHOW and the LICENSEE shall not thereafter manufacture or sell any products that use or employ any of the LICENSOR's TECHNICAL KNOWHOW. The LICENSEE shall also upon such termination promptly deliver to the LICENSOR all information, processing instructions, correspondence and other data relating to the manufacture, processing or packaging of the LICENSED PRODUCTS and shall not thereafter use or disclose any information or data furnished under this AGREEMENT. 14.4 After the full term expiration of this Agreement in accordance with Article 13 and provided that the LICENSEE have paid all other sums due hereunder to the LICENSOR up to the date of such expiration, the LICENSEE may continue to use, in the territory, on a non-exclusive basis, the TECHNICAL KNOWHOW then in use by its subject, however, to the provisions of Article 11 herein. 15. EFFECTIVE DATE This AGREEMENT shall take effect from the date when all the following conditions precedent have been satisfied: a. Both the PARTIES have obtained all necessary internal and corporate approvals to execute this AGREEMENT; b. All such necessary APPROVALS have been obtained and notification thereof provided to the LICENSOR; 9 10 c. This AGREEMENT has been executed by the PARTIES and filed with the Reserve Bank of India, and/or authorised dealer in accordance with the APPROVALS received from the GOVERNMENT. 16. INDEPENDENT PARTIES Nothing set forth herein shall create a partnership, agency or power of attorney between the PARTIES and neither PARTY shall be liable for a debt or liability of the other unless it is specifically provided for in this Agreement. 17. ENTIRE AGREEMENT This Agreement supersedes all other agreements previously made between the PARTIES relating to its subject matter. There are no other understanding or agreements. Any amendment hereof or modifications hereto shall be made in writing duly signed by authorised representatives of the PARTIES. 18. WAIVER Failure to exercise any rights under this AGREEMENT by either PARTY in any one or more instances shall not constitute a waiver of such rights or any other rights in any other instance. 19. ASSIGNMENT This AGREEMENT may be assigned either fully or in part, by the LICENSOR in respect of any of its rights and obligations to any other party without the consent of the LICENSEE. However the LICENSEE cannot assign this AGREEMENT without the prior written consent of the LICENSOR. 20. GOVERNMENT APPROVAL The Letters of Approval No. 8/423/94-IA1 dated 21.9.94 and 8/423/94-1A2 dated 20.10.95 issued by the Government of India, Ministry of Commerce, Office of the Development Commissioner, Madras Export Processing Zone, in favour of licensee shall be deemed to be a part of this Agreement. Only those provisions of this Agreement which are covered by the said letter or which are not at variance with the provisions of that letter, shall be binding on the Government of India or the Reserve Bank of India. 21. GOVERNING LAW 21.1 This AGREEMENT and its substantive provisions shall be governed by and construed in accordance with the laws of India. 10 11 22. DISPUTES AND ARBITRATION 22.1 It is specifically agreed that in case of any disputes, controversy, claim or breach arising out of or in relation to this AGREEMENT (including any disputes as to the existence and/or validity hereof; the parties shall seek to resolve such controversy, claim or breach by amicable arrangement and compromise, and only if the parties fail to resolve the same by amicable arrangement and compromise within a period of sixty (60) days of receipt of written notice of the same by the other PARTY, either PARTY may resort to arbitration as provided for in Article 22.2 hereof. 22.2 Except as hereinafter provided, any dispute controversy, claim or breach arising out of or in relation to this Agreement (including a dispute as to the existence or validity hereof) shall be finally settled, without appeal, by arbitration in accordance with the Rules of the International Chamber of Commerce, then in effect which shall be deemed to have been incorporated herein, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 23. NOTICE Any notice required or permitted to be given hereunder shall be considered properly if sent by Registered Air Mail or by telefax (confirmed in writing by the Registered Air Mail) to the respective address of the PARTIES as below: If to JT Storage Corporation, Inc. 166, Bay Points Parkway, San Jose, CA 95234, U.S.A. FAX: 408-405-1800 TEL: 408-408-1801 If to Modular Electronics (I) Pvt. Ltd., Unit #35 and 36, Madras Export Processing Zone Madras -- 600 045. INDIA FAX: 236-8054 TEL: 2368254/2368079 or to such other address as a party may have previously notified to the other PARTY in writing. 24. SEVERABILITY If one or more of the provisions hereof shall be void, invalid, illegal or unenforceable in any respect under any applicable law or decision, the validity, legality and enforceability of the remaining provisions herein continued shall not be affected or impaired in any way. Each PARTY hereto shall, in any such event, execute such additional documents as the other PARTY may reasonably request or require in order to give valid, legal and enforceable effects to any provision here of which is determined to be invalid, illegal or unenforceable. IN WITNESS WHEREOF, the PARTIES have caused this AGREEMENT to be executed by and through their duly authorised representatives as of the date written herein. 11 12 LICENSOR LICENSEE BY [Sig] : BY [Sig] : NAME : NAME : TITLE : TITLE : DATE : DATE : WITNESS : 12 EX-10.18 38 LEASE JTS & CILKER REVOCABLE TRUST 6/15/95 1 EXHIBIT 10.18 LEASE (SINGLE-TENANT SINGLE BUILDING MODIFIED NET) by and between CILKER REVOCABLE TRUST OF OCTOBER 9, 1990 ("Landlord") and JT STORAGE, INC. ("Tenant") For the 52,000 Square Foot Premises at 166 Baypointe Parkway, San Jose, CA 95134 2 LEASE SUMMARY Lease Date: June 15, 1995 ---------------------------- Landlord: Cilker Revocable Trust ----------------------------- of October 9, 1990 ----------------------------- Address of Landlord: 1631 Willow Street, Suite 225 ----------------------------- San Jose, CA 95125 ----------------------------- Tenant: JT Storage, Inc. ----------------------------- Address of Tenant: 1289 Anvilwood ----------------------------- Sunnyvale, CA 94086 ----------------------------- Contact: Burton R. Feldstein ----------------------------- Telephone: (408) 747-1315 ----------------------------- Building Address: 166 Baypointe Parkway ----------------------------- San Jose, CA 95134 ----------------------------- Premises Square Footage: 52,000 ----------------------------- Building Square Footage: 52,000 ----------------------------- Anticipated Commencement Date: July 1, 1995 ----------------------------- Term: Five (5) Years ----------------------------- Base Monthly Rent: $40,820.00/month ----------------------------- Security Deposit: $46,020.00 ----------------------------- Tenant's Percentage: 100% ----------------------------- 3 LEASE ----- (SINGLE TENANT SINGLE BUILDING MODIFIED NET) Table of Contents ----------------- PARAGRAPH PAGE - --------- ---- 1 Parties 1 2 Premises 1 3 Definitions 1 4 Lease Term 3 5 Rent 3 6 Late Payment Charges 4 7 Security Deposit 4 8 Holding Over 4 9 Tenant Improvements 5 10 Condition of Premises 5 11 Use of the Premises 5 12 Quiet Enjoyment 7 13 Alterations 7 14 Surrender of the Premises 8 15 Real Property Taxes 9 16 Utilities and Services 9 17 Repair and Maintenance 10 18 Liens 12 19 Landlord's Right to Enter the Premises 12 20 Signs 13 21 Insurance 13 22 Waiver of Subrogation 15 23 Damage or Destruction 15 24 Condemnation 17 25 Assignment and Subletting 17 26 Default 18 (i) 4 PARAGRAPH PAGE - --------- ---- 27 Subordination 20 28 Notices 21 29 Attorney's Fees 21 30 Estoppel Certificates 21 31 Transfer of the Premises by Landlord 22 32 Landlord's Right to Perform Tenant's Covenants 22 33 Tenant's Remedy 22 34 Mortgagee Protection 22 35 Brokers 23 36 Acceptance 23 37 Modifications for Lender 23 38 Parking 23 39 General 23 40 Option to Renew 24 41 Approvals 25 42 Reasonable Expenditures 25 TABLE OF EXHIBITS ----------------- EXHIBIT A The Premises --------- EXHIBIT B The Property --------- EXHIBIT C Work Letter Agreement --------- EXHIBIT D Commencement Date Memorandum --------- EXHIBIT E CC&R'S --------- (ii) 5 LEASE (SINGLE TENANT BUILDING ON SINGLE-BUILDING PROPERTY) 1. Parties. THIS LEASE (the "Lease"), dated June 15th, 1995, is entered into by and between The Cilker Revocable Trust of October 9, 1990 ("Landlord"), whose address is 1631 Willow Street, Suite 225, San Jose, California 95125 and JT Storage, Inc., a Delaware corporation ("Tenant"), whose address is 1289 Anvilwood, Sunnyvale, California 94086. 2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those certain premises consisting of approximately fifty two thousand (52,000) square feet, as shown in EXHIBIT "A" (the "Premises") in that certain building commonly known as 166 Baypointe Parkway (the "Building"), as further defined in Paragraph 3.B., in the City of San Jose, County of Santa Clara (the "County"), California located on that certain real property consisting of approximately three and 4/100ths (3.04) acres as more particularly described in EXHIBIT "B", (the "Property") together with a right to the Outside Area as defined in Paragraph 3.E. 3. Definitions. The following terms shall have the following meanings in this Lease: A. Alterations. Any alterations, additions or improvements made in, on or about the Building or the Premises after the Commencement Date, including, but not limited to, lighting, heating, ventilating, air conditioning, electrical, partitioning, drapery and carpentry installations. B. Building. That certain building on the Property consisting of approximately fifty two thousand (52,000) square feet. C. CC&R's. Those certain covenants, conditions and restrictions recorded at Page 94 Book 1771 on August 2, 1984 of the official Records of Santa Clara County, State of California, as attached hereto as EXHIBIT "E". D. Commencement Date. The Commencement Date of this Lease shall be the first day of the Term determined in accordance with Paragraph 4.A. E. Outside Area. All areas and facilities within the Property and outside the Premises, including, without limitation, the roof, parking areas, sidewalks, landscaped areas, service areas, trash disposal facilities, and similar areas and facilities. F. HVAC. Heating, ventilating and air conditioning. G. Interest Rate. Ten percent (10%) per annum, however, in no event to exceed the maximum rate of interest permitted by law. H. Landlord's Agents. Landlord's authorized agents, partners, subsidiaries, directors, officers, contractors and employees. -1- 6 I. Base Monthly Rent. The rent payable pursuant to Paragraph 5.A., as adjusted from time to time pursuant to the terms of this Lease. J. Real Property Taxes. Any form of association fee, assessment, license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (i) determined by the area of the Property or any part thereof or the rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of such rent or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Property or the Premises or any part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Property; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Property whether or not now customary or within the contemplation of the parties; or (v) surcharged against the parking area. As of the date hereof, the parties acknowledge that an association fee is levied against the Premises. K. Rent. Monthly Rent plus the Additional Rent defined in Paragraph 5.B. L. Security Deposit. That amount paid by Tenant pursuant to Paragraph 7. M. Sublet. Any transfer, sublet, assignment, license or concession agreement, change of ownership, mortgage, or hypothecation of this Lease or the Tenant's interest in the Lease or in and to all or a portion of the Premises. N. Subrent. Any consideration of any kind received, or to be received, by Tenant from a subtenant if such sums are related to Tenant's interest in this Lease or in the Premises, including, but not limited to, bonus money and payments (in excess of book value) for Tenant's assets including its trade fixtures, equipment and other personal property, goodwill, general intangibles, and any capital stock or other equity ownership of Tenant. O. Subtenant. The person or entity with whom a Sublet agreement is proposed to be or is made. P. Tenant Improvements and Work Letter Agreement. Those certain improvements to the Premises to be constructed by Landlord as outlined in the Work Letter Agreement, pursuant to EXHIBITS "C" and "C-1". Q. Tenant Improvements Allowance. The cost allowance provided by Landlord for the construction of the Tenant Improvements as further described in EXHIBIT "C". R. Tenant's Percentage. The percentage of the area of the Premises to the total area of the Building. Tenant's Percentage is agreed to be one hundred percent (100%) for the purpose of this Lease. S. Tenant's Personal Property. Tenant's trade fixtures, furniture, telephone and computer equipment and cabling equipment and other personal property in the Premises. T. Term. The term of this Lease set forth in Paragraph 4.A., as it may be extended hereunder pursuant to any options to extend granted herein. -2- 7 4. Lease Term. A. Term. The Term of this Lease shall be a period of five (5) years, beginning on the Commencement Date of July 1, 1995 (subject to Paragraph 5.A of the Work Letter Agreement), and terminating on June 30, 2000, unless sooner terminated, subject to any extensions granted hereunder. Tenant agrees that if Landlord, for any reason whatsoever, is unable to deliver possession of the Premises on the anticipated Commencement Date, Landlord shall not be liable to Tenant for any loss or damage therefrom, nor shall this Lease be void or voidable. In such event, the Commencement Date, termination date and all other dates of this Lease shall be extended to conform to the date of Landlord's tender of possession of the Premises to Tenant, in the condition required by Paragraph 5.A of the Work Letter Agreement, and Tenant shall not be obligated to pay Monthly Rent or other sums due Landlord hereunder until possession of the Premises is tendered to Tenant as provided therein. If the Commencement Date is delayed beyond the anticipated Commencement Date for any reason other than a delay by Tenant, Landlord shall use all reasonable efforts to accommodate occupancy in that portion of the second floor of the Premises which is ready for occupancy which occupancy shall be on all terms and conditions set forth herein, except for the payment of Monthly Rent and Additional Rent. B. Early Entry. Tenant will be permitted access to the Premises prior to the Commencement Date for the purpose of fixturing or any other purpose permitted by Landlord. Such early entry shall be at Tenant's sole risk and subject to all the terms and provisions hereof, except for the payment of Monthly Rent and Additional Rent. Landlord shall have the right to impose such reasonable additional conditions on Tenant's early entry as Landlord shall deem appropriate, and shall further have the right to require that Tenant execute an early entry agreement containing such conditions prior to Tenant's early entry. C. Termination. Either party, at its option, may terminate this Lease by giving written notice of its election to terminate to the other party if the Commencement Date has not occurred on or before September 1, 1995, through no fault of the terminating party and provided that the party seeking to terminate this Lease has used its best efforts to perform the obligations of such party which are required to be performed in advance of the Commencement Date. 5. Rent. A. Base Monthly Rent. Tenant shall pay to Landlord, in lawful money of the United States, for each calendar month of the Term, commencing on the day fifteen (15) days after the Commencement Date (the "Rent Start Date"), Base Monthly Rent in the amount set forth below, in advance, on the first day of each calendar month, without abatement, deduction, claim, offset, prior notice or demand. Additionally, Tenant shall pay, as and with the Base Monthly Rent, the estimated monthly Additional Rent as set forth in Paragraph 5.B herein, as adjusted from time to time hereunder. Tenant shall deposit with Landlord upon mutual execution of this Lease the sum of Forty Thousand Eight Hundred Twenty and no/100ths Dollars ($40,820.00) to be applied to the Base Monthly Rent for the first month for which it is due. Tenant shall pay the Base Monthly Rent on the amount and for the months set forth below, and otherwise as provided in this Paragraph 5.A: Base Monthly Rent Months 01-24 $40,820.00 Months 25-48 $43,420.00 Months 49-60 $46,020.00
B. Additional Rent. All monies required to be paid by Tenant under this Lease, including, without limitation, Real Property Taxes pursuant to Paragraph 15., Outside Area Expenses -3- 8 pursuant to Paragraph 17., insurance premiums pursuant to Paragraph 21., and any association fee shall be deemed Additional Rent. C. Prorations. If the Commencement Date is not the first (1st) day of a month, or if the termination date of this Lease is not the last day of a month, a prorated installment of Monthly Rent based on a thirty (30) day month shall be paid for the fractional month during which the Lease commences or terminates. 6. Late Payment Charges. Tenant acknowledges that late payment by Tenant to Landlord of Rent and other charges provided for under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult or impracticable to fix. therefore, if any installment of Rent or any other charge due from Tenant is not received by Landlord within five (5) days after such amount shall be due and after Landlord has made a reasonable effort to contact Tenant regarding such late payment, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the amount overdue as a late charge for every month or portion thereof that the Rent or other charges remain unpaid. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. Initials: WHE LAC JSP - --------------------------------- ----------------------------------- Landlord MCA AP Tenant 7. Security Deposit. Tenant shall deposit with Landlord upon execution the sum of Forty Six Thousand Twenty and no/100ths. Dollars ($46,020.00) as the Security Deposit for the full and faithful performance of every provision of this Lease to be performed by Tenant. If Tenant commits an event of default as defined in Paragraph 26 hereof, with respect to any provision of this Lease, and after the period to cure the default has elapsed, Landlord may apply all or any part of the Security Deposit for the payment of any rent or other sum in default, the repair of such damage to the Premises or the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default to the full extent permitted by law. If any portion of the Security Deposit is so applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, however, Tenant shall be entitled to interest on the Security Deposit. If Tenant is not otherwise in default pursuant to Paragraph 14 herein, so much of the Security Deposit as has not been properly applied hereunder, including interest, shall be returned to Tenant within thirty (30) days of termination of the Lease. 8. Holding Over. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with the express or implied consent of Landlord, such tenancy shall be month-to-month only and shall not constitute a renewal or extension for any further term. If Tenant remains in possession either with or without Landlord's consent, Base Monthly Rent shall be increased to an amount equal to one hundred twenty-five percent (125%) of 9 the Base Monthly Rent payable during the last month of the Term, and any other sums due under this Lease shall be payable in the amount and at the times specified in this Lease. Such month-to-month tenancy shall be subject to every other term, condition, and covenant contained herein. If Tenant fails to surrender the Premises upon the expiration of the Term despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation any claim made by a succeeding tenant, resulting from Tenant's failure to surrender. 9. Tenant Improvements. Landlord agrees to construct such Tenant Improvements pursuant to the terms of Exhibits "C" and "C-1" herein. 10. Condition of Premises. Landlord represents and warrants that, as of the Commencement Date, the Premises and all elements of the Premises, including the sidewalks, driveways, parking lot, mechanical, electrical, plumbing, truck doors, roof and roofing system (including roof membrane) will be in good operating condition and repair. Any damage to the Premises caused by Tenant's move-in shall be repaired or corrected by Tenant, at its expense. Tenant acknowledges that neither Landlord nor its Agents have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its Agents agreed to undertake any Alterations or construct any Tenant Improvements to the Premises except as expressly provided in this Lease. If Tenant fails to submit a punchlist to Landlord within forty-five (45) days of occupancy or lease commencement, whichever is sooner, then it shall be deemed that there are no Tenant Improvement items needing additional work or repair, other than as may be required because of latent defects or conditions which were not reasonably discoverable by Tenant. Landlord's contractor shall complete all reasonable punchlist items within forty-five (45) days after the walk-through inspection or as soon as practicable thereafter. Upon completion of such punchlist items, Tenant shall approve such completed items in writing to Landlord. If Tenant fails to approve such items within fourteen (14) days of written notice of completion, such items shall be deemed approved by Tenant. 11. Use of the Premises. A. Tenant's Use. Tenant shall use the Premises solely for office/R&D, light manufacturing, test & assembly, engineering, distribution & storage and shall not use the Premises for any other purpose without obtaining the prior written consent of Landlord. Tenant shall have the exclusive use of all Outside Areas on the Property, subject only to the reasonable requirements of Landlord to perform Landlord's obligations, or exercise the rights reserved to Landlord, hereunder. B. Compliance. (i) The parties acknowledge that the Premises consist, in part, of the existing Building which may not comply with legal and other requirements which would be applicable to buildings newly-constructed as of the date of this Lease. Subject to that limitation, Landlord represents and warrants that to the best of his knowledge, as of the Commencement Date, no condition on, in or about the Premises or the Property, or any improvements thereon, shall violate any requirements of covenants, conditions, restrictions and encumbrances ("CC&R's), insurance underwriter's requirements, or any rules, regulations, statutes, ordinances, laws of building codes, (collectively, "Laws") applicable thereto, including current building code requirements for seismic and structural strength, the Americans with Disabilities Act of 1990, as amended, or Title 24. -5- 10 Tenant shall not use the Premises or suffer or permit anything to be done by any agent, employee, contractor or invitee of Tenant, in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental law, rule, regulation or requirement of public authorities now in force or which may hereafter be in force, or relating to or affecting the condition, use or occupancy of the Premises. Tenant shall not commit any public or private nuisance or any other act or thing which might or would disturb the quiet enjoyment of any occupant of nearby property. Tenant shall place no loads upon the floors, walls or ceilings in excess of the maximum designed load determined by Landlord or which endanger the structure; nor place any harmful liquids in the drainage systems; nor dump or store waste materials or refuse or allow such to remain outside the Building proper, except in the enclosed trash areas provided. Tenant shall not store or permit to be stored or otherwise placed any other material of any nature whatsoever outside the Building. If applicable Laws, CC&R's or insurance underwriter's requirements require the construction of any improvement on, in or about the Premises which would properly be capitalized under generally acceptable accounting principles (a "Capital Improvement"), except as provided below, Landlord shall construct the Capital Improvement and, provided that the cost of such Capital Improvement is properly reimbursable by Tenant hereunder, Tenant shall pay to Landlord, with each monthly installment of Base Rent coming due after completion of the Capital Improvement in question and receipt of Landlord's statement of the cost therefor, an amount equal to the cost of such Capital Improvement amortized over its useful life (as reasonably determined by the manufacturer or supplier of the item in question, where applicable in equal monthly installments, until the earlier of the expiration of the term of this Lease or the end of the useful life of the Capital Improvement. If applicable Laws, CC&R's or insurance underwriter's requirements require the construction of any Capital Improvement as the result of a particular or unique use of the Premises made by Tenant, Tenant shall construct such Capital Improvement at its sole cost. Tenant shall not be required to construct or pay the cost of complying with any CC&R's, insurance underwriter's requirements or Laws regarding the presence of hazardous or toxic materials, unless the hazardous or toxic materials in question were stored, used or disposed of by Tenant, its agents, employees or contractors on or about the Premises. (ii) In particular, Tenant, at its sole cost, shall comply with all laws relating to the storage, use and disposal of hazardous, toxic or radioactive matter by Tenant, its agents, employees or contractors, including those materials identified in Sections 66680 through 66685 of title 22 of the California Code of Regulations, Division 4, Chapter 30 as they may be amended from time to time (collectively "Toxic Materials"). If Tenant does store, use or dispose of any Toxic Materials, Tenant shall notify Landlord in writing at least ten (10) days prior to their first appearance on the Premises. Tenant shall be solely responsible for and shall defend, indemnify and hold Landlord and its Agents harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with its storage, use and disposal of Toxic Materials by Tenant, its agents, employees or contractors. Tenant shall further be solely responsible for and shall defend, indemnify and hold Landlord and its Agents harmless from and against all claims, costs, and liabilities, including attorneys' fees and costs, arising out of or in connection with the removal, clean-up and restoration work and materials necessary to comply with the requirements of the governmental agency having jurisdiction over the removal or remediation of the materials involved, and return the Premises and any other property of whatever nature to their condition existing prior to the appearance of the Toxic Materials on the Premises. If any governmental agency or the beneficiary of any deed of trust covering the Property requires any testing of the Premises or the -6- 11 Property, including the soil or groundwater of the Property, to ascertain whether there has been any release of Toxic Materials in, on or about the Premises or the Property, Landlord shall have the right to install monitoring wells on or about the Outside Area and to perform such other tests and investigations of the Premises and the Property for such purpose. Tenant shall reimburse Landlord as Additional Rent for the reasonable cost of such tests and investigations and of the installation, maintenance, repair and replacement of such monitoring wells or other measuring devices if the results of such tests and investigations disclose the existence of facts which give rise to the liability of Tenant pursuant to the indemnity provisions of this Paragraph 11.B(ii). Tenant's obligations hereunder shall survive the termination of this Lease. Landlord represents and warrants that to the best of his knowledge it has provided true, accurate and complete copies of all reports, studies, assessments and other materials or correspondence provided to Landlord or prepared by any third party in connection with the investigation of the Property for the presence of Toxic Materials. Landlord shall hold Tenant harmless from and against all claims, costs, and liabilities, including attorneys' fees and costs, arising out of or in connection with the presence of any Toxic Materials on or about the Property, from any source, other than those Toxic Materials for which Tenant or Tenant's agents are responsible hereunder. 12. Quiet Enjoyment. Landlord covenants that Tenant, upon performing the terms, conditions and covenants of this Lease, shall have quiet and peaceful possession of the Premises as against any person claiming the same by, through or under Landlord. 13. Alterations. After the Commencement Date, Tenant shall not make or permit any Alterations in, on or about the Premises, except for non structural Alterations, not exceeding Twenty-Five Thousand Dollars ($25,000.00) in cost, without the prior written consent of Landlord, and according to plans and specifications approved in writing by Landlord, which consent shall not be unreasonably withheld. Notwithstanding the foregoing Tenant shall not, without the prior written consent of Landlord, make any: (i) Alterations to the exterior of the Building; (ii) Alterations to and penetrations of the roof of the Building (provided that Tenant shall be entitled to install such satellite dishes or antennae the placement of which on the roof is reasonably necessary in the conduct of Tenant's business in the Premises, subject to the reasonable requirements of Landlord; and (iii) Alterations visible from outside the Premises, including Common Area, to which Landlord may withhold Landlord's consent on wholly aesthetic grounds. All Alterations shall be installed at Tenant's sole expense, in compliance with all applicable laws and the CC&R's, by a licensed contractor, shall be done in a good and workmanlike manner conforming in quality and design with the Premises existing as of the Commencement Date. All Alterations, trade fixtures and Tenant's Personal Property installed in the Premises at Tenant's expense ("Tenant's Property") shall at all times remain Tenant's Property and Tenant shall be entitled to all depreciation, amortization and other tax benefits with respect thereto. Except for Alterations which cannot be removed without injury to the Premises, at any time Tenant may remove Tenant's Property from the Premises, provided Tenant repairs all damage caused by such removal. At the time that Landlord consents to any proposed -7- 12 Alteration, and otherwise, within fifteen (15) days of written request, Landlord shall advise Tenant in writing whether it will require Tenant to remove any Alterations from the Premises upon termination of the Lease. If Landlord fails to so advise Tenant at the time that Landlord consents to any proposed Alteration, or in response to a written request, Landlord shall be deemed to have consented to the Alterations in question remaining in the Premises upon termination of the Lease. Tenant shall not be liable for removal of any approved alterations which enhance the structural integrity and future use of the building. Notwithstanding any other provision of this Lease, Tenant shall be solely responsible for the maintenance and repair of any and all Alterations made by Tenant to the Premises. Tenant shall give Landlord written notice of Tenant's intention to perform work on the Premises which might result in any claim of lien at least twenty (20) days prior to the commencement of such work to enable Landlord to post and record a Notice of Nonresponsibility or other notice deemed proper before the commencement of any such work. 14. Surrender of the Premises. Upon the expiration or earlier termination of the Term, Tenant shall surrender the Premises to Landlord in its condition existing as of the Commencement Date, normal wear and tear and fire or other casualty, or other condition which is not the obligation of Tenant to correct, excepted, with all interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, the HVAC equipment serviced and repaired by a reputable and licensed service firm, all floors cleaned and waxed, all broken, marred or nonconforming acoustical ceiling tiles replaced, all windows washed, the plumbing and electrical systems and lighting in good order and repair, including replacement of any burned out or broken light bulbs or ballasts, the lawn and shrubs in good condition including the replacement of any dead or damaged plantings, and the sidewalk, driveways and parking areas in good order, condition and repair, all to the reasonable satisfaction of Landlord. Tenant shall remove from the Premises all of Tenant's Alterations required to be removed pursuant to Paragraph 13., and all Tenant's Personal Property and repair any damage and perform any restoration work caused by such removal. Subject to the provisions of Paragraph 13 above, Landlord shall notify Tenant of the items to be removed and/or restored within one hundred (100) days prior to the expiration of the lease term. If Tenant fails to remove such Alterations and Tenant's Personal Property, and such failure continues after the termination of this Lease, Landlord may retain such property and all rights of Tenant with respect to it shall cease, or Landlord may place all or any portion of such property in public storage for Tenant's account. Tenant shall be liable to Landlord for costs of removal of any such Alterations and Tenant's Personal Property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with interest at the Interest Rate from the date of expenditure by Landlord. If the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify Landlord and its Agents against all loss or liability, including attorneys' fees and costs resulting from delay by Tenant in so surrendering the Premises. Normal wear and tear, for the purposes of this Lease, shall be construed to mean wear and tear caused to the Premises by a natural aging process which occurs in spite of prudent application of reasonable standards for maintenance, repair and janitorial practices. It is not intended, nor shall it be construed, to include items of neglected or deferred maintenance which would have or should have been attended to during the Term of the Lease if reasonable standards had been applied to properly maintain and keep the Premises at all times in good condition and repair. -8- 13 15. Real Property Taxes. A. Payment by Tenant. On or before April 1 and December 1 of each calendar year during the Term, Tenant shall pay to Landlord, as Additional Rent, all Real Property Taxes and Assessment District taxes as set forth on the County assessor's tax statement for the Premises. Landlord shall give Tenant at least fifteen (15) days' prior written notice of the amount so due, including a copy of the tax statement. Upon Landlord's receipt of the Real Property Tax payment from Tenant, Landlord shall pay the taxes to the County. If Tenant fails to pay Tenant's Percentage of the Real Property Taxes on or before April 1 and December 1, respectively, Tenant shall pay to Landlord any penalty incurred by such late payment. Tenant shall pay Tenant's Percentage of any Real Property Tax not included within the County tax assessor's tax statement within ten (10) days after being billed for same by Landlord. The foregoing dates for payment are based on the dates currently established by the County as the dates on which Real Property Taxes become delinquent if not paid. If such delinquency dates change, the dates on which Tenant must pay such taxes shall be at least ten (10) days prior to the delinquency dates. Notwithstanding the foregoing, at any time, upon prior written notice to Tenant, Landlord shall have the right to require that Tenant pay one-twelfth (1/12th) of the Real Property Taxes payments to Landlord directly, on the first (1st) day of each calendar month. Assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges are to be included within the definition of Real Property Taxes for purposes of this Lease. B. Taxes on Tenant Improvements and Personal Property. Tenant shall pay any increase in Real Property Taxes resulting from any and all Alterations and Tenant Improvements of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay prior to delinquency all taxes assessed or levied against Tenant's Personal Property in, on or about the Premises or elsewhere. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. C. Proration. Tenant's liability to pay Real Property Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included at the commencement or expiration of the Term. With respect to any assessments which may be levied against or upon the Premises, or which under the laws then in force may be evidenced by improvements or other bonds or may be paid in annual installments, only the amount of such annual installment (with appropriate proration for any partial year) and interest due thereon shall be included within the computation of the annual Real Property Taxes levied against the Premises. 16. Utilities and Services. Tenant shall be responsible for and shall pay promptly all charges for water, gas, electricity, computer and telephone cabling and equipment, refuse pickup, janitorial service and all other utilities, materials and services furnished directly to or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. Tenant shall be responsible for all costs related to excessive intentional or unintentional use of water as determined by Landlord. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service or other service furnished to the Premises, except -9- 14 that resulting from the negligence or willful misconduct of Landlord, or Landlord's Agents. In addition, Tenant shall not be entitled to any abatement or reduction of Rent by reason of such failure or interruption, no eviction of Tenant shall result from such failure or interruption and Tenant shall not be relieved from the performance of any covenant or agreement in this Lease because of such failure or interruption except to the extent attributable to the negligence or willful misconduct of Landlord, or Landlord's Agents. 17. Repair and Maintenance. A. Building. (i) Landlord's Obligations. Landlord shall keep in good order, condition and repair the structural parts of the Building, which structural parts include only the roof, the roof surface membrane (to be reimbursed by Tenant, except as otherwise provided herein), exterior walls, foundation and subflooring of the Building, except for any damage thereto caused by the negligence or willful acts or omissions of Tenant or of Tenant's agents, employees or invitees, or by reason of the failure of Tenant to perform or comply with any terms in this Lease, or caused by Alterations made by Tenant or by Tenant's agents, employees or contractors. Except as otherwise reasonably apparent to Landlord, or part of the regularly scheduled repair or maintenance of the Property, it is an express condition precedent to all obligations of Landlord to repair and maintain that Tenant shall have notified Landlord of the need for such repairs or maintenance. (ii) Tenant's Obligations. Tenant shall at all times and at its own expense clean, keep and maintain in good order, condition and repair every part of the Premises which is not within Landlord's obligation pursuant to Paragraph 17.A.(i), except for any damage thereto caused by the negligence or willful acts or omissions of Landlord or Landlord's Agents. Tenant's repair and maintenance obligations shall include, all plumbing and sewage facilities within the Premises, fixtures, interior walls and ceiling, floors, windows, doors, entrances, plateglass, showcases, skylights, all electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust equipment and systems, any automatic fire extinguisher equipment within the Premises, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. Landlord will obtain HVAC systems preventive maintenance contracts with quarterly service in accordance with manufacturer recommendations, which shall be subject to the reasonable approval of Landlord and paid for by Tenant, and which shall provide for and include replacement of filters, oiling and lubricating of machinery, parts replacement, adjustment of drive belts, oil changes and other preventive maintenance including annual maintenance of duct work, interior unit drains and caulking at sheet metal and recaulking of jacks and vents. Tenant shall have the benefit of all warranties available to Landlord regarding the equipment in such HVAC systems. The cost of any repair or replacement of Capital Equipment in or on the Premises, including but not limited to the roof and HVAC equipment, shall be amortized over the useful life of the Equipment, as established by the manufacturer or supplier of such an item, but in no event to exceed fifteen (15) years. Such amortization shall be based on the Tenant paying for a pro rata share of such cost by taking the remaining Lease Term and dividing it by the useful life, but in no case shall this ratio exceed 100%. If Tenant extends this Lease, it will reimburse Landlord for any unamortized portion of this cost during that extension, and any other portions of the Premises to be maintained by Tenant. Notwithstanding the foregoing, Tenant shall have no obligation to perform any item of repair or maintenance, or to pay -10- 15 any cost as part of Outside Area Expenses, as defined below, or otherwise, which is: (i) necessitated by the acts or omissions of Landlord or Landlord's Agents; (ii) occasioned by fire, acts of God or other casualty; (iii) required as a consequence of any construction defect in the Premises; (iv) reimbursable by third parties; or (v) properly treated as a Capital Improvement (except as provided below). B. Outside Area. (i) Landlord's Obligations. Landlord shall maintain the Outside Area including those portions of the Building within the Outside Area, including the roof (subject to Tenant's obligation to pay for annual roof inspection and repair as set forth in Paragraph 17.B.(ii), and exterior walls (excluding the doors, ceiling and plateglass). Provided Landlord maintains the Property in a condition comparable to similarly situated buildings in the vicinity of the Premises, the manner in which the Outside Area shall be maintained and the expenditures therefor shall be at the sole discretion of Landlord. As required to perform the obligations of Landlord hereunder, or in the exercise of the rights reserved to Landlord, Landlord shall at all times have exclusive control of the Outside Area and may at any time temporarily close any part thereof, exclude and restrain anyone from any part thereof, except the bona fide customers, employees and invitees of Tenant who use the Outside Area in accordance with the rules and regulations as Landlord may from time to time promulgate, and may change the configuration or location of the Outside Area. In exercising any such rights, Landlord shall make a reasonable effort to minimize any disruption of Tenant's business. (ii) Tenant to Pay Outside Area Expenses. Tenant shall pay, as Additional Rent, Tenant's Percentage of all reasonable costs and expenses paid or incurred by Landlord during the Term in maintaining, repairing and replacing the Outside Area, including annual roof inspections and preventive maintenance work on the roof, and a reasonable management fee for Landlord's property manager which management fee shall be $0.02/square foot/month subject to annual CPI adjustments during the term of the Lease (the "Outside Area Expenses"). Landlord shall provide Tenant a reasonably detailed Budget summary of the costs which constitute Outside Area Expenses on an annual basis, together with copies of invoices for the costs incurred. If any Outside Area Expense would properly be considered a Capital Improvement, Landlord shall construct the item in question, and, provided that the cost of such Capital Improvement is properly reimbursable by Tenant hereunder, Tenant shall pay to Landlord, with each monthly installment of Base Rent coming due after completion of the Capital Improvement in question and receipt of Landlord's statement of the cost therefor, an amount equal to the cost of such Capital Improvement amortized over its useful life (as reasonably determined by the manufacturer or supplier of the item in question, where applicable) in equal monthly installments, until the earlier of the expiration of the term of this Lease or the end of the useful life of the Capital Improvement. (iii) Monthly Payments. From and after the Rent Start Date, Tenant shall pay to Landlord on the first day of each calendar month of the Term a monthly amount based upon the Budget estimated by Landlord for the Outside Area Expenses. The foregoing estimated monthly charge may be adjusted by Landlord at the end of any calendar quarter on the basis of Landlord's experience and reasonably anticipated costs. Any such adjustment shall be effective as of the calendar month next succeeding receipt by Tenant of written notice of such adjustment provided Tenant has received at least thirty (30) days' notice of the adjustment before it is due. Within one hundred twenty (120) days following the end of each calendar year Landlord shall furnish Tenant a statement of the actual Outside Area Expenses -11- 16 ("Actual Expenses") for the calendar year and the payments made by Tenant with respect to such period. If Tenant's payments for the Outside Area Expenses do not equal the amount of the Actual Expenses, Tenant shall pay Landlord the deficiency within thirty (30) days after receipt of such statement. If Tenant's payments exceed the Actual Expenses, Landlord shall either offset the excess against the Outside Area Expenses next thereafter to become due to Landlord, or shall refund the amount of the overpayments to Tenant, in cash, as Landlord shall elect. There shall be appropriate adjustments of the Outside Area Expenses as of the Commencement Date and expiration of the Term. Landlord shall make the books and records concerning the calculation of Outside Area Expenses available to Tenant for inspection during normal business hours at a location reasonably convenient to the Premises. If Tenant's review of those books and records indicates that the charge for Outside Area Expenses requested by Landlord exceeds the actual amount due, Landlord shall promptly reimburse to Tenant any overcharge. C. Compliance with Governmental Regulations. Subject to Paragraph 11.B above, Tenant shall comply with, including the making by Tenant of any Alteration to the Premises, all present and future regulations, rules, laws, ordinances, and requirements of all governmental authorities (including, without limitation, state, municipal, county and federal governments and their departments, bureaus, boards and officials) arising from the use or occupancy of, or applicable to, the Premises or privileges appurtenant to or in connection with the enjoyment of the Premises. Any such capital expenditures shall be amortized over its useful life, and Tenant shall pay in monthly installments during each year of the lease term that portion of such amortized expenditure that is allocable to such year. 18. Liens. Tenant shall keep the Building and the Property free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord and its Agents harmless from all liability and cost, including attorneys' fees and costs, in connection with or arising out of any such lien or claim of lien. Tenant shall cause any such lien imposed to be released of record by payment or posting of a proper bond acceptable to Landlord within ten (10) days after written request by Landlord. Tenant shall give Landlord written notice of Tenant's intention to perform work on the Premises which might result in any claim of lien at least ten (10) days prior to the commencement of such work to enable Landlord to post and record a Notice of Nonresponsibility. If Tenant fails to so remove any such lien within the prescribed ten (10) day period, then Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord as Additional Rent for such amounts upon demand. Such reimbursement shall include all costs incurred by Landlord including Landlord's reasonable attorneys' fees with interest thereon at the Interest Rate. 19. Landlord's Right to Enter the Premises. Tenant shall permit Landlord and its Agents to enter the Premises at all reasonable times with reasonable notice, except for emergencies in which case no notice shall be required, to inspect the same, to post Notices of Nonresponsibility and similar notices and "For Sale" signs, to show the Premises to interested parties such as prospective lenders and purchasers, to make necessary repairs, to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time after written notice from Landlord, and at any reasonable time within one hundred eighty (180) days prior to the expiration of the Term, to place upon the Premises ordinary "For Lease" signs and to show the Premises to prospective tenants. The above rights are subject -12- 17 to reasonable security regulations of Tenant, and to the requirement that Landlord shall at all times act in a manner to cause the least possible interference with Tenant's business. 20. Signs. Tenant shall have the right to erect and maintain a Tenant identification sign in, on or about the Building, Outside Area or the Premises or other advertising material that is visible from the exterior of the Building with Landlord's consent, which shall not be unreasonably withheld. The size, design, color and other physical aspects of the Tenant identification sign shall be subject to the Landlord's written approval prior to installation, which shall not be unreasonably withheld, and any appropriate municipal or other governmental approvals. The cost of the sign, its installation, maintenance and removal expense shall be at Tenant's sole expense. If Tenant fails to maintain its sign, or, if Tenant fails to remove its sign upon termination of this Lease, Landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord for such amounts shall be deemed Additional Rent. 21. Insurance. A. Indemnification. Tenant hereby agrees to defend, indemnify and hold harmless Landlord and its Agents from and against any and all damage, loss, liability or expense including attorneys' fees and legal costs suffered directly, or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or in any way attributable to the use or occupancy of the Premises or any part thereof by Tenant, the acts or omissions of the Tenant, its agents, employees or any contractors or invitees brought onto the Premises by the Tenant, except to the extent caused by the negligence or willful misconduct of Landlord or its Agents. Tenant agrees that the obligations assumed herein shall survive this Lease. Landlord shall indemnify and hold harmless Tenant from all damages, liabilities, claims, judgments, actions, attorneys' fees, consultants' fees, cost and expenses arising from the negligence or willful misconduct of Landlord or its employees, agents, contractors or invitees, or the breach of Landlord's obligations or representations under this Lease. B. Tenant's Insurance. Tenant agrees to maintain in full force and effect at all times during the Term, at its own expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or carriers acceptable to Landlord which afford the following coverages: (i) Commercial general liability insurance in an amount not less than Three Million and no/100ths Dollars ($3,000,000.00) combined single limit for both bodily injury and property damage which includes blanket contractual liability broad form property damage, personal injury, completed operations, products liability, and fire damage legal (in an amount not less than Fifty Thousand and no/100ths Dollars ($50,000.00), naming Landlord and its Agents as additional insureds. (ii) "Special Risk" property insurance (including, without limitation, vandalism, malicious mischief, inflation endorsement, and sprinkler leakage endorsement) on Tenant's Personal Property located on or in the Premises. Such insurance shall be in the full amount of the replacement cost, as the same may from time to time increase as a result of inflation or otherwise, and shall be in a form providing -13- 18 coverage comparable to the coverage provided in the standard ISO All- Risk form. As long as this Lease is in effect, the proceeds of such policy shall be used for the repair or replacement of such items so insured. Landlord shall have no interest in the insurance upon Tenant's Personal Property. (iii) Boiler and machinery insurance, including but not limited to, steam pipes, pressure pipes, condensation return pipes and other pressure vessels and HVAC equipment, including miscellaneous electrical apparatus, in an amount satisfactory to Landlord. C. Premises Insurance. During the Term Landlord shall maintain "Special Risk" property insurance (including inflation endorsement, sprinkler leakage endorsement, earthquake and flood coverage) on the Premises, excluding coverage of all Tenant's Personal Property on or in the Premises, but including the Building and any Tenant Improvements. Such insurance shall also include insurance against loss of rents on a "Special Risk" basis, including earthquake and flood, in an amount equal to the Monthly Rent and Additional Rent, and any other sums payable under the Lease, for a period of at least twelve (12) months commencing on the date of loss. Such insurance shall name Landlord and its Agents as named insureds and include a lender's loss payable endorsement in favor of Landlord's lender (Form 438 BFU Endorsement). Subject to the remaining provisions of this Lease, Tenant shall reimburse Landlord for the costs of such policy, annually, or upon such other periodic basis as Landlord shall elect, within fifteen (15) days of the date of receipt of a statement for the same, as Additional Rent. If the insurance premiums are increased after the Commencement Date, Tenant shall pay such increase within fifteen (15) days of notice of such increase. Nothing herein will require Tenant to reimburse to Landlord that portion of insurance premiums attributable to earthquake coverage which exceeds, in any one year, a commercially reasonable amount. The parties agree, without limitation, that, if insurance premiums attributable to earthquake coverage exceed three (3) times the premiums payable for casualty insurance, such cost will be deemed in excess of a commercially reasonable amount and providing the lien holder has waived the requirement for such coverage. D. Increased Coverage. Upon demand, Tenant shall provide Landlord, at Tenant's expense, with such increased amount of existing insurance, and such other insurance as the holder of a first deed of trust on the Property may reasonably require to afford Landlord and Landlord's lender adequate protection. E. Co-Insurer. If, on account of the failure of Tenant to comply with the foregoing provisions, Landlord is adjudged a co-insurer by its insurance carrier, then, any loss or damage Landlord shall sustain by reason thereof, including attorneys' fees and costs, shall be borne by Tenant and shall be immediately paid by Tenant upon receipt of a bill therefor and evidence of such loss. F. Insurance Requirements. All such insurance shall be in a form satisfactory to Landlord and shall be carried with companies that have a general policy holder's rating of not less than "A" and a financial rating of not less than Class "X" in the most current edition of Best's Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days' prior written notice to Landlord; and shall be primary as to Landlord. The policy or policies, or duly executed certificates for them, together with satisfactory evidence of payment of the premium thereon shall be deposited with Landlord -14- 19 prior to the Commencement Date, and upon renewal of such policies, not less than thirty (30) days prior to the expiration of the term of such coverage. If Tenant fails to procure and maintain the insurance required hereunder, Landlord may, but shall not be required to, order such insurance at Tenant's expense and Tenant shall reimburse Landlord. Such reimbursement shall include all costs incurred by Landlord including Landlord's reasonable attorneys' fees, with interest thereon at the Interest Rate. G. Landlord's Disclaimer. Landlord and its Agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Premises, or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or whatsoever, unless caused by or due to the negligence or willful acts of Landlord, or Landlord's Agents. Landlord and its Agents shall not be liable for any latent defect in the Premises. Tenant shall give prompt written notice to Landlord in case of a casualty, accident or repair needed in the Premises. 22. Waiver of Subrogation. Landlord and Tenant each hereby waive all rights of recovery against the other on account of loss and damage occasioned to such waiving party for its property or the property of others under its control to the extent that such loss or damage is insured against under any insurance policies which may be in force at the time of such loss or damage. Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in this Lease and Tenant and Landlord shall cause each insurance policy obtained by such party to provide that the insurance company waives all right of recovery by way of subrogation against either Landlord or Tenant in connection with any damage covered by such policy. 23. Damage or Destruction. A. Landlord's Obligation to Rebuild. If the Premises are damaged or destroyed, Landlord shall promptly and diligently repair the Premises unless it has the right to terminate this Lease as provided herein and it elects to so terminate. B. Right to Terminate. Landlord shall have the right to terminate this Lease in the event any of the following events occurs: (i) Insurance proceeds are not available to pay one hundred percent (100%) of the cost of such repair, excluding the deductible; (ii) The Premises cannot, with reasonable diligence, be fully repaired by Landlord within one hundred twenty (120) days after the date of the damage or destruction; or (iii) The Premises cannot be safely repaired because of the presence of hazardous factors, including, but not limited to, earthquake faults, radiation, chemical waste and other similar dangers. If Landlord elects to terminate this Lease, Landlord may given Tenant written notice of its election to terminate within sixty (60) days after such damage or destruction, and this Lease shall terminate thirty (30) days after the date Tenant receives such notice. If Landlord elects not to terminate the Lease, subject to Tenant's termination right set forth below, -15- 20 Landlord shall promptly commence the process of obtaining necessary permits and approvals and repair of the Premises as soon as practicable, and this Lease will continue in full force and effect. All insurance proceeds from insurance under Paragraph 21., excluding proceeds for Tenant's Personal Property, shall be disbursed and paid to Landlord. Tenant shall not be obligated to pay any such deductible if Landlord elects to terminate the lease due to casualty not caused by Tenant, its subtenants or their respective agents, employees, contractors or invitees. In no case shall the total deductible for casualty insurance or the amount of deductible paid by Tenant for any casualty, except for earthquake, exceed fifteen thousand dollars ($15,000). The total deductible amount for any earthquake casualty shall not exceed ten percent (10%) of the then current replacement cost of the improvements to be restored, and Tenant shall be obligated to pay up to one-half (5%) of this amount. Tenant shall have the right to terminate this Lease, if the Premises cannot, with reasonable diligence, be fully repaired within one hundred ninety-five (195) days from the date of damage or destruction, or if the estimate of the time required for such repair indicates that the repair will require in excess of one hundred ninety-five (195) days from the date of the damage or destruction. The determination of the estimated repair period shall be made by Landlord in its good faith business judgment within thirty (30) days after such damage or destruction. Landlord shall deliver written notice of the repair period to Tenant after such determination has been made and Tenant shall exercise its right to terminate this Lease, if at all, within ten (10) days of receipt of such notice from Landlord. C. Limited Obligation to Repair. Landlord's obligation, should it elect or be obligated to repair or rebuild, shall be limited to the basic Premises, the Tenant Improvements or the basic Building as they exist as of the Commencement Date, subject to any changes in applicable Laws, as the case may be, and Tenant shall, at Tenant's expense, replace or fully repair all Tenant's Personal Property and any Alterations installed by Tenant and existing at the time of such damage or destruction, as necessary for the conduct of Tenant's business. D. Abatement of Rent. Rent shall be temporarily abated proportionately, but only to the extent of any proceeds received by Landlord from rental abatement insurance described in Paragraph 21.C., during any period when, by reason of such damage or destruction, Landlord and Tenant reasonably determine that there is substantial interference with Tenant's use of the Building, having regard to the extent to which Tenant may be required to discontinue Tenant's use of the Building. Such abatement shall commence upon such damage or destruction and end upon substantial completion by Landlord of the repair or reconstruction which Landlord is obligated or undertakes to do. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, damage to Tenant's Personal Property or any inconvenience occasioned by such damage, repair or restoration. E. Damage Near End of Term. Anything herein to the contrary notwithstanding, if the Premises are destroyed or damaged during the last twelve (12) months of the Term, and the cost of repairing the damage or destruction exceeds ten percent (10%) of the replacement cost of the entire Premises, then Landlord and Tenant may elect to cancel and terminate this Lease as of the date of the occurrence of such damage. If Landlord and Tenant do not elect to so terminate this Lease, the repair of such damage shall be governed by Paragraphs 23.A. and 23.B. -16- 21 24. CONDEMNATION. If title to all of the Premises or so much thereof is taken for any public or quasi-public use under any statute or by right of eminent domain so that reconstruction of the Premises will not, in Landlord's and Tenant's mutual opinion, result in the Premises being reasonably suitable for Tenant's continued occupancy for the uses and purposes permitted by this Lease, this Lease shall terminate as of the date that possession of the Premises or part thereof be taken and rent shall be adjusted to the date of termination. A sale by Landlord to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes of this paragraph. If any part of the Premises is taken and such partial taking renders the Premises unsuitable for Tenant's business as reasonably determined by Tenant, Tenant shall have the right to terminate this Lease, which termination shall be effective on the date set forth in Tenant's termination notice and rent shall be adjusted to the date of termination. If any part of the Premises is taken and the remaining part is reasonably suitable for Tenant's continued occupancy for the purposes and uses permitted by this Lease, this Lease shall, as to the part so taken, terminate as of the date that possession of such part of the Premises is taken and the Rent and other sums payable hereunder shall be reduced in the same proportion that Tenant's use of Premises is reduced. If the parties disagree as to the amount of Rent reduction, the matter shall be resolved by arbitration. Each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Building or Premises. No award for any partial or entire taking shall be apportioned. Tenant assigns to Landlord its interest in any award which may be made in such taking or condemnation, together with any and all rights of Tenant arising in or to the same or any part thereof. Nothing contained herein shall be deemed to give Landlord any interest in or require Tenant to assign to Landlord any separate award made to Tenant for the taking of Tenant's Personal Property, for the interruption of Tenant's business, or its moving costs, or for the loss of its goodwill. 25. ASSIGNMENT AND SUBLETTING. A. Landlord's Consent. Tenant shall not enter into a Sublet without Landlord's prior written consent, which consent shall not be unreasonably withheld. Any attempted or purported Sublet without Landlord's prior written consent shall be void and confer no rights upon any third person and, at Landlord's election, shall terminate this Lease. Each Sublessee shall agree in writing, for the benefit of Landlord, to assume, to be bound by, and to perform the terms, conditions and covenants of this Lease to be performed by Tenant. Notwithstanding anything contained herein, Tenant shall not be released from personal liability for the performance of each term, condition and covenant of this Lease by reason of Landlord's consent to a Sublet unless Landlord specifically grants such release in writing. Consent by Landlord to any Sublet shall not be deemed a consent to any subsequent Sublet. B. Information to be Furnished. If Tenant desires at any time to Sublet the Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (i) the name of the proposed Subtenant; (ii) the nature of the proposed subtenant's business to be carried on -17- 22 in the Premises; (iii) the terms and provisions of the proposed Sublet and a copy of the proposed Sublet form containing a description of the subject premises; and (iv) such financial information, including financial statements, as Landlord may reasonably request concerning the proposed Subtenant. C. Landlord's Alternatives. At any time within ten (10) days after Landlord's receipt of the information specified in Paragraph 25.B., Landlord may, by written notice to Tenant, elect: (i) to consent to the Sublet by Tenant; or (ii) to refuse its consent to the Sublet. If Landlord consents to the Sublet, Tenant may thereafter enter into a valid Sublet or portion thereof, upon the terms and conditions and with the proposed Subtenant set forth in the information furnished by Tenant to Landlord pursuant to Paragraph 25.B. Landlord and Tenant shall split any profit 50/50 derived from any Sublet after deduction for reasonable costs of such Sublet including brokerage commissions, legal fees, and the costs of any Alteration(s) made by Tenant to the portion of the Premises which is Sublet pursuant to Paragraph 13 herein. D. Proration If a portion of the Premises is Sublet, the pro rata share of the Rent attributable to such partial area of the Premises shall be determined by Landlord by dividing the Rent payable by Tenant hereunder by the total leasable square footage of the Premises and multiplying the resulting quotient (the per square foot rent) by the number of square feet of the Premises which are Sublet appropriately adjusted, as necessary, for sublet areas which are warehouse spaces as opposed to those that are office spaces. E. Assignment and Exempt Sublets. Notwithstanding the above, Landlord's consent shall not be required for an Assignment or a Sublet of this Lease to an exempt subsidiary, affiliate or parent corporation of Tenant, or a corporation into which Tenant merges or consolidates, if Tenant gives Landlord prior written notice of the name of any such Sublessee or Assignee, and if the Sublessee or Assignee assumes, in writing, all of Tenant's obligations under the Lease. An assignment or other transfer of this Lease to a purchaser of all or substantially all of the assets of Tenant shall be deemed a Sublet requiring Landlord's prior written consent. 26. DEFAULT. A. Tenant's Default. An Event of Default under this Lease by Tenant shall exist if any of the following occurs: (i) If Tenant fails to pay Rent or any other sum required to be paid hereunder within fourteen (14) days after receipt of written notice; provided, however, that Tenant may cure such default at any time prior to a termination of this Lease by Landlord by paying all Rent and other expenses or charges then due together with interest at the Interest Rate from the due date through the date of payment; or (ii) If Tenant fails to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Tenant fails to cure such breach within twenty (20) days after written notice from Landlord where such breach could reasonably be cured within such twenty (20) day period; provided, however, that where such failure could not reasonably be cured within the twenty (20) day period, that Tenant shall not be in default if it commences such performance within the twenty (20) day period and diligently thereafter prosecutes the same to completion; or (iii) If Tenant assigns its assets for the benefit of its creditors; or -18- 23 (iv) If the sequestration or attachment of or execution on any material part of Tenant's Personal Property essential to the conduct of Tenant's business occurs, and Tenant fails to obtain a return or release of such Personal Property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or (v) If a court makes or enters any decree or order other than under the bankruptcy laws of the United States adjudging Tenant to be insolvent; or approving as properly filed a petition seeking reorganization of Tenant; or directing the winding up or liquidation of Tenant and such decree or order shall have continued for a period of thirty (30) days. B. Remedies. Upon an Event of Default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: (i) Landlord may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate this Lease, and Landlord shall have the right to collect Rent when due. (ii) Landlord may terminate Tenant's right to possession of the Premises at any time by giving written notice to that effect, and relet the Premises or any part thereof. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises or any part thereof, including, without limitation, broker's commissions, expenses of cleaning and redecorating the Premises required by the reletting and like costs. Reletting may be for a period shorter or longer than the remaining term of this Lease. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord has the right to remove all Tenant's Personal Property and store same at Tenant's cost and to recover from Tenant as damages: (a) The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus (b) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance or the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus (d) Any other amount which is necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus -19- 24 (e) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Paragraphs 26.B(ii)(a) and 26.B.(ii)(b) is computed by allowing interest at the Interest Rate on the unpaid rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Paragraph 26.B.(ii)(c) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law,in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant hereunder. (iii) Landlord may, with or without terminating this Lease, re-enter the Premises and remove all persons and property from the premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking possession of the Premises by Landlord pursuant to this paragraph shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant. C. Landlord's Default. Except as reasonably apparent to Landlord, or part of the regularly scheduled repair or maintenance of the Property, Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such thirty (30) day period and thereafter diligently prosecute the same to completion. 27. SUBORDINATION. This Lease is subject and subordinate to all ground and underlying leases and any first mortgages and first deeds of trust (collectively "Encumbrances") which now affect the Building or the Property, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") shall require that this Lease be prior and superior thereto, within seven (7) days of written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver any and all documents or instruments, in the form presented to Tenant, which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust, so long as Tenant is not in default, Holder agrees to recognize Tenant's rights under this Lease as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, -20- 25 Tenant shall execute any and all documents required by Landlord or the Holder required to effectuate such subordination to make this Lease subordinate to any lien of the Encumbrance. If Tenant fails to do so, it shall be deemed that this Lease is subordinated. Notwithstanding anything to the contrary set forth in this paragraph, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. Promptly following the date of this Lease, Landlord shall deliver to Tenant a recognition agreement in form reasonably acceptable to Tenant, whereby the holder of any deed of trust or other similar security instrument affecting the Property, shall agree to recognize the tenancy of Tenant on all the terms and conditions set forth herein, so long as there shall be no Event of Default by Tenant hereunder. 28. Notice. Any notice or demand required or desired to be given under this Lease shall be in writing and shall be personally served or in lieu of personal service may be given by mail. If given by mail, such notice shall be deemed to have been given when seventy-two (72) hours have elapsed from the time when such notice was deposited in the United States mail, registered or certified, and postage prepaid, addressed to the party to be served. At the date of execution of this Lease, the addresses of Landlord and Tenant are as set forth in Paragraph 1. After the Commencement Date, the address of Tenant shall be the address of the Premises. Either party may change its address by giving notice of same in accordance with this paragraph. 29. Attorneys' Fees. If either party brings any action or legal proceeding for damages for an alleged breach of any provision of this Lease, to recover rent, or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover as a part of such action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and costs. 30. Estoppel Certificates. Tenant shall within seven (7) days following written request by Landlord. (i) Execute and deliver to Landlord any documents, including estoppel certificates, in the form prepared by Landlord (a) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the Rent and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord, or, if there are uncured defaults on the part of Landlord, stating the nature of such uncured defaults, and (c) evidencing the status of the Lease as may be required either by a lender making a loan to Landlord to be secured by deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord. Tenant's failure to deliver an estoppel certificate within seven (7) days after delivery of Landlord's written request therefor shall be conclusive upon Tenant (a) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (b) that there are now no uncured defaults in Landlord's performance and (c) that no Rent has been paid in advance. - 21 - 26 If Tenant fails to so deliver a requested estoppel certificate within the prescribed time, it shall be deemed that the Lease is unmodified and in full force and effect except as represented by Landlord. (ii) Deliver to Landlord the current financial statements of Tenant, and financial statements of the two (2) years prior to the current financial statements year, with an opinion of a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied. 31. TRANSFER OF THE PREMISES BY LANDLORD. In the event of any conveyance of the Premises and assignment by Landlord of this Lease, Landlord shall be and is hereby entirely released from all liability under any and all of its covenants and obligations contained in or derived from this Lease occurring after the date of such conveyance and assignment, and Tenant agrees to attorn to such transferee provided such transferee assumes Landlord's obligations under this Lease. 32. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS. If Tenant shall commit an Event of Default, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation of Tenant under this Lease, make such payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All sums so paid by Landlord and all penalties, interest and costs in connection therewith shall be due and payable by Tenant on the next day after any such payment by Landlord, together with interest thereon at the Interest Rate from such date to the date of payment by Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment of Rent. If Landlord fails to perform any obligation of Landlord hereunder with respect to the repair or maintenance of the Premises, the Outside Area or any other portion of the Property within thirty (30) days of written notice from Tenant, or such shorter time as may be required in an emergency, whether or not written notice shall be provided, Tenant shall be entitled to perform such obligation and Landlord shall reimburse to Tenant the reasonable cost of such performance promptly following receipt of written notice from Tenant describing the work performed and the cost incurred. 33. TENANT'S REMEDY. If, as a consequence of a default by Landlord under this Lease, Tenant recovers a money judgment against Landlord, such judgment shall be satisfied from insurance and/or out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Premises and out of Rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Premises, and neither Landlord nor its Agents shall be liable for any deficiency. 34. MORTGAGE PROTECTION. If Landlord defaults under this Lease, Tenant will notify any beneficiary of a deed of trust or mortgage of a mortgage covering the Premises whose address has been furnished to Tenant in writing, and offer such beneficiary or mortgagee a -22- 27 reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure, and provided that such attempt to cure by any such beneficiary or mortgagee shall not limit the remedies otherwise available to Tenant as a result of the default of Landlord. 35. BROKERS. Landlord and Tenant each warrant and represent that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease except for CPS Realty Group (representing Landlord exclusively) and Cooper/Brady (representing Tenant exclusively). 36. ACCEPTANCE. This Lease shall only become effective and binding upon full execution hereof by Landlord and delivery of a signed copy to Tenant. Neither party shall record this Lease nor a short form memorandum thereof. 37. MODIFICATIONS FOR LENDER. If, in connection with obtaining financing for the Premises or any portion thereof, Landlord's lender shall request reasonable modification to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not materially adversely affect Tenant's rights hereunder. 38. PARKING. Tenant shall have the right to park in 100% of the Property's parking facilities, which provides parking spaces at a rate of 4 parking spaces per 1,000 usable square feet in the Property, and which will be provided without charge. 39. GENERAL. A. Captions. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. B. Executed Copy. Any fully executed copy of this Lease shall be deemed an original for all purposes. C. Time. Time is of the essence for the performance of each term, condition and covenant of this Lease. D. Separability. If one or more of the provisions contained herein, except for the payment of Rent, is for any reason held invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. E. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State of California. F. Gender; Singular, Plural. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. -23- 28 G. Binding Effect. The covenants and agreements contained in this Lease shall be binding on the parties hereto and on their respective successors and assigns to the extent this Lease is assignable. H. Waiver. The waiver by Landlord of any breach of any term, condition or covenant, of this Lease shall not be deemed to be a waiver of such provision or any subsequent breach of the same or other term, condition or covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach at the time of acceptance of such payment. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord. I. Entire Agreement. This Lease is the entire agreement between the parties, and there are no agreements or representations between the parties except as expressed herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. J. Authority. If Tenant is a corporation or a partnership, each individual executing this Lease on behalf of said corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. Landlord, at its option, may require a copy of such written authorization to enter into this Lease. K. Exhibits. All exhibits, amendments, riders and addendum attached hereto are hereby incorporated herein and made a part hereof. L. Lease Summary. The Lease Summary attached to this Lease is intended to provide general information only. In the event of any inconsistency between the Lease Summary and the specific provisions of this Lease, the specific provisions of this Lease shall prevail. M. Joint and Several Liability. The obligations of the parties hereunder, and each individual entity, partnership, corporation or person constituting a party, shall be joint and several. 40. OPTION TO RENEW. A. Grant of Option. Landlord hereby grants to Tenant two (2) option(s) (the "Option(s)") to extend the term of this Lease, each for an additional term of two (2) years, commencing when the then-existing term expires, upon the terms and conditions set forth in this Paragraph. B. Exercise of Option. Tenant may exercise such option by giving Landlord written notice (the "Exercise Notice") of its intention not less than six (6) months prior to the expiration of the then-existing term of this Lease. C. Extended Term Rent. If this Option is exercised, the Base Monthly Rent for the Premises shall be adjusted to an amount not less than the rent payable for the month immediately preceding the commencement dates of the term of the Option(s) or equal to ninety-seven and one-half percent (97-1/2%) of the then current fair market monthly rent ("Fair Market Rent"), whichever is greater, for the Premises as of the commencement date of the applicable extended term as determined by the agreement of the -24- 29 parties. The Fair Market Rent for the Premises shall not include the value, if any, attributable to Alterations to the Premises made at the cost of Tenant. If the parties are unable to agree on the Fair Market Rent for the Premises within sixty (60) days after the Exercise Notice, Tenant shall be entitled to require the Fair Market Rent to be determined by arbitration, as set forth below. All other terms and conditions contained in the Lease shall remain in full force and effect and shall apply during the Option term. D. ARBITRATION. (i) Promptly following notice to Landlord from Tenant, each party shall appoint a qualified, licensed real estate appraiser experienced in appraising office space in San Jose, California to act as an arbitrator. The two (2) appraisers so appointed shall determine the Fair Market Rent pursuant to the terms and conditions of this Lease within sixty (60) days of Tenant's initial notice, and they shall notify the parties of that determination in writing. (ii) If the two (2) appraisers do not agree on the Fair Market Rent, they shall appoint a third, similarly qualified appraiser. Within thirty (30) days of his appointment, the third appraiser shall select, from the proposals submitted by the first two appraisers, the proposal that most closely approximate the third appraiser's determination of Fair Market Rent, and that figure shall be deemed the Fair Market Rent for purposes of this Lease. The third appraiser shall have no right to compromise or modify either of the proposals submitted by the first two appraisers. (iii) Each party shall pay all charges and expenses of the appraiser appointed by that party, and one-half of any charges and expenses incurred by the third appraiser. (iv) If either party fails to select an appraiser as provided herein, or if either of the appraisers fails to present a determination within the required time period, the determination presented by the appraiser appointed by the other party shall be considered final and binding upon both parties. 41. APPROVALS. Whenever the Lease requires an approval, consent, designation, determination or judgment by either Landlord or Tenant, such approval, consent, designation, determination or judgment shall not be unreasonably withheld or delayed. 42. REASONABLE EXPENDITURES. Any expenditure by a party permitted or required under the Lease, for which such party is entitled to demand and does demand reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred, and shall be substantiated by documentary evidence available for inspection and review by the other party or its representative during normal business hours. -25- 30 THIS LEASE is effective as of the date the last signatory necessary to execute the Lease shall have executed this Lease. TENANT: JT Storage, Inc., a Delaware corporation By: /s/ David B. Pearce ------------------------------- Its: President ------------------------------- LANDLORD: The Cilker Revocable Trust of October 9, 1990 By: /s/ William H. Cilker ------------------------------- William H. Cilker By: /s/ Leila A. Cilker ------------------------------- Leila A. Cilker By: /s/ Marian C. Armstrong ------------------------------- Marian C. Armstrong By: /s/ Tom Claiborne Polk ------------------------------- Tom Claiborne Polk, an unmarried man The undersigned spouse of Marian C. Armstrong consents to the terms of the preceding Lease agreement: /s/ James D. Armstrong, Sr. - ------------------------------------ -26- 31 [SECOND LEVEL FLOOR PLAN] [FIRST LEVEL FLOOR PLAN] THE PREMISES EXHIBIT "A" 32 THE PROPERTY LEGAL DESCRIPTION: APN 097-07-045 All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, described as follow: PARCEL ONE: All of Lot 5, as shown upon that certain Map entitled, "TRACT NO. 7544", recorded March 7, 1984 in Book 525 of Maps at Pages 45 and 46, and the Certificate of Correction, recorded August 8, 1985 in Book J 422, Page 1784, Official Records, Santa Clara County. RESERVING THEREFROM as appurtenant to Lot 6, an easement for the purpose of vehicular and pedestrian ingress and egress over the following described parcel: Being a strip of land 13 feet in width, the easterly and southerly line of which is described as follows: Beginning at the southeasterly corner of Lot 5 as said lot is shown on Tract 7544 recorded in Book 525 of Maps, Pages 45 and 46, Santa Clara County Records, said point being on the northerly Right of Way line of Tasman Drive, as shown on said Tract Map: Thence northwesterly along the easterly lot line of Lot 5, as said lot is shown on aforesaid Tract Map, North 30 degrees 23' 31' West, 194.18 feet: Thence northeasterly North 36 degrees 23' 34" East, 33.70 feet to the terminus of said strip of land, said terminus being on the northerly lot line of Lot 8, as said lot is shown on aforesaid Tract Map. PARCEL TWO: TOGETHER WITH and as appurtenant to Lot 5, an easement for the purpose of vehicular and pedestrian ingress and egress over the following described parcel: Being a strip of land 13 feet in width, the Northwesterly and Westerly line of which is described as follows: Beginning at the most northerly corner of Lot 8 as said Lot is shown on Tract 7544 recorded in Book 525 of Maps at Pages 45 and 46, Santa Clara County recorded said point being on the Westerly right of way line of Zanker Road as shown on said Tract Map. Thence Southwesterly along the Northwesterly lot line of Lot 8 as shown on aforesaid Tract Map South 36 degrees 23' 34" West, 1220.80 feet to the most Westerly corner of Lot 8: Thence Southeasterly along the Southwesterly lot line of aforesaid Lot 8, South 30 degrees 31' 20" East, 194.18 feet to the terminus of said strip of land, said terminus being on the Northerly right of way line of Tasman Drive as shown on aforesaid Tract Map. EXHIBIT "B" 33 PARCEL THREE: TOGETHER WITH and as appurtenant to Lot 5, an easement for the purpose of vehicular and pedestrian ingress and egress over the following described parcel: Being a strip of land 13 feet in width, the Southeasterly line of which is described as follows: Beginning on the Southeasterly corner of Lot 7 as said lot is shown on Tract 7544 recorded in Book 525 of Maps Pages 45 and 46 Santa Clara County Records, said point being on the Westerly right of way line of Zanker Road as shown on said Tract Map; Thence Southwesterly along the Southeasterly lot line of Lot 7 as said lot is shown on aforesaid Tract Map South 36 degrees 23' 34" West, 466.10 feet to the terminus of said strip of land, said terminus being the most Southwesterly corner of Lot 7. PARCEL FOUR: TOGETHER WITH and as appurtenant to Lot 5, an easement for the purpose of vehicular and pedestrian ingress and egress over the following described parcel: Being a strip of land 13 feet in width, the Southeasterly line of which is described as follows: Beginning at the most easterly corner of Lot 6 as said lot is shown on Tract 7544 recorded in Book 525 of Maps pages 45 and 46 Santa Clara County Records, said point being on the northerly lot line of Lot 8 as said lot is shown on said Tract Map; Thence southwesterly along the southeasterly lot line of Lot 6 as said lot is shown on aforesaid Tract Map South 36 degrees 23' 34" West, 721.00 feet to the terminus of said strip of land, said terminus being the most southerly corner of said Lot 6. 34 EXHIBIT C WORK LETTER AGREEMENT This Work Letter Agreement ("Work Letter") is entered into as of June ____, 1995 by and between THE CILKER REVOCABLE TRUST OF OCTOBER 9, 1990 ("Landlord"), and JT STORAGE, INC., a Delaware corporation ("Tenant"), in connection with that certain Commercial Lease (the "Lease") of even date herewith. In consideration of the mutual covenants contained herein, Landlord and Tenant hereby agree as follows: 1. ARCHITECT. A. The parties hereby approve the retention by Landlord of HPC Architecture (the "Architect") in connection with the design and construction of the Tenant Improvements, as defined below. 2. PREPARATION OF SPACE PLANS, CONSTRUCTION DRAWINGS. A. Approval of Space Plans. Landlord and Tenant hereby approve the space plan prepared by the Architect as of June 7, 1995 and attached hereto as Exhibit C-1 (the "Space Plan"). B. Preparation of Construction Drawings. Based on the approved Space Plan, the Architect shall prepare and submit to Landlord and Tenant complete architectural plans, drawings and specifications for the Tenant Improvements (collectively, the "Construction Drawings"). Both Landlord and Tenant agree that the mechanical, electrical and plumbing improvements will be excluded from the Architect's Construction Drawings and will be constructed on a design build basis. Within three (3) days of receipt of the Construction Drawings: (i) Landlord and Tenant shall notify the Architect in writing of their approval of the Construction Drawings, or, (ii) if Landlord or Tenant disapproves of any portion of the Construction Drawings, Landlord and/or Tenant shall notify the Architect in writing of such disapproval and the specific reasons therefor. The Architect shall make any changes requested by Landlord and Tenant which are necessary in order to make the Final Plans and Specifications consistent with the approved Preliminary Plans and Specifications. Upon approval by both parties, the Construction Drawings may be attached as Exhibit C-2. 3. SELECTION OF GENERAL CONTRACTOR. A. Bids and Selection of General Contractor and Subcontractors. The parties hereby approve the retention of San Jose Construction Company, Inc. as the general contractor (the "General Contractor") for the construction of the Tenant Improvements, on terms and conditions to be approved by both parties, which terms shall include a maximum payment for overhead and profit to the General Contractor of two and one-half percent (2-1/2%) of the Approved Tenant Improvement Cost, as defined below. General Contractor, shall solicit bids from at least three (3) qualified, licensed subcontractors for certain Major Subcontracts, as defined below, in each case approved by Landlord and Tenant. For purposes of the preceding sentence, Major Subcontracts shall mean the following: drywall, paint and carpet. Each final bid from the prospective subcontractors shall include a guaranteed maximum contract price (including materials and labor supplied in connection with the Tenant Improvements). All bids 1 EXHIBIT "C" 35 shall be subject to the prior review and written approval of Tenant and Landlord, such approval or disapproval to be provided by Tenant to Landlord within three (3) business days after receipt of preliminary and final bids by Tenant. Landlord and Tenant shall attempt to revise the prospective bids so that a mutually acceptable bid has been received within no more than five (5) business days after the initial notice of disapproval from Tenant. The sum of (i) the approved bids, (ii) the design-build costs, incurred for mechanical, electrical and plumbing improvements, (iii) the compensation payable to the General Contractor pursuant to this Paragraph 3.A, and (iv) the additional costs of constructing the Tenant Improvements as reviewed and approved by Landlord and Tenant shall be referred to herein as the Approved Tenant Improvement Cost. B. Form of Construction Contract. The proposed form of construction contract between Landlord and the General Contractor shall provide, among other things, that Tenant is the third-party beneficiary thereof, that all change orders are to be signed by Tenant, that all payments to contractor(s) shall be subject to a standard retention of ten percent (10%) (and the subcontracts shall so be provided) and that the General Contractor and all subcontractors shall carry insurance pursuant to the requirements set forth below. Within five (5) days after execution, Landlord shall deliver to Tenant a copy of the construction contract between Landlord and the General Contractor. C. Insurance. Landlord shall require all contractors to obtain and maintain the following insurance policies during the construction of the Tenant Improvements, as applicable: (i) Comprehensive general liability (including products/completed operations), with limits of not less than $500,000/$500,000 bodily injury and $500,000 property damage or $500,000 combined single limit, with JT Storage, Inc. and Landlord named as an additional insured; (ii) Umbrella liability (including products/completed operations), with limits of not less than $1,000,000, with JT Storage, Inc. and Landlord named as additional insured; (iii) Automobile liability, with limits of not less than $500,000/$500,000 bodily injury and $250,000 property damage; and (iv) Worker's compensation (including employer's liability) insurance in compliance with law. All such policies (except worker's compensation) shall provide that twenty (20) days' prior notice of cancellation or reduction in coverage or limits shall be delivered to Tenant. A certificate evidencing such insurance shall be delivered, prior to commencement of construction of the Tenant Improvements, to Tenant. Landlord shall not permit the General Contractor or any subcontractor to commence construction of any part of the Tenant Improvements until it has provided Tenant with certificates of insurance evidencing such insurance coverage. D. Permits. Landlord shall submit the Construction Drawings to all governmental agencies and authorities whose review and/or approval thereof is required and shall use its best efforts to procure all permits, consents and approvals required under applicable laws, ordinances, codes, rules and regulations ("Permits"). If Landlord is unable to procure the Permits within sixty (60) days after the date of execution hereof, Landlord shall be entitled to terminate the Lease within ten (10) days thereafter by written notice to Tenant. 4. CONSTRUCTION OF TENANT IMPROVEMENTS. A. Landlord shall cause the Tenant Improvements to be constructed in accordance with the Construction Drawings and this Work Letter, in a first-class manner, and under competent supervision. All materials and equipment utilized in the Tenant Improvements shall be new, first-class and of the type and quality 2 36 customary in first-class R&D/Light Manufacturing buildings in the vicinity of the Premises. The Tenant Improvements, and the construction thereof, shall comply with all applicable laws, codes, ordinances, rules and regulations. 5. CONSTRUCTION SCHEDULE. A. Landlord shall use all reasonable efforts to substantially complete the Tenant Improvements on or before July 1, 1995 the "Anticipated Commencement Date"). The Commencement Date shall occur on the date that Landlord has "substantially completed" the Tenant Improvements, which shall be deemed to occur when all the following have been completed: (i) the Architect has certified to Tenant that the Tenant Improvements have been constructed in accordance with the Construction Drawings; (ii) there remains no incomplete or defective item of Tenant Improvements that would adversely affect Tenant's intended use of the Premises; (iii) Landlord has delivered legal possession of the Premises and the Tenant Improvements, in the condition required in the Lease, to Tenant; and (iv) Landlord has obtained all approvals and permits from the appropriate governmental authorities required for the legal occupancy of the Premises and the Tenant Improvements for Tenant's intended use, including a certificate of occupancy for the Shell Building and the Tenant Improvements. Landlord shall provide written notice of the impending Commencement Date no later than fifteen (15) days before the actual Commencement Date. B. Any Tenant Improvement Costs related to demolition and Landlord's construction management shall be borne by Landlord. 6. COST OF TENANT IMPROVEMENTS. A. Tenant Improvement Allowance. Landlord shall contribute up to Three Hundred Ninety Thousand Dollars ($390,000) (the "Tenant Improvement Allowance") to the actual cost of constructing the Tenant Improvements (the "Tenant Improvement Cost"). In addition, at the request of Tenant, Landlord shall contribute an additional amount of up to One Hundred Forty Thousand Dollars ($140,000) (the "Additional Tenant Improvement Allowance") to the Tenant Improvement Cost. Tenant shall pay the cost of constructing the Tenant Improvements up to a maximum amount equal to the difference between the Approved Tenant Improvement Cost and the sum of the Tenant Improvement Allowance, and so much of the Additional Tenant Improvement Allowance as Tenant requests Landlord to provide ("Tenant's Contribution") in accordance with the provisions of Paragraph 9 hereof. Tenant shall reimburse to Landlord the entire Additional Tenant Improvement Allowance either: (i) within thirty (30) days of substantial completion of the Tenant Improvements and following receipt of a statement from Landlord setting forth in reasonable detail the application of the Additional Tenant Improvement Allowance, or, (ii) through an increase in Base Monthly Rent equal to Twenty-One and 25/100 Dollars ($21.25) for each One Thousand Dollars ($1,000) of the Additional Tenant Improvement Allowance applied as set forth herein. B. Tenant Improvement Cost. The Tenant Improvement Cost shall include, but not be limited to, the following: (1) all costs of preliminary and final architectural and engineering plans and specifications for the Tenant Improvements, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation; 3 37 (2) all costs of interior design and finish schedule plans and specifications including the General Contractor's as-built drawings. (3) all direct and indirect costs of procuring and installing Tenant Improvements in the Premises, including the approved construction fee for overhead and profit payable to the General Contractor, and the cost of general conditions to be provided by the General Contractor; and (4) all fees payable to the Architect and Landlord's engineering firm, if required by landlord and Tenant to re-design any portion of the Tenant Improvements following Tenant's and Landlord's approval of the Construction Drawings. In no event will the Tenant Improvement Costs include, nor will the Tenant Improvement Allowance or the Additional Tenant Improvement Allowance be applied to the cost of procuring, constructing or installing in the Premises any of Tenant's personal property, including voice and data equipment and cabling. C. Exclusions from Tenant Improvements Cost. Notwithstanding anything to the contrary contained in the Lease or this Work Letter, the cost of constructing the Tenant Improvements shall not include the following: (1) Costs attributable to (A) work to be performed at the cost of Landlord or any other party, including the previous tenant, which work will consist of demolition of certain existing interior improvements; (B) improvements installed outside the demising walls of the Premises unless (1) necessitated by Tenant Improvements made inside the demising walls of the Premises; or (2) requested by Tenant or as shown in the Construction Drawings; and (C) improvements installed "off-site" (such as streets, curbs, gutters, traffic lights, lights for parking and street lighting); (2) Costs for improvements which are not shown on or described in the Construction Drawings unless otherwise approved by Tenant; (3) Costs incurred to remove Hazardous Materials from the Property or the surrounding area unless the presence of such materials was caused by Tenant or its agents, contractors, employees or invitees in violation of Hazardous Materials laws; (4) Attorneys' fees incurred in connection with negotiation of construction contracts, and attorneys' fees, experts' fees and other costs of legal and arbitration proceedings to resolve construction disputes with third parties; (5) Loan fees, mortgage brokerage fees, interest and other costs of financing construction costs; (6) Costs incurred as a consequence of delay (unless the delay is caused by Tenant) or construction defects; (7) Costs recoverable by Landlord upon account of warranties and insurance; (8) Restoration costs as a consequence of casualties; (9) Penalties and late charges attributable to the failure to pay construction costs, except to the extent such penalties and late charges arise due to delays caused by Tenant, its agents, contractors, employees or invitees; and (10) Any construction management or supervision fee otherwise charged by Landlord in connection with its construction of improvements to a particular premises. (11) Tenant's space planner. 4 38 7. CHANGE ORDERS. Tenant shall have the right to make reasonable changes in the Construction Drawings, subject to the conditions set forth in this Paragraph 7. Before approval of any change in the Construction Drawings, Landlord shall advise Tenant in writing of (i) the estimated cost of any such change; and (ii) the additional time, if any, that such change would add to the time required for substantial completion (as defined above) of the Tenant Improvements. If Tenant objects to such cost and/or delay, Tenant shall have the right to withdraw the request for such change. If Tenant approves such cost and delay, then Tenant shall give its approval in writing; thereafter, Tenant's responsibility (if any) for any such cost or delay shall be limited to the amount which it so approved. Change orders shall not be subject to a Landlord mark-up fee unless they necessitate cost for overtime. 8. TENANT DELAY. If any failure by Tenant to perform any obligations hereunder delays the Commencement Date of the Lease beyond the date on which the Commencement Date would have occurred but for such delay, including Tenant's request for items which have been identified as long-lead time items to be included in the Tenant Improvements (a "Tenant Delay"), the Commencement Date shall be deemed to occur on the date on which it would have occurred but for such Tenant Delay. 9. PAYMENT OF TENANT IMPROVEMENT COSTS. Within thirty (30) days after substantial completion of the Tenant Improvements, Landlord shall provide Tenant with a detailed statement of the Tenant Improvement Cost, such statement to be accompanied by invoices and other appropriate evidence of payment from Landlord or its General Contractor: (i) if the Tenant Improvement Cost exceeds the Tenant Improvement Allowance, and so much of the Additional Tenant Improvement Allowance as has been drawn down at the request of Tenant, Tenant shall either pay the difference to Landlord within thirty (30) days after Tenant's receipt of the statement, or through an increase in Base Monthly Rent equal to Twenty-One and 2/5100 Dollars ($21.25) for each One Thousand Dollars ($1,000) of the Additional Tenant Improvement Allowance applied as set forth in Paragraph 6.A. No payment by Tenant pursuant to this Paragraph shall constitute a waiver by Tenant of any right of Tenant to contest the amount of the Tenant Improvement Cost. Notwithstanding any provision in this Work Letter to the contrary, Tenant shall have no obligation to pay any cost which is excluded from the definition of Tenant Improvement Cost by Paragraph 6.C., and shall have no obligation to pay any portion of the Tenant Improvement Cost that exceeds the Approved Tenant Improvement Cost unless Tenant has approved in writing such excess amount. 10. PUNCHLIST AND CORRECTION OF DEFECTS. Not later than five (5) days before the Anticipated Commencement Date, Landlord and Tenant shall conduct a walk-through of the Premises and mutually prepare a written punchlist setting forth any defective item of construction. Landlord shall cause all defects, errors or omissions listed in the punchlist to be corrected within forty-five (45) days after receipt thereof; or as soon as practicable thereafter. Notwithstanding anything to the contrary contained in the Lease, Tenant's acceptance of the Premises or submission of a punchlist shall not be deemed a waiver of Tenant's right to have defects in the Tenant Improvements or the Premises repaired at no cost to Tenant. Landlord also hereby assigns to Tenant all warranties related to the improvements with respect to the Premises, including warranties which would reduce Tenant's maintenance obligations under the Lease, and shall cooperate with Tenant to enforce all such warranties. 5 39 11. MISCELLANEOUS. (A) Time is of the Essence. Time is of the essence of each and every provision of this Work Letter. (B) Definitions. All terms capitalized herein and not otherwise defined shall have the meanings set forth in the Lease. (C) Incorporation in the Lease. The provisions of this Work Letter shall be incorporated into and constitute a part of the Lease. (D) Approvals. Except as expressly provided otherwise, whenever the approval of a party is required hereunder, such approval shall not be unreasonably withheld or delayed. IN WITNESS WHEREOF, the parties hereto have executed this Work Letter as of the date first above written. TENANT: JT Storage, Inc., a Delaware corporation By: /s/ David B. Pearce ------------------------------- Its: President ------------------------------- LANDLORD: The Cilker Revocable Trust of October 9, 1990 By: /s/ William H. Cilker ------------------------------- William H. Cilker By: /s/ Leila A. Cilker ------------------------------- Leila A. Cilker By: /s/ Marian C. Armstrong ------------------------------- Marian C. Armstrong By: /s/ Tom Claiborne Polk ------------------------------- Tom Claiborne Polk, an unmarried man 6 40 EXHIBIT "C-1" TO BE INSERTED SPACE PLAN Dated June 7, 1995 This plan is to substantially conform to the Preliminary layout dated June 7, 1995 by HPC Architecture. EXHIBIT "C-1" 41 COMMENCEMENT DATE MEMORANDUM LANDLORD: THE CILKER REVOCABLE TRUST OF OCTOBER 9, 1990 --------------------------------------------- TENANT: JT STORAGE, INC. ---------------- LEASE DATE: ---------------------------------------------- PREMISES: 166 BAYPOINTE PARKWAY ---------------------- SAN JOSE, CALIFORNIA ---------------------- Pursuant to Paragraph 4.A. of the above referenced Lease, the Commencement Date is hereby established as ___________________________, 1995. LANDLORD THE CILKER REVOCABLE TRUST OF OCTOBER 9, 1990 By: --------------------------------- William H. Cilker Its: --------------------------------- TENANT JT STORAGE, INC. By: --------------------------------- Its: --------------------------------- EXHIBIT "D" EX-10.19 39 LOAN AGREE MODULAR ELEC (I) & INDUSRIAL CREDIT 1 Exhibit 10.19 LOAN AGREEMENT BETWEEN MODULER ElECTRONICS (I) PVT. LTD. AS BORROWER AND THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED AS LENDER 2 LOAN AGREEMENT THIS Agreement made this 15th day of September One Thousand Nine Hundred and Ninety Two between MODULER ELECTRONICS (I) PVT. LTD., a company within the meaning of the Companies Act, 1956 (1 of 1956) and having its, Registered office at 35 & 36, SDF Block 1, Madras Export Processing Zone Tambaram, Kadaperi, Madras 600 045 (hereinafter referred to as to the "Borrower", which expression shall, unless it be repugnant or to the subject or context thereof, include its successors and assigns); AND THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED, a public company incorporated under the Indian Companies Act, 1913 (7 of office at 163, and having its registered office at Backbay Reclamation, Bombay 400 020 (hereinafter referred to as "the Lender", which expression shall, unless it be repugnant to the subject or context thereof, include its unless it be repugnant or successors and assigns). 3 CONTENTS
Article Subject Page No. ------- ------- ------- I DEFINITIONS: GENERAL CONDITIONS 2 II AGREEMENT AND TERMS OF LOAN 3 III SECURITY 6 IV APPOINTMENT OF NOMINEE DIRECTOR(S) 8 V SPECIAL CONDITIONS 8 VI EFFECTIVE DATE OF AGREEMENT 8 SCHEDULE I - THE PROJECT 9 SCHEDULE II - FINANCING PLAN 10 SCHEDULE III - AMORTIZATION SCHEDULE 11 SCHEDULE IV - SPECIAL CONDITIONS 12
4 3 Provided, however, that the General Conditions shall in their application to this Agreement stand modified as under: a) The words "commitment charge" wherever they appear shall be substituted by "Front End Fees". b) Section 4.16 - PLACE AND MODE OF PAYMENT BY THE BORROWER be substituted by the following: "Section 4.16 - PLACE AND MODE OF PAYMENTS AND CREDIT THEREFOR- All monies payable by the Borrower to the Lender shall be paid to the Lender at such office(s) as may be specified by them by telegraphic, telex or mail transfer to the account of such, office(s) or by cheque or bank draft drawn in favour of the Lender on a scheduled bank at Bombay or such other place or to such other account as the Lender may notify to the Borrower and shall be so paid as to enable the Lender to realise, at par, the amount on or before the relative due date. Credit for all payments by local cheque/bank draft will be given on the Lender's immediately next working day after the date of receipt of the instrument or the relative due date whichever is later. Credit for all payments by outstation cheque/bank draft will be given only on realisation or on the relative due date whichever is later." c) Section 7.4 - NOMINEE DIRECTOR sub clause (v) be substituted as follows: The Nominee Director(s) shall be entitled to receive all notices agenda, minutes of Board Meetings, etc. and to attend all General Meetings and Board Meetings and meetings of any Committees of the Board of which he is a member." ARTICLE II AGREEMENT AND TERMS OF LOAN 2.1. AMOUNT AND TERMS OF LOAN: The Borrower agrees to borrow from the lender and the Lender agrees to lend to the Borrower, on the terms and conditions contained herein as also in the General Conditions, sum to the maximum extent of Rs. 180 lacs. 5 4 2.2 INTEREST (i) The Borrower shall pay to the Lender interest at the rate of 20% per annum on the principal amounts of the Loan outstanding from time to time, quarterly in each year, on February 15, May 15, August 15 and November 15. (ii) Disbursements made pending creation of final security as stipulated in Article III hereof shall carry further interest at the rate of 1% per annum till creation of such security. PROVIDED that in the event of any upward revision of the minimum lending rate(s) of the commercial banks for cash credits, the Borrower shall pay to the Lender interest at such higher rate as shall from time to time be fixed by the Lender and intimated to the Borrower but so that such revised rate shall not at any point of time exceed the highest of the interest rates charged by the commercial banks for cash credits. PROVIDED further that in the event of increase in the rate of interest : (a) The Borrower shall have an option to prepay to the Lender forthwith on receipt of such intimation, the entire outstanding of the Loan together with all outstanding interest and other charges thereon with such premium as may be specified by the Lender. (b) In the alternative, the Borrower shall have an option to make such prepayment together with interest, at the increased rate as intimated till payment, at any time during a period of two years after receipt of such intimation. 2.3 FRONT END FEE The Company shall pay to the Lenders Front End Fee of 1% of the Loan on or before signing this Agreement. 2.4 COSTS AND CHARGES The Borrower shall pay all taxes, duties, costs, charges and expenses in connection with or relating to the Loan transaction (including costs of investigation of title and protection of Lender's interests). In the event of the Borrower failing to pay the aforesaid monies, the Lender will be at liberty but shall not be obliged to pay the same. All such sums shall be reimbursed by the Borrower to the lender within 30 days from the date of notice of demand from the Lender and shall be debited to the Borrower's Loan Account and shall carry interest at the rate of 20% per annum from the date of payment till such reimbursement. 6 5 In case of default in making such reimbursement within 30 days from the date of notice of demand, the Borrower shall also pay on the defaulted amounts, liquidated damages at the rate 2% per annum from the date of notice of demand till reimbursement in accordance with the provisions of the General Conditions. 2.5 LAST DATE OF WITHDRAWAL : Unless the Lender otherwise agrees, the right to make withdrawals from the Loan shall cease on February 15, 1995. 2.6 REPAYMENT The Borrrower undertakes to repay the principal amounts of the Loan in accordance with the Amortization Schedule set forth in Schedule III hereto. 2.7 CONVERSION RIGHT IN CASE OF DEFAULT (a) If the Borrower commits a default in payment or repayment of three consecutive instalments of principal amounts of the Loan or interest thereon or any combination thereof, then, the Lender shall have the right to convert (which right is hereinafter referred to as "the conversion right") at its option the whole of the outstanding amount of the Loan, or a part not exceeding 20% of the Loan, whichever is lower, into fully paid-up equity shares of the Borrower, at par, in the manner specified in a notice in writing to be given by the lender to the Borrower (which notice is hereinafter referred to as the "notice of conversion") prior to the date on which the conversion is to take effect, which date shall be specified in the said notice (which date is hereinafter referred to as the "date of conversion"). 7 6 On receipt of notice of conversion, the Borrower shall allot and issue the requisite number of fully paid-up equity shares to the Lender as from the date of conversion and the Lenders shall accept the same in satisfaction of the principal amount of the Loan to the extent so converted. The part of the Loan so converted shall cease to carry interest as from the date of conversion and the Loan shall stand correspondingly reduced. Upon such conversion, the instalments of the Loan payable after the date of conversion as per Schedule III hereto shall stand reduced proportionately by the amounts of the Loan so converted. The equity shares so alloted and issued to the Lender shall carry, from the date of conversion, the right to receive proportionately the dividends and other distributions declared or to be declared in respect of the equity capital of the Borrower. Save as aforesaid, the said shares shall rank pari passu with the existing equity shares of the Borrower in all respects. The Borrower shall, at all times, maintain sufficient unissued equity shares for the above purpose. ii) The conversion right reserved as aforesaid may be exercised by the Lender on one or more occasions during the currency of the Loan on the happening of any of the events specified in sub-clauses 1 (a) above. iii) The Borrower assures and undertakes that in the event of the Lender exercising the right of conversion as aforesaid, the Borrower shall get the equity shares which will be issued to the Lender as a result of the conversion, listed with the Stock Exchange(s) at Bombay and Madras. iv) (a) For purposes of sub-clause 1 (a) above it shall not be construed as a default, if the Borrower approaches the Lender well in advance for postponement of principal or interest, as the case may be, and the Lender agrees to the same. ARTICLE III SECURITY 3.1 SECURITY FOR THE LOAN (A) The Loan together with all interest, liquidated damages, premia on prepayment or on redemption, costs, expenses and other monies whatsoever stipulated in this Agreement shall be secured by 8 7 (a) a first charge by way of hypothecation in favour of the Lender off all the Borrower's movables save and except book debts), including movable machinery, machinery spares, tools and accessories, present and future, subject to prior charges created and/or to be created: i) in favour of the Borrower's Bankers on the Borrower's stocks of raw materials, semi-finished and finished goods, consumable stores and such other movables as may be agreed to by the Lender for securing the borrowings for working capital requirements in the ordinary course of business. (B) The Borrower shall make out a good and marketable title to its properties to the satisfaction of the Lender and comply with all such formalities as may be necessary or required for the said purpose. 3.2 CREATION OF ADDITIONAL SECURITY If, at any time during the subsistence of this Agreement, the Lender is of the opinion that the security provided by the Borrower has become inadequate to cover the balance of the Loan then outstanding, then, on the Lender advising the Borrower to that effect, the Borrower shall provide and furnish to the Lender, to the satisfaction of the Lender such additional security as may be acceptable to the Lender to cover such deficiency. 3.3 ACQUISITION OF ADDITIONAL IMMOVABLE PROPERTIES So long as any monies remain due and outstanding to the Lender, the Borrower undertakes to notify the Lender in writing of all its acquisitions of immovable properties and as soon as practicable thereafter to make out a marketable title to the satisfaction of the Lender and charge the same in favour of the Lender by way of first charge in such form and manner as may be decided by the Lender. 3.4 GUARANTEE The Borrower shall procure irrevocable and unconditional personal guarantee from [*] in favour of the Lender for the due repayment of the Loan and the payment of all interest and other monies payable by the Borrower in the form prescribed by the Lender and to be delivered to the Lender before any part of the Loan is advanced. The Borrower shall not pay any guarantee commission to the said Guarantors. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 8 ARTICLE IV APPOINTMENT OF NOMINEE DIRECTOR(S) The Borrower agrees that the Lender shall be entitled to appoint and withdraw from time to time one Director on the Board of Directors of the Borrower at any time during the currency of this Agreement. ARTICLE V SPECIAL CONDITIONS The Loan hereby granted shall also be subject to the Borrower complying with the special conditions set out in Schedule IV hereto. ARTICLE VI EFFECTIVE DATE OF AGREEMENT This Agreement shall become binding on the Borrower and the Lender on and from the date first above written. It shall be in force till all the monies due and payable under this Agreement are fully paid off. 10 9 SCHEDULE I THE PROJECT Moduler Electronics (I) Pvt. Ltd. (MEPL), an existing 100% EOU has been promoted by the Tandon group for manufacture and export of Winchester Head Gimble Assembly (HGA) for use in hard disk drives and Switch Mode Power Supplies (SMPS) for use in computers and instrumentation. The company now proposes to augment its existing manufacturing facilities at Meepz, Madras in order to manufacture the latest version of HGA and also expand the production capacity of SMPS from the existing level of 10,000 nos. per month to 25,000 nos. per month. The cost of the project, expected to be implemented by March 1994, is estimated at Rs. 470 lacs. The Borrower has requested the Lenders and the Lenders have at the request of the Borrower agreed to lend and advance to the Borrower the Rupee Term Loans of Rs. 180 lacs to meet a part of the cost of the project. 11 10 FINANCIAL PLAN Cost of Project --------------- Plant & machinery - HGA 152 - SMPS 100 Incremental margin money 218 for working capital --- 470 --- Means of Financinq ------------------ Rupee loan - ICICI 180 Internal accruals 290 --- 470 ---
12 11 SCHEDULE III AMORTIZATION SCHEDULE (Rs. in lacs)
Principal amount Date Payment Principal outstanding after Due Payment Amount each payment ---------------- ---------------- ------------------- 180 May 15, 1995 15 165 August 15, 1995 15 150 November 15, 1995 15 135 February 15, 1996 15 120 May 15, 1996 15 105 August 15, 1996 15 90 November 15, 1996 15 75 February 15, 1997 15 60 May 15, 1997 15 45 August 15, 1997 15 30 November 15, 1997 15 15 February 15, 1998 15 --
13 12 SCHEDULE IV SPECIAL CONDITIONS --- N I L ---- 14 13 IN WITNESS WHEREOF the Borrower has caused its Common Seal to be affixed hereto and to a duplicate hereof on the day, month and year first hereinabove written and the Lender has caused the same and the said duplicate to be executed by the hand of Shri S. Nagarkatte authorized official of the Lender as hereinafter appearing. THE COMMON SEAL OF MODULER ELECTRONICS (1) PVT. LIMITED has pursuant to the Resolution of its Board of Directors passed in that behalf on the 9th day of September 1992 hereunto been affixed in the presence of Shri [*] , Director, who has signed these presents in token thereof and Shri B.V. Shah authorized person who has countersigned the same in token thereof. SIGNED AND DELIVERED BY the withinnamed Lender by the hand of Shri S. Nagarkatte an authorized official of the Tender. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 15 GENERAL CONDITIONS NO. GC-I-86 APPLICABLE TO ASSISTANCE PROVIDED BY FINANCIAL INSTITUTIONS 16 TABLE OF CONTENTS
Article Number Title Page No. I Applicability 02 II Definitions 02 III Approvals 03 IV Disbursement, Interest, 03-06 Commitment, other charges and Repayment. V Borrower's warranties 07 VI Predisbursement conditions 08 VII Conditions applicable during currency of Loan Agreement 1. Project 09 2. Financing of Project 10 3. General Covenants 10 4. Nominee Director 13 5. Management 14 VIII Reports 15 IX Inspection 15 X Events of default and remedies 16-18 XI Cancellation, suspension 19 and termination XII Waiver 20 XIII Applicability of other statutes 21 XIV Miscellaneous 21
* * * * 17 2 ARTICLE I APPLICABILITY The General conditions set out herein shall, if the Loan Agreement so provides, be applicable to the assistance provided singly or jointly (that is in participation) by Industrial Development Bank of India ('IDBI'), Industrial Finance Corporation of India ('IFCI'), The Industrial Credit And Investment Corporation of India Limited ('ICICI'), Industrial Reconstruction Bank of India ('IRBI'), Life Insurance Corporation of India ('ILIC'), General Insurance Corporation of India ('GIC'), National Insurance Company Limited ('NIC'), New India Assurance Company Limited ('GIC'), Oriental Insurance Company Limited ('OIC), United India Insurance Company Limited ('UII') and Unit Trust of India ('UTI'). If there is any inconsistency between the General Conditions and the Loan Agreement, the Loan Agreement will prevail. All the provisions of these General Conditions and the Loan Agreement shall have full force and effect till all monies due from the Borrower to the Lenders under the Loan Agreement are paid/repaid in full. ARTICLE II DEFINITIONS The following terms have the following meanings in these General Conditions and in the Loan Agreement : 1. "Borrower" means the party to the Loan Agreement to which the Loans are made. 2 "Lead Institution" means any one of the Lenders as may be designated by them, from time to time, as their attorney in a particular Loan transaction. In the event of any Lender granting Loan(s) to the Borrower singly (and not in participation with other Lenders), the expression "Lead Institution" wherever it appears in these General Conditions or in the Loan Agreement shall mean only the "Lender". 3. "Lenders" means IDBI, IFCI, ICICI, IRBI, LIC, GIC, NIC, NIA, OIC, UII and UTI or any one or more of them where the subject or context, so admits. 4. "Loan Agreement" means the particular loan agreement and includes these General Conditions as applied thereto, and all schedules and amendments supplemental to the Loan Agreement. 18 3 5. "Loans" means the loans agreed to be provided under the Loan Agreement. 6. "Normal Loan" means that component of a rupee term loan which carries interest at the maximum rate applicable to a widely held public limited company.- 7. "Project" means the project for which the Loans are agreed to be granted, as described in the Loan Agreement. 8. All other terms used in these General Conditions shall have the meanings assigned to them under the Loan Agreement. ARTICLE III APPROVALS Unless otherwise agreed to by the Lead Institution, the Borrower shall approach the Lead Institution for obtaining all consents and approvals required under the Loan Agreement. All acts and deeds done, and all consents and approvals given, by the Lead Institution shall be deemed to have been done and given by every Lender individually. ARTICLE IV DISBURSEMENT, INTEREST, COMMITMENT, OTHER CHARGES AND REPAYMENT Section 4.1 - TERMS OF DISBURSEMENT (i) The Loans will be disbursed by the Lenders through the Lead Institution, in one or more instalment(s) as may be decided by the Lead Institution subject to the Borrower complying with the provisions of the Loan Agreement and the disbursement procedure stipulated by the Lead Institution and the expenditure incurred on the Project being in consonance with the details mentioned in Loan Agreement. All disbursements shall be by cheque(s)/authorisation(s) and the collection/ remittance charges will be borne by the Borrower. The interest on the Loans will accrue as from the date of the cheque(s)/authorisation(s) of the Lead Institution. (ii) In the event of the Lender(s) agreeing to disburse any amount of the Loans pending creation of final security as stipulated in the Loan Agreement, the same may be disbursed on such terms as may be decided by the Lead Institution. 19 4 Section 4.2 - ADJUSTMENT OF OVERDUES The Lead Institution may deduct from sums to be lent to the Borrower any monies then remaining due and payable by the Borrower to the Lenders. Section 4.3 - INTEREST (i) All interest on the Loans and an all other monies accruing due under the Loan Agreement shall, in case the same be not paid on the respective due dates, carry further interest at the applicable rate(s) under the Loan Agreement, computed from the respective due dates and shall become payable upon the footing of compound interest with quarterly rests as provided in the Loan Agreement. (ii) All interest or other monies which shall accrue under the provisions of the Loan Agreement shall also be payable in the manner and on the dates as mentioned in the Loan Agreement for payment of interest on the principal amounts of the Loans. Section 4.4 - COMMITMENT CHARGES (i) Commitment charge shall be payable in the manner and on the dates specified for payment of interest under the Loan Agreement. (ii) Arrears of commitment charge shall carry interest at the applicable rate for Normal Loans on the date of the Loan Agreement. (iii) Commitment charge shall be payable even though the Loans are ultimately cancelled or not availed of for any reason whatsoever. (iv) In the event of such cancellation, the commitment charge in respect of the Loans or any part thereof which has been cancelled, shall cease to accrue from the day on which the Borrower's request for cancellation is received by the Lead Institution. Section 4.5 - WEIGHTED AVERAGE RATE OF INTEREST AND COMMITMENT CHARGE The Lenders may charge interest and commitment charge on the Loans at the weighted average rate, where applicable. For the purpose of this clause, "weighted average rate" means the weighted mean of the rates of interest or commitment charge, as the case may be, applicable to the Loans. Section 4.6 - COMPUTATION OF INTEREST AND OTHER CHARGES Interest and all other charges shall accrue from day to day and shall be computed on the basis of 365 days' year and the actual number of days elapsed. 20 5 Section 4.7 - REPAYMENT (i) The Lead Institution may, in suitable circumstances, revise, vary or postpone the repayment of the principal amounts of the Loans or the balance outstanding for the time being or any instalment(s) of the said principal amounts of the Loans or any part there of upon such terms and conditions as may be decided by the Lead Institution. (ii) In the event of any default in the payment of installments, of principal, any interest, commitment charge and liquidated damages, postponement, if any, allowed by the Lead Institution shall be at the rate of interest as may be stipulated by the Lead Institution at the time of postponement. (iii) If, for any reason, the amount finally disbursed by the Lenders out of the Loans is less than the amount of the Loans, the instalment(s) of repayment of the Loans shall stand reduced proportionately but shall be payable on the due dates as specified in the Amortization Schedule in the Loan Agreement. Section 4.8 - ACCELERATION OF REPAYMENT BY THE LENDERS If the Lead Institution finds that the profitability of the Borrower, the cash flow and other circumstances so warrant, the Lead Institution may, on previous intimation to the Borrower, require the Borrower to prepay the Loans on dates earlier than the dates specified in the Amortization Schedule in the Loan Agreement and also increase the amount of the installments of repayment fixed in that Schedule. Section 4.9 - PREMATURE REPAYMENT The Borrower shall not prepay the outstanding principal amounts of the Loans in full or in part, before the due dates except after the conversion right is exercised in full, or has lapsed and after obtaining the prior approval of the Lead Institution (which may be granted conditionally). Section 4.10 - DUE DATE OF PAYMENT If the due date in respect of any instalment of principal, interest, commitment charge and liquidated damages and all other monies payable under the Loan Agreement falls on a Saturday or a day which is a bank holiday at the place where the payment is to be made, the immediately preceding working day shall be the due date for such payment. Section 4.11 - LIQUIDATED DAMAGES ON DEFAULTED AMOUNTS In case of default in payment of instalment of principal, interest, 21 6 commitment charge and all other monies (except liquidated damages) on their respective due dates, liquidated damages at the rate of 2% per annum for the period of default. Liquidated damages shall be payable in the manner and on the dates as specified in the Loan Agreement for payment of interest. Arrears of liquidated damages shall carry interest at the applicable rate for Normal Loans on the date of the Loan Agreement. Section 4.12 - REIMBURSEMENT OF EXPENSES (i) The Borrower shall reimburse all sums paid by the Lead Institution or the Lenders under Article VII Sections 7.3(vii), 7.5(vii), Article IX-Section 9(b) and Article X Section 10.4 within 30 days from the date of notice of demand from the Lead Institution. All such sums shall be debited to the Borrower's Loan Account and shall carry interest from the date of payment till such reimbursement at the applicable rate for Normal Loans on the date of the Loan Agreement. (ii) In case of default in making such reimbursement within 30 days from the date of notice of demand, the Borrower shall also pay an the defaulted amounts, liquidated damages at the rate of 2% per annum from the expiry of 30 days from the date of notice of demand till reimbursement in accordance with the provisions of Section 4.11. Section 4.13 - APPROPRIATION OF PAYMENTS a) Unless otherwise agreed to by the Lead Institution, any payments due and payable under the Loan Agreement and made by the Borrower shall be appropriated towards such dues in the following order, viz., (i) Premium on prepayment; (ii) Costs, charges, expenses and other monies; (iii) Interest on costs, charges, expenses and other monies; (iv) Commitment charge; (v) Interest on arrears of commitment charge; (vi) Interest, including additional interest, payable in terms of the Loan Agreement; (vii) Further interest and liquidated damages on defaulted amounts payable in terms of Section 4.3(i) and 4.11; (viii) Repayment of installments of principal due and payable under the Loan Agreement. b) Notwithstanding anything contained in Clause(a) hereinabove, the Lenders may, at their discretion, appropriate such payments towards the dues, if any, payable by the Borrower in respect of earlier loan(s) availed of by the Borrower from the Lenders in the order specified in the relative Loan Agreement(s). Section 4.14 - RESTRICTION ON PREFERENTIAL PAYMENTS The borrower shall pay and discharge all its liabilities to each of 22 : 7 : Section 4.15 - SHARING OF PREFERENTIAL PAYMENTS If the Borrower makes any payment to any of the Lenders in preference to other Lenders, the Lender receiving such payment shall, notwithstanding anything to the contrary contained in the Loan Agreement, share the same with other(s) on pro-rata basis or in such other manner as the Lenders may mutually agree and such sharing shall be binding on the Borrower. Section 4.16 - PLACE AND MODE OF PAYMENT BY THE BORROWER All monies payable by the Borrower to the Lenders shall be paid to the Lead Institution at such office(s) as may be specified by the Lead Institution, by telegraphic, telex or mail transfer to the account of such office(s) or by cheque or bank draft drawn in favour of the Lead Institution on a scheduled bank at Bombay or such other place or to such other account as the Lead Institution may notify to the Borrower and shall be so paid as to enable the Lead Institution to realise, at par, the amount on or before the relative due date. Credit for all payments by cheque/bank draft will be given only on realisation or on the relative due date, whichever is later. ARTICLE V Section 5 - BORROWER'S WARRANTIES Except to the extent already disclosed in writing by the Borrower to the Lenders, the Borrower shall be deemed to have assured, confirmed and undertaken as follows: (a) DUE PAYMENT OF PUBLIC AND OTHER DEMANDS The Borrower is not in arrears of any public demands such as income-tax, corporation tax and all other taxes and revenues or any other statutory dues payable to the Central or State Governments or any local or other authority. (b) SELLING AND PURCHASING AGREEMENTS The Borrower has entered into requisite selling and purchasing arrangements to the satisfaction of the Lead Institution. (c) MANAGEMENT AGREEMENT The terms and conditions of appointment of Managing Director or any other person holding substantial powers of management by whatever name called shall be subject to the approval of the Lead Institution. (d) CONFLICT WITH MEMORANDUM AND ARTICLES OF ASSOCIATION Nothing in the Loan Agreement conflicts with the Memorandum and 23 : 8 : ARTICLE VI PREDISBURSEMENT CONDITIONS Section 6 - CONDITIONS PRECEDENT TO DISBURSEMENT The obligation of the Lenders to make disbursements under the Loan Agreement shall be subject to the Borrower performing all its obligations and undertakings under the Loan Agreement besides compliance by the Borrower with the Disbursement Procedure stipulated by the Lead Institution, such as submission of necessary information, documents, etc. to the satisfaction of the Lead Institution. Before seeking disbursement, the Borrower shall also comply with the following conditions: (a) RAISING OF SHARE CAPITAL The Borrower shall raise share capital as stipulated in the Loan Agreement and the promoters shall subscribe to such share capital to the extent stipulated by the Lead Institution. (b) SECURITY IN FAVOUR OF LENDERS The Borrower shall create security as stipulated in the Loan Agreement in favour of the Lenders. (c) BORROWING FROM OTHER INSTITUTIONS/BANKS The Borrower shall enter into effective agreements with other institutions and banks in the form and substance satisfactory to the Lead Institution for raising of funds as per the financing plan. (d) NON-EXISTENCE OF EVENT OF DEFAULT The Borrower shall satisfy the Lead Institution that no event of default as defined in Article X hereof and no event which, with the lapse of time or notice and lapse of time as specified in Article X, would become an event of default, has happened and been continuing. (e) COMPLIANCE WITH SPECIAL CONDITIONS The Borrower shall comply with such special conditions as may be stipulated by the Lead Institution at the time of communication of the sanction of the Loans or subsequently. (f) DETAILED REVIEW OF THE PROGRESS (1) The Lead Institution shall have the right to review the cost of the project before final disbursement of the Loans. (2) The Lead Institution may withhold disbursement of the amount of the Loans equivalent to the provision against margin money for working 24 : 9 : capital in the cost of the Project, till such time as the Project is completed and build-up of working capital commences. (g) UNDERTAKING FOR MEETING SHORTFALL The Borrower shall procure undertaking(s) from such persons as may be specified by the Lead Institution in the form required by the Lead Institution, whereby it/he/they shall take the responsibility for making arrangements satisfactory to the Lead Institution for meeting the shortfall, if any, in the resources of the Borrower for completing the project and for working capital. The Borrower shall join in such undertaking as a confirming party. The funds brought in to meet the shortfall in the resources of the Borrower for completing the Project and/or working capital shall be in such form and manner and on such terms as may be required by the Lead Institution. ARTICLE VII CONDITIONS APPLICABLE DURING CURRENCY OF THE LOAN AGREEMENT Section 7.1 - PROJECT The Borrower shall, (i) PROJECT CHANGES Promptly notify the Lead Institution of any proposed change in the nature or scope of the Project and of any event or condition which might materially and adversely affect or delay completion of the project or result in substantial overrun in the original estimate of costs. Any proposed change in the nature or scope of the Project shall not be implemented or funds committed therefor without the prior approval of the Lead Institution. (ii) CONTRACT CHANGES Obtain prior concurrence of the Lead Institution to any material modification or cancellation of the Borrower's agreements with its machinery suppliers, collaborators, technical consultants and suppliers of raw materials. (iii) DELAY IN COMPLETING THE PROJECT Promptly inform the Lead Institution of the circumstances and conditions which are likely to disable the Borrower from implementing the Project or which are likely to delay its completion or compel the Borrower to abandon the same. 25 : 10 : Section 7.2 - FINANCING OF THE PROJECT The Borrower shall, (i) UTILISATION OF THE LOANS Furnish to the Lead Institution at the end of each month following the month in which the Loan monies are disbursed, a statement showing the manner in which the said monies have been utilised. (ii) SPECIAL BANK ACCOUNT (a) Keep the drawals from the Loans in special accounts in the name of the Borrower with a scheduled bank to be approved by the Lead Institution, the payments from which the account shall be subject to verification by any person authorised in this behalf by the Lead Institution. The Borrower shall also obtain and furnish to the Lead Institution a letter (in a form approved by the Lead Institution) from the said bank forgoing its right of set-off or lien in respect of such account. (b) Keep such records as may be required by the Lead Institution to facilitate verification of the entries in the said account. The Borrower shall also authorise the said bank to furnish to the Lead Institution, as and when required by it, certified true copy of the said account with details for verification by the Lead Institution, at the expense of the Borrower. (c) Not transfer the Loans or any portion thereof from the said special account for being kept in call or any deposit in any bank without obtaining the prior approval of the Lead Institution. Section 7.3 - GENERAL COVENANTS The Borrower shall, (i) NEW PROJECT Not undertake any new project, diversification, modernisation or substantial expansion of the Project described herein. The word 'substantial' shall have the same meaning as under the Industries (Development and Regulation) Act, 1951. (ii) LOANS AND DEBENTURES Not issue any debentures, raise any loans, accept deposits from public, issue equity or preference capital, change its capital structure or create any charge on its assets or give any guarantees without the prior approval of the Lead Institution. This provision shall not apply to normal trade guarantees or temporary loans and advances granted to staff or contractors or suppliers in the ordinary course of business or to raising of unsecured loans, overdrafts, cash credit or other facilities from banks in the ordinary course of business. 26 : 11 : (iii) PREMATURE REPAYMENT Not prepay any loan availed of by it from any other party without the prior approval of the Lead Institution. If for any reason, the Borrower is required to prepay any loan, it shall make proportionate prepayment to the Lenders as well as subject to such conditions as may be stipulated by the Lenders. (iv) COMMISSION Not pay any commission to its promoters, directors, managers or other persons for furnishing guarantees, counter guarantees or indemnities or for undertaking any other liability in connection with any financial assistance obtained for or by the Borrower or in connection with any other obligation undertaken for or by the Borrower for the purpose of the Project. (v) NOTICE OF WINDING UP OR OTHER LEGAL PROCESS Promptly inform the vendors if it has notice of any application for winding up having been made or any statutory notice of winding up under the provisions of the Companies Act, 1956, or any other notice under any other Act or otherwise of any suit or other legal process intended to be filed or initiated against the Borrower and affecting the title to the properties of the Borrower or if a receiver is appointed of any of its properties or business or undertaking. (vi) ADVERSE CHANGES IN PROFITS AND PRODUCTION Promptly inform the Lead Institution of the happening of any labour strikes, lockouts, shut-downs, fires or other similar happenings likely to have an adverse effect on the Borrower's profits or business and of any material changes in the rate of production or sales of the Borrower with an explanation of the reasons therefor. (vii) INSURANCE a) Keep insured up to the replacement value thereof as approved by the Lead Institution (including surveyor's and architect's fees) the properties charged/to be charged to the Lenders and such of its other properties as are of an insurable nature against fire, theft, lightning, explosion, earthquake, riot, strike, civil commotion, storm, tempest, flood, marine risks, erection risks, war risks, and such other risks as may be specified by the Lead Institution and shall duly pay all premia and other sums payable for that purpose. The insurance in respect of the properties charged/to be charged to the Lenders shall be taken in the joint names of the Borrower and the Lenders and any other person or institution having an insurable interest in the properties of the Borrower and acceptable to the Lead Institution. The Borrower shall keep deposited with the Lead Institution the insurance policies and renewals thereof. 27 12 b) Agree that, in the event of failure on the part of the Borrower to insure the properties or to pay the insurance premia or other sums referred to above, the Lenders may get the properties insured or pay the insurance premia and other sums referred to above, as the case may be. (viii) LOSS OR DAMAGE BY UNCOVERED RISKS Promptly inform the Lead Institution of any loss or damage which the Borrower may suffer due to any force majeure circumstances or act of God, such as earthquake, flood, tempest or typhoon, etc. against which the Borrower may not have insured its properties. (ix) ANNUAL ACCOUNTS Submit its duly audited annual accounts, within six months from the close of its accounting year. In case statutory audit (if required) is not likely to be completed during this period, the Borrower shall get its accounts audited by an independent firm of Chartered Accountants and furnish the same to the Lead Institution. (x) DIVIDEND Not declare or pay any dividend to its shareholders during any financial year unless it has paid all the dues to the Lenders up to the date on which the dividend is proposed to be declared or paid or has made satisfactory provisions therefor. Further, the Borrower shall not declare dividend to the equity shareholders in excess of 15% or the average of the dividend paid in the three preceding years, whichever is higher, without prior approval of the Lead Institution, which may be given conditionally. (xi) SUBSIDIARIES Not create any subsidiary or permit any company to become its subsidiary. (xii) MEMORANDUM AND ARTICLES OF ASSOCIATION Carry out such alterations to its Memorandum and Articles of Association as may be deemed necessary in the opinion of the Lead Institution to safeguard the interests of the Lenders arising out of the Loan Agreement. (xiii) MERGER CONSOLIDATION, ETC. Not undertake or permit any merger, consolidation, reorganisation, scheme or arrangement or compromise with its creditors or shareholders or effect any scheme of amalgamation or reconstruction. (xiv) INVESTMENTS BY BORROWER Not make any investments by way of deposits, loans, share capital, etc. in any concern. 28 13 (xv) REVALUATION OF ASSETS Not revalue its assets at any time during the currency of the Loans. (xvi) TRADING ACTIVITY Not carry on any general trading activity other than the sale of its own products. (xvii) SELLING AND PURCHASING ARRANGEMENTS Undertake that any arrangement for the sale of its products and purchase of raw materials and inputs, shall be subject to prior approval of the Lead Institution. If so required by the Lead Institution, the Borrower shall take steps to suitably modify or terminate the existing selling/purchasing arrangements in such manner as may be required by the Lead Institution. The Borrower shall not enter into any fresh agreement for the appointment of sole selling agents/sole purchasing agents without the prior approval of the Lead Institution. Any such arrangement shall be subject to such terms and conditions as may be stipulated by the Lead Institution. Section 7.4 - NOMINEE DIRECTOR (i) Each of the Lenders shall have the right to appoint and remove from time to time, Director(s) on the Board of Directors of the Borrower as set out in the Loan Agreement (such directors are hereinafter referred to as 'Nominee Director(s)'). (ii) The Nominee Director(s) shall not be required to hold qualification shares and not be liable to retire by rotation. (iii) The Nominee Director(s) shall be entitled to all the rights and privileges of other directors including the sitting fees and expenses as payable to other Directors but if any other fees, commission, monies or remuneration in any form is payable to the Directors, the fees, commission, monies and remuneration in relation to such Nominee Director(s) shall accrue to the Lenders and the same shall accordingly be paid by the Borrower directly to the Lead Institution for the account of the concerned Lenders. Provided that if any such Nominee Director is an officer of the Lenders, the sitting fees in relation to such Nominee Director(s) shall also accrue to the Lenders and the same shall accordingly be paid by the Borrower directly to the Lead Institution for the account of the concerned Lenders. Any expenditure incurred by the Lenders or the Nominee Director(s) in connection with his appointment or directorship shall be borne by the Borrower. (iv) The Nominee Director(s) shall be appointed a Member of the Management Committee or other Committees of the Board, if so desired by the Lenders. 29 14 (v) The Nominee Director(s) shall be entitled to receive all notices, agenda, etc. and to attend all General Meetings and Board Meetings and Meetings of any Committees of the Board of which he is a member. (vi) If, at any time, the Nominee Director is not able to attend a meeting of the Board of Directors or any of its Committees of which he is a member, the Lenders may depute an observer to attend the meeting. The expenses incurred by the Lenders in this connection shall be borne by the Borrower. Section 7.5 - MANAGEMENT Unless the Lead Institution otherwise agrees (i) EXISTING MANAGEMENT The Borrower shall not remove any person, by whatever name called, exercising substantial powers of management of the affairs of the Borrower at the time of execution of the Loan Agreement. (ii) PAYMENT OF REMUNERATION The person(s) referred to in (i) shall not be paid any commission in any year unless all the dues of the Lenders in that year have been paid to the satisfaction of the Lead Institution. (iii) PAYMENT OF COMPENSATION The Borrower shall not pay any compensation to any of the persons mentioned in (i) above in the event of loss of his/their office(s) for any reason whatsoever if there is a default in repayment of dues to the Lenders. (iv) UNDERTAKINGS The Borrower shall obtain suitable undertakings for giving effect to (ii) and (iii) above from the persons mentioned in (i) above. The appointment/reappointment including terms of appointment (or alteration in such terms) of the persons mentioned in (i) above shall be subject to the prior approval of the Lead Institution. (v) FUTURE ARRANGEMENT The Borrower shall, as and when required by the Lead Institution, appoint and change to the satisfaction of the Lead Institution, suitable technical, financial and executive staff of proper qualifications and experience for the key posts. The terms of such appointments including any changes therein, shall be subject to prior approval of the Lead Institution. (vi) REVIEW OF MANAGEMENT In case of default in payment of any dues to the Lenders or if in the 30 15 opinion of the Lead Institution the business of the Borrower is conducted in a manner opposed to the public policy or in a manner prejudicial to Lenders' interest, the Lead Institution shall have the right to review the management set up or organisation of the Borrower and to require the Borrower to restructure it as may be considered necessary by the Lead Institution, including the formation of Management Committees with such powers and functions as may be considered suitable by the Lead Institution. (vii) APPOINTMENT OF TECHNICAL/MANAGEMENT CONSULTANT The Lead Institution shall have the right to appoint, whenever it considers necessary, any person, firm, company or association of persons engaged in technical, management or any other consultancy business to inspect and examine the working of the Borrower and its factory and to report to the Lead Institution. The Lead Institution shall have the right to appoint, whenever it considers necessary, any Chartered Accountants/Cost Accountants as auditors for carrying out any specific assignment(s) or to examine the financial or cost accounting system and procedures adopted by the Borrower for its working or as concurrent or internal auditors, or for conducting a special audit of the Borrower. The costs, charges and expenses including professional fees and travelling and other expenses of such consultants or auditors shall be payable by the Borrower. (viii) The Borrower shall constitute such committees of the Board with such composition and functions as may be required by the Lead Institution for close monitoring of different aspects of its working. (ix) UNDERTAKINGS FOR NON-DISPOSAL OF SHAREHOLDINGS The Borrower shall not recognise or register any transfer of shares in the Borrower's capital made or to be made by promoters, their friends or associates as may be specified by the Lenders. ARTICLE VIII REPORTS Section 8 The Borrower shall furnish to the Lead Institution such reports as may be required by the Lead Institution. ARTICLE IX INSPECTION Section 9 - The Borrower shall, 31 : 16 : a) PROJECT EXPENDITURE RECORDS Maintain records showing expenditure incurred on the Project, utilisation of the disbursements out of the Loans, progress of the Project and the operations and financial conditions of the Borrower and such records shall be open to examination by the Lenders and their authorised representatives. b) TECHNICAL, FINANCIAL AND LEGAL INSPECTIONS Permit the Lenders and their authorised representatives to carry our technical, financial and legal inspections during the construction and operation periods of the Project and to inspect all records, registers and accounts of the Borrower. Any such representative of the Lenders shall have free access at all reasonable times to any part of the Borrower's factory and to its records, registers and accounts and to all schedules, costs, estimates, plans and specifications relating to the plant and shall receive full cooperation and assistance from the employees of the Borrower. The cost of inspection, including travelling and all other expenses shall be payable by the Borrower to the Lenders in this behalf. ARTICLE X EVENTS OF DEFAULT AND REMEDIES Section 10.1 If one or more of the events specified in this Section (hereinafter called 'events of default') happen(s), the Lead Institution or the Lenders or any of them may, by a notice in writing to the Borrower, declare the principal of and all accrued interest on the Loans to be due and payable forthwith and the security created in terms of Article III of the Loan Agreement shall become enforceable and the Lenders shall have the following rights (anything in the Loan Agreement to the contrary notwithstanding) namely: - (i) to enter upon and take possession of the assets of the Borrower; and (ii) to transfer the assets of the Borrower by way of lease or leave and licence or sale. EVENTS OF DEFAULT a) DEFAULT IN PAYMENT OF PRINCIPAL SUMS OF THE LOANS Default has occurred in the payment of principal sums of the Loans on the due dates. b) DEFAULT IN PAYMENT OF INTEREST 32 17 instalment of interest on the Loans and such default has continued for a period of thirty days. c) ARREARS OF INTEREST Interest amounting to at least Rs. 500 has been in arrears and unpaid for thirty days after becoming due. d) DEFAULT IN PERFORMANCE OF COVENANTS AND CONDITIONS Default has occurred in the performance of any other covenant, condition or agreement on the part of the Borrower under the Loan Agreement and any other agreement and such default has continued for a period of thirty days after notice in writing.thereof has been given to the Borrower by the Lenders/Lead Institution. e) SUPPLY OF MISLEADING INFORMATION Any information given by the Borrower in its application for Loans, in the reports and other information furnished by the Borrower in accordance with the Reporting System and the warranties given/deemed to have been given by the Borrower to the Lead Institution/Lenders is misleading or incorrect in any material respect. f) INABILITY TO PAY DEBTS If there is reasonable apprehension that the Borrower is unable to pay its debts or proceedings for taking it into liquidation, either voluntarily or compulsorily, may be or have been commenced. g) INADEQUATE INSURANCE If the properties and assets offered to the Lenders as security for the Loans have not been kept insured by the Borrower or depreciate in value to such an extent that, in the opinion of the Lead Institution, further security to the satisfaction of the Lead Institution should be given and on advising the Borrower to that effect such security has not been given to the Lenders. h) SALE, DISPOSAL AND REMOVAL OF ASSETS If, without the prior approval of the Lead Institution, any land, buildings, structures or plant and machinery of the Borrower are sold, disposed of, charged, encumbered or alienated or the said buildings, structures, machinery, plant or other equipment are removed, pulled down or demolished. i) REFUSAL TO DISBURSE LOANS BY OTHER FINANCIAL INSTITUTION If the other financial institution(s) or bank(s) with whom the Borrower has entered into agreements for financial assistance have refused to disburse it(s)/their loan(s) or any part thereof or have recalled its/their loan(s) under their respective loan agreements with the Borrower. 33 18 j) PROCEEDINGS AGAINST BORROWER The Borrower has voluntarily or involuntarily become the subject of proceedings under any bankruptcy or insolvency law or the Borrower is voluntarily or involuntarily dissolved. k) INABILITY TO PAY DEBTS ON MATURITY The Borrower is unable or has admitted in writing its inability to pay its debts as they mature. l) LIQUIDATION OR DISSOLUTION OF THE BORROWER The Borrower has taken or suffered to be taken any action for its reorganisation, liquidation or dissolution. m) APPOINTMENT OF RECEIVER OR LIQUIDATOR A receiver or liquidator has been appointed or allowed to be appointed of all or any part of the undertaking of the Borrower. n) ATTACHMENT OR DISTRAINT ON MORTGAGED PROPERTIES If an attachment or distraint has been levied on the mortgaged properties or any part thereof or certificate proceedings have been taken or commenced for recovery of any dues from the Borrower. o) EXTRAORDINARY CIRCUMSTANCES If extraordinary circumstances have occurred which make improbable for the Project to be carried out and for the Borrower to fulfill its obligations under the Loan Agreement. Section 10.2 CONSEQUENCES OF DEFAULT On the happening of any of the events of default, in addition to the rights specified in Section 10.1 hereof, each of the Lenders shall be entitled to appoint and remove from time to time Whole-time Director(s) on the Board of Directors of the Borrower (such Director(s) are hereinafter referred to as "the whole-time Nominee Director(s)"). Such Whole-time Nominee Director(s) shall exercise such powers and duties as may be approved by the Lenders and have such rights as are usually exercised by or are available to a Whole-time Director, in the management of the affairs of the Borrower. Such Whole-time Nominee Director(s) shall not be required to hold qualification shares nor be liable to retire by rotation and shall be entitled to receive such remuneration, fees, commission and monies as may be approved by the Lead Institution. Such Whole-time Nominee Director(s) shall have the right to receive notices of and attend all General Meetings and Board Meetings or any committees of the Borrower of which they are members. 34 19 Any expense that maybe incurred by the Lenders or such Whole-time Nominee Director(s) in connection with their appointment or directorship shall be paid or reimbursed by the Borrower to the Lenders, or as the case may be, to such Whole-time Nominee Director(s). Section 10.3 NOTICE TO THE LENDERS ON THE HAPPENING OF AN EVENT OF DEFAULT If any event of default or any event which, after the notice, or lapse of time, or both, would constitute an event of default has happened, the Borrower shall, forthwith give notice thereof to the Lead Institution in writing specifying the nature of such event of default, or of such event. Section 10.4 EXPENSES OF PRESERVATION OF ASSETS OF BORROWER AND OF COLLECTION All expenses incurred by the Lenders after an event of default has occurred in connection with: (i) preservation of the Borrower's assets (whether then or thereafter existing); and (ii) collection of amounts due under the Loan Agreement shall be payable by the Borrower. ARTICLE XI CANCELLATION, SUSPENSION AND TERMINATION Section 11.1 CANCELLATION BY NOTICE TO THE LENDERS The Borrower may, by notice in writing to the Lead Institution, cancel the Loans or any part thereof which the Borrower has not withdrawn prior to the giving of such notice. Provided that such cancellation shall be pro-rata for each Lender. Section 11.2 SUSPENSION Further access by the Borrower to the use of the Loans may be suspended or terminated by the Lead Institution/Lenders. a) NON-COMPLIANCE OF TERMS AND CONDITIONS Upon failure by the Borrower to carry out all or any of the terms of the Loan Agreement or on the happening of any event of default referred to in Article X hereof. 35 20 b) EXTRAORDINARY SITUATION If any extraordinary situation makes it improbable that the Borrower would be able to perform its obligations under the Loan Agreement. c) ASSIGNMENT OR TRANSFER OF PROPERTIES TO RECEIVER, ASSIGNEE, ETC. If the Borrower takes or permits to be taken any action or proceedings whereby any of its properties shall or may be assigned or, in any manner, transferred or delivered to any receiver, assignee, liquidator or other person whether appointed by the Borrower or by any Court of Law whereby such property shall or may be distributed among the creditors of the Borrower or the Borrower suffers any charge to be created over its properties in any legal proceedings. d) CHANGE IN THE BORROWER'S SET-UP If any change in the Borrower's set-up has taken place which, in the opinion of the Lead Institution (which shall be final and binding on the Borrower), would adversely affect the conduct of the Borrower's business or the financial position or the efficiency of the Borrower's management or personnel or the execution of the Project. Section 11.3 SUSPENSION TO CONTINUE TILL DEFAULT REMEDIED The right of the Borrower to make withdrawals from the Loans shall continue to be suspended until the Lead Institution has notified the Borrower that the right to make withdrawals has been restored. Section 11.4 TERMINATION If any of the events described above as also in Article X hereof has been continuing or if the Borrower has not withdrawn the Loans by the date referred to in the Loan Agreement or such later date as may be agreed to by the Lead Institution, then, in such event, the Lead Institution may, by notice in writing to the Borrower, terminate the right of the Borrower to make withdrawals. Upon such notice, the undrawn amount of the Loans shall stand cancelled. Notwithstanding any cancellation, suspension or termination pursuant to the aforesaid provisions, all the provisions of the Loan Agreement shall continue to be in full force and effect as herein specifically provided. ARTICLE XII WAIVER Section 12 WAIVER NOT TO IMPAIR THE RIGHTS OF THE LENDERS No delay in exercising omission to exercise any right, power or 36 21 remedy accruing to the Lead Institution/Lenders upon any default under the Loan Agreement, security documents or any other agreement or document shall impair any such right, power or remedy or shall be construed to be a waiver thereof or any acquiescence in such default, nor shall the action or inaction of the Lead Institution/Lenders in respect of any default or any acquiescence by it in any default, affect or impair any right, power or remedy of the Lead Institution/Lenders in respect of any other default. ARTICLE XIII APPLICABILITY OF OTHER STATUTES Section 13 APPLICATION OF OTHER STATUTES Nothing contained in the Loan Agreement shall prejudice or in any way affect the rights vested in the Lenders under the Industrial Development Bank of India Act, 1964 (18 of 1964), Industrial Finance Corporation Act, 1948 (15 of 1948), Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), Life Insurance Corporation of India Act, 1956 (31 of 1956), General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and Unit Trust of India Act, 1963 (52 of 1963) or any other statute. ARTICLE XIV MISCELLANEOUS Section 14.1 SERVICE OF NOTICE Any notice or request to be given or made to the Lead Institution/the Lenders or to the Borrower or to any other party shall be in writing. Such notice or request shall be deemed to have been given or made when it is delivered by hand or despatched by mail or telegram to the party to which it is required to be given or made at such party's designated address. Section 14.l SERVICE OF NOTICE a) Each of the Lenders shall maintain, in accordance with its usual practice, accounts evidencing the amounts from time to time lent by and owing to it under the Loan Agreement. b) The Lead Institution shall maintain in its books a control account or accounts in which shall be recorded. (1) the amount of any advance made under the Loan Agreement by each of the Lenders; 37 22 (2) the amount of any principal or interest due or to become due from the Borrower to each of the Lenders under the Loan Agreement; (3) the amount of any sum received or recovered by the Lead Institution under the Loan Agreement and/or security documents executed in favour of the Lenders and the other Lender's participation therein. In any legal action or proceedings arising out of or in connection with the Loan Agreement, the entries made in the accounts maintained pursuant to sub-clauses (a) and (b) above shall be prima-facie evidence of the existence and amount of obligations of the Borrower as therein recorded. Section 14.3 BENEFIT OF THE LOAN AGREEMENT The Loan Agreement shall be binding upon and enure to the benefit of each party thereto and its successors and assigns. Section 14.4 HEADINGS The headings of various Articles and Sections herein and in the Loan Agreement are inserted for convenience of reference and are not deemed to affect the construction of the relative provisions. EX-10.20 40 LOAN AGREE MODULAR & INDUSTRIAL CREDIT 10/11/94 1 EXHIBIT 10.20 [CURRENCY] The Industrial Credit & Investment Corporation of India Limited 163, Backbay Reclamation Bombay 400 020 Dear Sirs: In consideration of your having agreed to grant to Moduler Electronics (I) Pvt. Ltd. ("the Company"), the financial assistance in terms of the Foreign Currency Loan Agreement dated the 11th day of October 1994, we the Directors of the Company, do hereby, in pursuance of the said Loan Agreement, jointly and severally, undertake to you that we shall not demand or withdraw nor shall the Company repay any unsecured loans/deposits or any part thereof brought in/to be brought in by us for financing the capital cost and the requirement of working capital for the Company's project as per the Financing Plan approved by you so long as any moneys remain due by the Company to you under the said Loan Agreement or till the project is duly completed whichever is later without your prior approval. 2 : 2 : We agree that if a dispute arises whether the Project is duly completed or not, your decision shall be final and binding on us. We note that such unsecured loans/deposits shall carry interest as may be agreed to by you. We further agree that the Company shall not pay any interest on such unsecured loans/deposits, if at the time of such payment, there is a default in the payment of installments of principal and/or interest due and owing by the Company to you. Yours faithfully, [SIG] [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 : 3 : We note the above and agree and confirm that we shall not repay to the above mentioned the unsecured loans/deposits or any part thereof when received by us for financing the capital cost and the requirement of working capital for our Project as per the Financing Plan approved by you so long as any moneys remain due by us to you under the said Loan Agreement or till our Project is duly completed, whichever is later, without your prior approval. We shall pay such interest on the said unsecured loans/deposits as may be agreed to by you. We agree not to pay any interest on the said unsecured loans/deposits if at the time of such payment thee is a default in the payment of installments of principal and/or interest due and owing by us to you. For Moduler Electronics (I) Pvt. Ltd. [SIG] Director Dated this 11th day of October 1994, 4 [CURRENCY] LOAN AGREEMENT FC-Foreign Currency THIS AGREEMENT made this 11th day of October One Thousand Nine Hundred and Ninety Four at Bombay between Moduler Electronics (I) Pvt. Ltd., a Company within the meaning of the Companies Act, 1956 (1 of 1956) and having its Registered Office at 406, Dalamal Towers, Nariman Point, Bombay 400 021 (hereinafter referred to as "the Borrower" which expression shall, unless it be repugnant to the subject or context thereof, include its successors and assigns); AND THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED, a public company incorporated under the Indian Companies Act, 1913 (7 of 1913) and having its registered office at 163, Backbay Reclamation, Bombay 400 020 (hereinafter referred to as "the Lenders" which expression shall, unless it be repugnant to the subject or context thereof, include its successors and assigns); 5 : 2 : ARTICLE - I DEFINITIONS 1.1 The following terms shall have the following meanings: (a) "Due Date" means, in respect of i) an instalment of principal - the date on which the instalment falls due as stipulated in Schedule V hereto. ii) interest - the date on which interest falls due as stipulated in Schedule V hereto. iii) commitment charge - the date on which commitment charge falls due as stipulated in Section 2.3 of Article II hereof. 6 : 3 : (b) "Financing Plan" means the financing plan as described in Schedule III hereto. (c) "General Conditions" means the GENERAL CONDITIONS No. GC-FC-88 APPLICABLE TO FOREIGN CURRENCY LOANS PROVIDED BY FINANCIAL INSTITUTIONS. (d) "Loan" or "Loans" - means the amounts of various foreign currencies specified in Section 2.1 of Article II hereof or their equivalents in other foreign currencies used for their purchase, agreed to be provided by the Lenders for the Project or (as the context requires) so much thereof as may be outstanding from time to time. (e) "Project" - means the project to be financed as described in Schedule II hereto. 1.2 GENERAL CONDITIONS The Loan(s) hereby agreed to be granted by the Lenders shall be subject to the Borrower complying with the terms and conditions set out herein and also in the General Conditions a copy of which is annexed hereto. The General Conditions shall be deemed to form part of this Agreement and shall be read as if they are specifically incorporated herein. ARTICLE - II AGREEMENT AND TERMS OF LOAN 2.1 AMOUNT AND TERMS OF LOAN The Borrower agrees to borrow from the Lenders and the Lenders agree to lend to the Borrower out of foreign currencies specified in Schedule IV hereto, on the terms and conditions contained herein as also in the General Conditions, the sums to the maximum extent in various foreign currencies set out in Schedule I equivalent in the aggregate to about Rs.803 lacs. 2.2 INTEREST i) The Borrower shall pay to the Lenders interest on the Loan(s) at the rate(s) and in the manner provided in Schedule V hereto. ii) Disbursements made pending creation of final security as stipulated in Article III hereof shall carry further interest at the rate of 1% per annum till creation of such security. 7 : 4 : iii) Provided however, interest on rupee tied defaulted amounts, arrears of liquidated damages and sums incurred by the Lenders by way of expenses in terms of Sections 4.11, 4.5 and 4.7 respectively of the General Conditions shall be payable quarterly on January 1, April 1, July 1 and October 1. 2.3 FRONT END FEE The Borrower shall pay to the Lenders Front End Fee of 1.05% of the Loan on or before signing this Agreement. 2.4 LAST DATE OF WITHDRAWALS Unless the Lenders otherwise agree, the right to make drawals from the Loan(s) shall cease on January 31, 1995. 2.5 REPAYMENT The Borrower undertakes to repay the principal amount of the Loan(s) in accordance with the Amortization Schedule set forth in Schedule VI hereto. 2.6 CONVERSION RIGHT IN CASE OF DEFAULT If the Borrower commits a default in payment or repayment of any instalment of principal amount of the Loans or interest thereon or any combination thereof, then, the Lenders shall have the right to convert (which right is hereinafter referred to as "the conversion right") at its option 20% of the rupee equivalent of the defaulted amount determined in accordance with Section 4.11 of Article IV of the General Conditions into fully paid up equity shares of the Borrower, at par, in the manner specified in the notice in writing to be given by the Lenders to the Borrower (which notice is hereinafter referred to as the "notice of conversion") prior to the date on which the conversion is to take effect, which date shall be specified in the said notice (hereinafter referred to as the "date of conversion"). i) On receipt of notice of conversion, the Borrower shall allot and issue the requisite number of fully paid-up equity shares to the Lenders as from the date of conversion and the Lenders shall accept the same in satisfaction of the said defaulted amount(s) in respect of the Loans to the extent so converted. The amount so converted shall cease to carry interest as from the date of conversion and the outstanding amount in respect of the loans shall stand correspondingly reduced. The equity shares so allotted and issued to the Lenders shall carry, from the date of conversion, the right to receive proportionately the dividends and other distributions declared or to be declared in respect of the equity capital of the Borrower. Save as aforesaid, the said shares shall rank pari passu with the existing equity shares of the Borrower in all respects. The Borrower shall, at all times, maintain sufficient unissued equity shares for the above purpose. 8 : 5 : ii) The conversion right reserved as aforesaid may be exercised by the Lenders on one or more occasions during the currency of the Loan(s) on the happening of the default as specified in this Section. iii) The Borrower assures and undertakes that in the event of the Lenders exercising the right of conversion as aforesaid, the Borrower shall get the equity shares which will be issued to the Lenders as a result of the conversion, listed with the Stock Exchange(s) as Bombay. ARTICLE - III SECURITY 3.1 SECURITY FOR THE LOAN (A) The Loan(s) together with all interest, liquidated damages, commitment charges premia on prepayment or on redemption, costs, expenses and other monies whatsoever stipulated in this Agreement shall be secured by: - a) a first charge by way of hypothecation in favour of the Lenders of all the Borrower's moveables (save and except book debts), including moveable machinery, machinery spares, tools and accessories present and future, subject to prior charges created and/or to be created:- i) in favour of the Borrower's Bankers on the Borrower's stocks of raw materials, semi- finished and finished goods, consumable stores and such other moveables as may be agreed to by the Lead Institution for securing the borrowings for working capital requirements in the ordinary course of business; and The charges referred to above shall rank pari passu with the mortgages and charges created and/or to be created in favour of ICICI for its existing loans. (B) The borrower shall make out a good and marketable title to its properties to the satisfaction of the Lenders and comply with all such formalities as may be necessary or require for the said purpose. 9 : 6 : 3.2 CREATION OF ADDITIONAL SECURITY If at any time during the subsistence of this Agreement, the Lenders is of the opinion that the security provided by the Borrower has become inadequate to cover the balance of the Loans then outstanding, then, on the Lenders advising the Borrower to that effect, the Borrower shall provide and furnish to the Lenders, to the satisfaction of the Lenders, such additional security as may be acceptable to the Lenders to cover such deficiency. 3.3 ACQUISITION OF ADDITIONAL IMMOVEABLE PROPERTIES So long as any monies remain due and outstanding to the Lenders, the Borrower undertakes to notify the Lenders in writing of all its acquisitions of immoveable properties and as soon as practicable thereafter to make out a marketable title to the satisfaction of the Lenders and charge the same in favour of the Lenders by way of first charge the same in favour of the Lenders by way of first charge in such form and manner as may be decided by the Lenders. 3.4 GUARANTEE The Borrower shall procure irrevocable and unconditional personal guarantee(s) from [*] in favour of the Lenders for the due repayment of the Loans and the payment of all interest and other monies payable by the Borrower in the form prescribed by the Lenders and to be delivered to the Lenders before any part of the Loan is advanced. The Borrower shall not pay any guarantee commission to the said Guarantor. ARTICLE - IV APPOINTMENT OF NOMINEE DIRECTOR(S) The Borrower agrees that the Lenders shall be entitled to appoint and withdraw from time to time One Director on the Board of Directors of the Borrower during the currency of this Agreement. ARCICLE - V SPECIAL CONDITIONS The loan(s) hereby granted shall also be subject to the Borrower complying with the special conditions set out in Schedule VII hereto. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10 : 7 : ARTICLE - VI EFFECTIVE DATE OF AGREEMENT This Agreement shall become binding on the Borrower and the Lenders on and from the date first above written. It shall be in force till all the monies due and payable under this Agreement are fully paid of. 11 : 8 : SCHEDULE I PARTICULARS OF LOANS
NAME OF THE LENDER LOAN ------------------ ---- RC Equal US$ (Rs. in lacs) --- --------- ------------- The Industrial Credit and Investment US$ 16,50,375 520 Corporation of India Limited (ICICI) SGD 8,45,395 266 163 Backbay Reclamation BEF 6,627 2 Bombay 400 020 YEN 47,603 15 --------- --- TOTAL 25,50,000 803 ========= ===
12 : 9 : SCHEDULE II PROJECT The Loan(s) shall be utilised by the Borrower for import of Capital Goods under Open General Licence. The Rupee figure has been arrived at on the basis of rates of exchange of the foreign currencies involved prevailing at the time of sanction of the Loan(s) and is subject to revision based on the fluctuations in foreign currency rates. 13 : 10 : SCHEDULE III FINANCING PLAN A. The total estimated cost of the project is Rs.2274 lacs made up as under:
(Rc in lacs) Rupee equivalent Rupee of foreign currency Cost cost ----- ------------------- Plant & Machinery - a) Imported i) CIF value 910 Technical know-how fees 630 Miscellaneous fixed assets 75 Preoperative expenses 15 Contingencies 50 Margin money for working capital 594 ---- ----- 734 1,540 ----- Total of Rupee & foreign currency cost 2,274 =====
B. The proposed sources of financing are as follows:
(Rs. in lacs) (1) SHARE CAPITAL a) Promoters 200 (2) FOREIGN CURRENCY LOANS a) ICICI 803 (3) DEFERRED PAYMENTS Technical knowhow fees 630 (4) UNSECURED LOANS FROM PROMOTERS 641 ----- 2,274 =====
14 : 11 : SCHEDULE IV (Particulars of ICICI Loans) The Loan referred to in Section 2.1 herein is comprised of the following:- i) US $ 16,50,375 ii) SGD 12,85,000 iii) BEF 2,15,900 iv) YEN 46,87,500 which is agreed to be provided as follows:- i) US $ 16,50,375 ii) SGD 12,85,000 iii) BEF 2,15,900 iv) YEN 46,87,500 equivalent in the aggregate to US$ 25,50,000 (hereinafter referred to as the "US Dollars Loan - 1994") (which expression shall, unless expressly provided otherwise, mean the aggregate to the amounts of various foreign currencies used for their purchase expressed in US$ equivalent or so much as may be outstanding from time to time) out of the US Dollars available with ICICI. 15 : 12 : SCHEDULE V PART I SUB PART Y (US DOLLAR LOAN - 1994) The following provisions shall apply to the US Dollars Loan - 1994 : I. REPAYMENT The US Dollar Loan - 1994 is repayable in accordance with the amortization schedule set forth in Schedule VI. The amortization schedule has been drawn up on the basis of the aggregate US $ equivalent of the foreign currencies involved at the rates of exchange prevailing at the time of each disbursement. In such an event the Borrower shall, unless otherwise determined by ICICI, repay to ICICI, the principal amount of the US Dollar Loan - 1994 in accordance with the amortization schedule as of revised. All sums payable by the Borrower under this Agreement, shall be paid in full without set off or counter claim and without any deduction or withholding on account of any present or future taxes, levies, imposts, duties, charges or withholdings of any future taxes, levies, imposts, duties, charges or withholdings of any nature or otherwise imposed in India or by any taxing authority in India. II. INTEREST: The Borrower shall pay to ICICI interest on the principal amount of the US Dollar Loan - 1994 outstanding from time to time quarterly in each year on January 1, April 1, July 1 and October 1 at the rate of US Dollar LIBOR +2.75% per annum. III. COMPUTATION OF INTEREST AND OTHER CHARGES: Interest and all other charges will be calculated on the basis of a 360 day year and the actual number of days elapsed. IV. PREPAYMENT Unless expressly agreed to by ICICI and subject to payment of such premium as may be stipulated by ICICI, the Borrower shall not be entitled to prepay in whole or in part, the US Dollar Loan - 1994 before the due date(s). 16 : 13 : SCHEDULE VI AMORTISATION SCHEDULE FOR ICICI LOAN IN US$
Principle amount outstanding Date after payment Payment of each due Principle payment ------- ---------- ----------- 25,50,000 April 1, 1997.......................... 1,96,150 23,53,850 July 1, 1997.......................... 1,96,150 21,57,100 Oct. 1, 1997.......................... 1,96,150 19,61,550 Jan. 1, 1998.......................... 1,96,150 17,65,400 April 1, 1998.......................... 1,96,150 15,69,250 July 1, 1998.......................... 1,96,150 13,73,100 Oct. 1, 1998.......................... 1,96,150 11,76,950 Jan. 1, 1999.......................... 1,96,150 9,80,800 April 1, 1999.......................... 1,96,150 7,84,650 July 1, 1999.......................... 1,96,150 5,88,500 Oct. 1, 1999.......................... 1,96,150 3,02,350 Jan. 1, 2000.......................... 1,96,150 1,96,200 April 1, 2000.......................... 1,96,200 0 --------- Total.......................... 25,50,000 =========
[SEAL] 17 : 14 : SCHEDULE - VII SPECIAL CONDITIONS 1) The company shall obtain from the promoters, unsecured loans of Rs. 641 lacs for financing a part of the cost of the project. Such unsecured loans may carry interest at the rate of 17.5%p.a. or the rate of dividend paid on equity capital whichever is lower. The payment of interest on such unsecured loans and repayment thereof shall be subordinate to payment of interest and repayment of ICICI dues. Such unsecured loans shall not carry interest for the year in which the company has not paid dividends on its equity capital. 2) The company shall arrange with Tandon Associates Inc, USA for deferred payment of technical knowhow fees of Rs. 630 lacs over a period of 3 years begining in 1996 and ending in 1998. The payment of the deferred technical knowhow fees and royalty will be subordinate to payment of interest on and repayment of ICICI dues. Such deferred technical knowhow fees and royalty shall not carry any interest. 3) The Company does not undertake any new project or expansion or make any investment or take any assets on lease without prior approval of ICICI during the currency of ICICI loans. 4) The company shall undertake in terms of section 6(g) of GC-FC-88. 5) The company undertakes that during the currency of the loans from ICICI, it shall not, without obtaining prior consent in writing of ICICI declare dividend in excess of the rate stipulated in the Loan Agreement nor declare any dividend on its share capital, if it fails to meet its obligations to pay interest and / or instalments and / or other moneys payable to ICICI so long as it is in default. 6) ICICI shall be entitled to appoint one nominee on the Board of Directors of the company during the currency of ICICI assistance. 18 : 15 : IN WITNESS WHEREOF the Borrower has caused its Common Seal to be affixed hereto and to duplicate hereof and ICICI has caused this Agreement to be executed in duplicate on the day, month and year first above written as hereinafter appearing: THE COMMON SEAL of Moduler Electronics (I) Pvt. Ltd. has pursuant to the Resolution of its Board of Directors passed in that behalf on the 10th day of October 1994 hereunto been affixed in the presence of Shri /s/ [SIG] /s/ [SIG] Director who has signed these ------------------- presents in token thereof and Shri Secretary/authorised person who has countersigned the same in token hereof. /s/ [SIG] ------------------ SIGNED AND DELIVERED by the withinnamed Lenders by the hand of Shri /s/ [SIG] an authorised /s/ [SIG] official of ICICI. ------------------ 27/53 19 GENERAL CONDITIONS NO. GC-FC-88 APPLICABLE TO FOREIGN CURRENCY LOANS PROVIDED BY FINANCIAL INSTITUTIONS 20 TABLE OF CONTENTS -----------------
ARTICLE NUMBER TITLE PAGE NO. - -------------- ----- -------- I Applicability 01 II Definitions 01-02 III Approvals 02 IV Disbursement, Interest, Commitment 02-06 and other charges and Repayment V Borrower's warranties 06-07 VI Predisbursement conditions 07-09 VII Conditions applicable during currency of the Loan Agreement 1. Project 09-10 2. Utilisation of the Loans 10 3. General Covenants 10-14 4. Nominee Director 14 5. Management 14-16 VIII Reports 16 IX Inspection 16 X Events of default and remedies 17-20 XI Cancellation, suspension and termination 20-22 XII Waiver 22 XIII Applicability of other Statutes 22 XIV Miscellaneous 22
21 1 ARTICLE I APPLICABILITY The General Conditions set out herein shall, if the Loan Agreement so provides, be applicable to the foreign currency loans provided singly or jointly by the Industrial Development Bank of India (IDBI), The Industrial Finance Corporation of India (IFCI) and the Industrial Credit and Investment Corporation of India Limited (ICICI). If there is any inconsistency between these General Conditions and the Loan Agreement, the Loan Agreement will prevail. All the provisions of these General Conditions and the Loan Agreement shall have full force and effect till all monies due from the Borrower to the Lenders under the Loan Agreement are paid/repaid in full. ARTICLE II DEFINITIONS The following terms have the following meanings in these General conditions and in the Loan Agreement: 1. "Borrower" means the party to the Loan Agreement to which the Loans are made. 2. "Foreign Lending Agency" means the Agency providing foreign currency funds to the Lenders pursuant to terms of their Agreements. 3. "Lead Institution" means any one of the Lenders as may be designated by them from time to time, as their attorney in a particular loan transaction. In the event of any Lender granting loan(s) to the Borrower singly (and not jointly with other Lenders), the expression "Lead Institution" wherever it appears in these General Conditions or in the Loan Agreement shall mean only the "Lender". 4. "Lenders" means IDBI, IFCI and ICICI or anyone or more of them where the subject or context so admits. 5. "Loan Agreement" means the particular loan agreement and includes these General Conditions and applied thereto, and all schedules and amendments supplemental to the Loan Agreement. 6. "Loan" or "Loans" means amounts of various foreign currencies or their equivalents in other foreign currencies used for their purchase, agreed to be provided by the Lenders under the Loan Agreement or (as the context requires) so much thereof as may be outstanding from time to time. 22 2 7. "Project" means the project for which the Loans are agreed to be granted, as described in the Loan Agreement. 8. All other terms used in these General Conditions shall have the meanings assigned to them under the Loan Agreement. ARTICLE III APPROVALS Unless otherwise agreed to by the Lead Institution, the Borrower shall approach the Lead Institution for obtaining all consents and approvals required under the Loan Agreement. All acts and deeds done, and all consents and approvals given, by the Lead Institution shall be deemed to have been done and given by every Lender individually. ARTICLE IV DISBURSEMENT, INTEREST, COMMITMENT AND OTHER CHARGES AND REPAYMENT SECTION 4.1 - TERMS OF DISBURSEMENT (i) The Loans will be disbursed by the Lenders in such manner as may be decided by the Lenders subject to the Borrower complying with the provisions of the Loan Agreement and the disbursement procedure(s) stipulated by the Lenders (including production/execution of evidences/documents required for disbursement) and the expenditure incurred on the Project being in consonance with the details mentioned in the Loan Agreement. (ii) In the event of the Lenders agreeing to disburse any amount of the Loans pending creation of final security as stipulated in the Loan Agreement, the same may be disbursed on such terms as may be decided by the Lenders. All disbursements shall be by authorisation(s) and the collection/remittance charges will be borne by the Borrower. The interest on the Loans will accrue as from the value date as specified in the authorisation. SECTION 4.2 - INTEREST (i) All interest on the Loans and on all other monies accruing due under the Loan Agreement shall, in case the same be not paid on the respective due dates, carry further interest at the applicable rate(s) under the Loan Agreement, computed from the respective due dates and shall become payable upon the footing of compound interest with quarterly/half yearly/yearly rests as provided in the Loan Agreement. 23 3 (ii) All interest and other monies which shall accrue under the provisions of the Loan Agreement shall also be payable in the manner and on the dates as mentioned in the Loan Agreement for payment of interest on the principal amounts of the Loans. SECTION 4.3 - COMMITMENT CHARGE (i) Commitment charge shall be payable in the manner and on the dates specified in the Loan Agreement. (ii) Arrears of commitment charge shall carry interest at the lending rate(s) of the Lenders for normal rupee term loans prevailing on the date of default. (iii) Commitment charge shall be payable even though the Loans are ultimately cancelled or not availed of for any reason whatsoever. (iv) In the event of such cancellation, the commitment charge in respect of the Loans or any part thereof which has been cancelled, shall cease to accrue from the day on which the Borrower's request for cancellation is received by the Lenders. SECTION 4.4 - REPAYMENT (i) The Lenders may, in suitable circumstances, revise, vary or postpone the repayment of the principal amounts of the Loans or the balance outstanding for the time being or any installments) of the said principal amounts of the Loans or any part thereof upon such terms and conditions as may be decided by the Lenders. (ii) In the event of any default in the payment of installment(s) of principal, any interest, commitment charge or liquidated damages, postponement, if any, allowed by the Lenders shall be at the rate of interest as may be stipulated by The Lenders at the time of postponement. (iii) If, for any reason, the amount finally disbursed by the Lenders out of the Loans is less than the amount of the Loans, the installment(s) of repayment of the Loans shall stand reduced proportionately but shall be payable on the due dates as specified in the Amortization Schedule(s) in the Loan Agreement. SECTION 4.5 - LIQUIDATED DAMAGES ON DEFAULTED AMOUNTS In case of default in payment of installment(s) of principal, interest, commitment charge and all other monies (except liquidated damages) on their respective due dates, the Borrower shall pay on the defaulted amounts, liquidated damages at the rate of 2% per annum for the period of default. Liquidated damages shall be payable in the manner and 24 4 on the dates as specified in the Loan Agreement for payment of interest. Arrears of liquidated damages shall carry interest at the lending rate(s) of the Lenders for normal rupee term loans prevailing on the date of default. 4.6 - INCREASED COSTS In the event of the Lenders being called upon to pay any additional amount by the Foreign Lending Agency, in terms of their respective agreements, or on account of factors beyond the control of the Lenders, the Borrower shall reimburse all such amounts to the Lenders. SECTION 4.7 - REIMBURSEMENT OF EXPENSES (i) The Borrower shall reimburse all sums paid by the Lead Institution/the Lenders under Article IV - Sections 4.6 and 4.10(f) Article VII - Sections 7.3(B)(v), 7.3(B)(vii), 7.5(vii), Article IX-Section 9(b)(iii) and Article X - - Section 10.4 within 30 days from the date of notice of demand from the Lead Institution/Lenders. All such sums shall be debited to the Borrower's Loan Account and shall carry interest from the date of payment till such reimbursement at the lending rate(s) of the Lenders for normal rupee term loans prevailing on the date of payment. (ii) In case of default in making such reimbursement within 30 days from the date of notice of demand, the Borrower shall also pay on the defaulted amounts, liquidated damages at the rate of 2% per annum from the expiry of 30 days from the date of notice of demand till reimbursement in accordance with the provisions of Section 4.5. SECTION 4.8 - APPROPRIATION OF PAYMENTS a) Unless otherwise agreed to by the Lenders, any payments due and payable under the Loan Agreement and made by the Borrower shall be appropriated towards such dues in the following order, viz., - (i) Premium on prepayment; (ii) Costs, charges, expenses and other monies; (iii) Interest on costs, charges, expenses and other monies; (iv) Commitment charge; (v) Interest on arrears of commitment charge; (vi) Interest payable in terms of the Loan Agreement; (vii) Further interest and liquidated damages on defaulted amounts payable in terms of Section 4.2(i) and 4.5; (viii) Repayment of installments of principal due and payable under the Loan Agreement. 25 5 b) Notwithstanding anything contained in Clause(a) hereinabove, the Lenders may, at their discretion, appropriate such payments towards the dues, if any, payable by the Borrower in respect of earlier loan(s) availed of by the Borrower from the Lenders in the order specified in the relative Loan Agreement(s). 4.9 - ALTERATION IN SOURCE(S) OF THE LOAN/CURRENCY/INTEREST SWAPS The Lenders may, at any time, in their absolute discretion, alter the sources from which the Loans or any part thereof is agreed to be provided/provided under the Loan Agreement. In such an event, the liability of the Borrower in respect of the Loans or such part thereof in respect of which the source(s) has been altered as regards rate(s) of interest, repayment(s) of principal and currencies and date(s) and mode of such payment/repayment shall be as applicable to the loan(s) out of such altered source(s) as intimated by the Lenders, which shall be final and binding on the Borrower. The Lenders may, at any time, in their absolute discretion, effect currency and/or interest rate swap for the Loans or any part thereof agreed to be provided/provided herein. In such an event, the liability of the Borrower in respect of which the Loans or such part thereof in respect of the currency or currencies of repayment/payment of principal, interest and all other monies payable hereunder/rate(s) of interest on principal of the Loans/or such part thereof shall be as intimated by the Lenders, which shall be final and binding on the Borrower. SECTION 4.10 - PLACE AND MODE OF PAYMENT Notwithstanding anything contained hereinbefore, the Borrower shall make payments to each of the Lenders, whether of principal amount of the Loan, interest, commitment charge, premium on prepayment or on redemption, if any, in equivalent rupees in lieu of foreign currencies. For the purpose of this section, the following conditions shall apply: - a) The rupee sum shall be determined by the Lenders with reference to the actual cost to the Lenders (including all commission or other bank charges and out-of-pocket expenses) in remitting the foreign currencies on the due dates. b) The rupee sum shall be paid by the Borrower to the Lenders 15 days in advance of the due dates to enable the Lenders to remit the foreign currencies on the due dates. c) The rupee sum shall be paid by the Borrower to the Lenders by cheque or bank draft drawn on a Scheduled Bank in Bombay/New Delhi and the collection/remittance charges, if any, in respect thereof will be borne by the Borrower. 26 6 d) Credit for all payments made by the Borrower in terms of Agreement by cheque/bank draft will be given only on realisation or on the relative due date, whichever is later. e) For the purpose of sub-section (a) hereof a statement signed by a designated officer of the Lenders shall be sufficient evidence of the costs, commission, expenses, etc. f) Any difference on account of exchange fluctuations in the rates of foreign currencies involved between the payment made by the Borrower to the Lenders and the actual cost to the Lenders as referred to in sub-section (a) above shall be borne by or be given credit to the Borrower. In the case of ICICI, if ICICI decides not to call for payment in equivalent rupees in the manner provided above, ICICI shall have the right to notify the Borrower the place or places where and the person or persons to whom the payments in foreign currencies falling due thereafter shall be made and all expenses involved in making payments in the manner so notified shall be borne by the Borrower. SECTION 4.11 - RUPEE TYING OF DEFAULTED AMOUNTS Without prejudice to any of the obligations of the Borrower in terms of the Loan Agreement, in the event of default by the Borrower in making payment in discharge of any of its obligations under the Loan Agreement on the due dates then, notwithstanding anything to the contrary contained in the Loan Agreement, the liability of the Borrower thereafter in respect of such amounts shall be in rupees, which shall be determined and notified by the Lenders to the Borrower in accordance with the provisions of sub-section 4.10(a) hereinabove (hereinafter referred to as "the rupee tied defaulted amounts"). Notwithstanding anything to the contrary contained in the Loan Agreement, the rupee tied defaulted amounts will carry interest and further interest from the respective due dates at the lending rate(s) of the Lenders for normal rupee term loans prevailing on the date of default and shall be payable on the dates specified in the Loan Agreement. ARTICLE V SECTION 5 - BORROWER'S WARRANTIES Except to the extent already disclosed in writing by the Borrower to the Lenders, the Borrower shall be deemed to have assured, confirmed and undertaken as follows: 27 7 (a) DUE PAYMENT OF PUBLIC AND OTHER DEMANDS The Borrower is not in arrears of any public demands such as income-tax, corporation tax and all other taxes and revenues or any other statutory dues payable to the Central or State Government(s) or any local or other authority. (b) SELLING AND PURCHASING ARRANGEMENTS The Borrower has entered into requisite selling and purchasing arrangements to the satisfaction of the Lead Institution. (c) MANAGEMENT AGREEMENT The terms and conditions of appointment of Managing Director or any other person holding substantial powers of management, by whatever name called, shall be subject to the approval of the Lead Institution. (d) CONFLICT WITH MEMORANDUM AND ARTICLES OF ASSOCIATION Nothing in the Loan Agreement conflicts with the Memorandum and Articles of Association of the Borrower. (e) IMPORT LICENCE The Borrower has obtained import licence(s) with list of equipment/necessary information about eligibility, scope and validity of imports under Open General Licence for equipment to be imported for the Project, and final quotation therefor. The Borrower further undertakes to obtain information regarding changes in import policy, eligibility and scope of import and shall advise the Lenders in this regard from time to time. ARTICLE VI PREDISBURSEMENT CONDITIONS SECTION 6 - CONDITIONS PRECEDENT TO DISBURSEMENT The obligation of the Lenders to make disbursements under the Loan Agreement shall be subject to the Borrower performing all its obligations and undertakings under the Loan Agreement besides compliance by the Borrower with the Disbursement Procedure stipulated by the Lenders, such as submission of necessary information, documents, etc. to the satisfaction of the Lenders. Before seeking disbursement the Borrower shall also comply with the following conditions: 28 8 (a) RAISING OF SHARE CAPITAL The Borrower shall raise share capital as stipulated in the Loan Agreement and the promoters shall subscribe to such share capital to the extent stipulated by the Lenders. (b) SECURITY IN FAVOUR OF THE LENDERS The Borrower shall create security as stipulated in the Loan Agreement in favour of the Lenders. (c) BORROWING FROM OTHER INSTITUTIONS/BANKS The Borrower shall enter into effective agreements with other institutions/banks in the form and substance satisfactory to the Lenders for raising of funds as per the Financing Plan. (d) NON-EXISTENCE OF EVENT OF DEFAULT The Borrower shall satisfy the Lenders that no event of default as defined in Article X hereof and no event which, with the lapse of time or notice and lapse of time as specified in Article X would become an event of default, has happened and been continuing. (e) DRAW DOWN SCHEDULE The Borrower shall, within a period of 30 days from the date of the Loan Agreement or such extended period as may be agreed to by the Lenders, supply to the Lenders full information regarding the orders for the equipment placed by it with its foreign suppliers and the schedule showing the dates on which it expects to establish Letters of Credit under the disbursement procedure and the dates on which payments under those Letters of Credit are expected to be made. (f) LETTERS OF CREDIT The Borrower shall open Letter(s) of Credit for import of capital goods approved under the financing plan only through the Lead Institution/the Lenders. (g) COMPLIANCE WITH SPECIAL CONDITIONS The Borrower shall comply with such special conditions as may be stipulated by the Lenders at the time of communication of the sanction of the Loan or subsequently. (h) DETAILED REVIEW OF THE PROGRESS The Lenders shall have the right to review the cost of the Project before final disbursement of the Loan. 29 9 (i) UNDERTAKING FOR MEETING SHORTFALL The Borrower shall procure undertaking(s) from such persons as may be specified by the Lead Institution in the form required by the Lead Institution whereby it/he/they shall take the responsibility for making arrangements satisfactory to the Lead Institution for meeting the shortfall, if any, in the resources of the Borrower for completing the Project and for working capital. The Borrower shall join in such undertaking as a confirming party. The funds brought in to meet the shortfall in the resources of the Borrower for completing the Project and/or working capital shall be in such form and manner and on such terms as may be required by the Lead Institution ARTICLE VII CONDITIONS APPLICABLE DURING CURRENCY OF THE LOAN AGREEMENT SECTION 7.1 - PROJECT The Borrower shall, (i) PROJECT IMPLEMENTATION Carry out and operate the Project with due diligence and efficiency and in accordance with sound engineering, technical, administrative, financial, managerial and industrial standards and business practices with qualified and experienced management and personnel and in accordance with the Financing Plan and cause the financing specified in the Financing Plan to be applied exclusively to the Project. (ii) PROJECT CHANGES Promptly notify the Lead Institution of any proposed change in the nature or scope of the Project and of any event or condition which might materially and adversely affect or delay completion of the Project or result in substantial overrun in the original estimate of costs. Any proposed change in the nature or scope of the Project shall not be implemented or funds committed therefor without the prior approval of the Lead Institution. (iii) CONTRACT CHANGES Obtain prior concurrence of the Lead Institution to any material modification or cancellation of the Borrower's agreements with its machinery suppliers, collaborators, technical consultants and suppliers of raw materials. 30 10 (iv) DELAY IN COMPLETING THE PROJECT Promptly inform the Lead institution of the circumstances and conditions which are likely to disable the Borrower from implementing the Project or which are likely to delay its completion or compel the Borrower to abandon the same. SECTION 7.2 - UTILISATION OF THE LOANS (i) The Borrower shall use the Loans solely for the purposes described in the Loan Agreement and covenants that the capital goods and services purchased from the Loan shall be used exclusively in the carrying out of the Project. (ii) The Borrower shall purchase the capital goods and services to be financed out of the Loans at a reasonable price, account being taken also of other relevant factors such as time of delivery, efficiency, reliability of the goods, their suitability for the Project and availability of maintenance facilities and spare parts therefor and in the case of services, their quality and the competence of the parties rendering them. (iii) The Borrower shall not use the proceeds of the Loan for the purpose of trading in any other currency. SECTION 7.3 - GENERAL COVENANTS (A) Without the prior approval of the Lead Institution, the Borrower shall not (i) NEW PROJECT Undertake any new project, diversification, modernisation or substantial expansion of the Project described herein. The word "substantial" shall have the same meaning as under the Industries (Development and Regulation) Act, 1951. (ii) LOANS AND DEBENTURES Issue any debentures, raise any loans, accept deposits from public, issue equity or preference capital, change its capital structure, create any charge on its assets or give any guarantees. This provision shall not apply to normal trade guarantees or temporary loans and advances granted to staff or contractors or suppliers in the ordinary course of business or to raising of unsecured loans, overdrafts, cash credit or other facilities from banks in the ordinary course of business. (iii) PREMATURE REPAYMENT Prepay any loan availed of by it from any other party. 31 11 (iv) COMMISSION Pay any commission to its promoters, directors, managers or other persons for furnishing guarantees, counter guarantees or indemnities or for undertaking any other liability in connection with any financial assistance obtained for or by the Borrower or in connection with any other obligation undertaken for or by the Borrower for the purpose of the Project. (v) DIVIDEND Declare or pay any dividend to its shareholders during any financial year unless it has paid all the dues to the Lenders up to the date on which the dividend is proposed to be declared or paid or has made satisfactory provisions therefor. Further, the Borrower shall not declare dividend to the equity shareholders in excess of 15% or the average of the dividend paid in the three preceding years, whichever is higher, without prior approval of the Lead Institution, which may be given conditionally. (vi) SUBSIDIARIES Create any subsidiary or permit any company to become its subsidiary. (vii) MERGER, CONSOLIDATION, ETC. Undertake or permit any merger, consolidation, reorganisation, scheme of arrangement or compromise with its creditors or shareholders or effect any scheme of amalgamation or reconstruction. (viii) INVESTMENTS BY BORROWER Make any investments by way of deposits, loans, share capital, etc. in any concern. (ix) REVALUATION OF ASSETS Revalue its assets at any time during the currency of the Loans. (x) TRADING ACTIVITY Carry on any general trading activity other than the sale of its own products. (B) Unless otherwise agreed to by the Lead Institution, the Borrower shall, (i) ACCOUNTING AND COST CONTROL SYSTEMS Promptly and diligently instal and thereafter maintain an accounting and cost control system satisfactory to the Lenders and maintain 32 12 books of accounts and other records adequate to reflect truly and fairly the financial position of the Borrower and the results of its operations (including the progress of the Project) in conformity with sound accounting principles consistently applied. Such records and books shall be open to examination by the Lenders and any authorised representative of the Foreign Lending Agency. (ii) INFORMATION OF LOANS, GOODS, ETC. Provide to the Lenders all such information relating to the Loans, the goods and services financed out of the Loans, the Project and its operations and other related matters as the Lenders or the Foreign Lending Agency shall, from time to time, at their discretion request, including information relating to the administration, management and financial condition of the Borrower. (iii) NOTICE OF WINDING UP OR OTHER LEGAL PROCESS Promptly inform the Lenders if it has notice of any application for winding up having been made or any statutory notice of winding up under the provisions of the Companies Act, 1956, or any other notice under any other Act or otherwise of any suit or other legal process intended to be filed or initiated against the Borrower and affecting the title to the properties of the Borrower or if a receiver is appointed of any of its properties or business or undertaking. (iv) ADVERSE CHANGES IN PROFITS AND PRODUCTION Promptly inform the Lead Institution of the happening of any labour strikes, lockouts, shutdowns, fires or any event likely to have a substantial effect on the Borrower's profits or business and of any material changes in the rate of production or sales of the Borrower with an explanation of the reasons therefor. (v) INSURANCE a) Insure and keep insured against such risks as may be determined by the Lenders all the goods to be imported for the purpose of the Project whether financed out of the proceeds of the Loans or not and in particular the goods to be financed out of the proceeds of the Loans as are of an insurable nature against all marine, transit and other hazards incidental to the acquisition, transportation and delivery of the goods to the place of use or installation and for such insurance any indemnity shall be payable in a currency freely usable by the Borrower to replace or repair such goods. b) Keep insured up to the replacement value thereof as approved by the Lead Institution (including surveyor's and architect's fees) the properties charged/to be charged to the Lenders and such of its other properties as are of an insurable nature against fire, theft, lightning, explosion, earthquake, riot, strike, civil commotion, storm, tempest, flood, marine risks, erection risks, war risks and such other risks as may be specified by the Lead Institution. 33 13 c) Duly pay all premia and other sums payable for that purpose. The insurance in respect of the properties charged/to be charged to the Lenders shall be taken in the joint names of the Borrower and the Lenders and any other person or institution having an insurable interest in the properties of the Borrower and acceptable to the Lead Institution. The Borrower shall keep deposited with the Lead Institution the insurance policies and renewals thereof. d) Agree that, in the event of failure on the part of the Borrower to insure the properties or to pay the insurance premia or other sums referred to above, the Lenders may get the properties insured or pay the insurance premia and other sums referred to above, as the case may be. (Vi) LOSS OR DAMAGED BY UNCOVERED RISKS Promptly inform the Lead Institution of any loss or damage which the Borrower may suffer due to any force majeure circumstances or act of God such as earthquake, flood, tempest or typhoon, etc. against which the Borrower may not have insured its properties. (vii) COSTS AND CHARGES Pay all taxes, duties, cesses, costs, charges and expenses in connection with or relating to the Loan transaction (including cost of investigation of title and protection of the Lenders' interest). In the event of the Borrower failing to pay the aforesaid monies, the Lenders/Lead Institution shall be at liberty but shall not be obliged to pay the same. (viii) ANNUAL ACCOUNTS Submit to each of the Lenders its duly audited annual accounts within six months from the close of its accounting year. In case statutory audit (if required) is not likely to be completed during this period, the Borrower shall get its accounts audited by an independent firm of Chartered Accountants and furnish the same to the Lead Institution. (ix) MEMORANDUM AND ARTICLES OF ASSOCIATION Carry out such alterations to its Memorandum and Articles of Association as may be deemed necessary in the opinion of the Lead Institution to safeguard the interests of the Lenders arising out of the Loan Agreement. (x) SELLING AND PURCHASING ARRANGEMENTS Undertake that if so required by the Lead Institution, the Borrower shall take steps to suitably modify or terminate the existing selling/purchasing arrangements in such manner as may be required by the Lead Institution. The Borrower shall not enter into any fresh agreement for the appointment of sole selling agents/sole purchasing agents without the 34 14 prior approval of the Lead Institution. Any such arrangement shall he subject to such terms and conditions as may be stipulated by the Lead Institution. SECTION 7.4 - NOMINEE DIRECTOR (i) Each of the Lenders shall have the right to appoint and remove from time to time, Director(s) on the Board of Directors of the Borrower as set out in the Loan Agreement (such directors are hereinafter referred to as 'Nominee Director(s)'). (ii) The Nominee Director(s) shall not be required to hold qualification shares and not be liable to retire by rotation. (iii) The Nominee Director(s) shall be entitled to all the rights and privileges of other Directors including the sitting fees and expenses as payable to other Directors but if any other fees, commission, monies or remuneration in any form is payable to the Directors, the fees, commission, monies and remuneration in relation to such Nominee Director(s) shall accrue to the Lenders and the same shall accordingly be paid by the Borrower directly to the Lead Institution for the account of the concerned Lender. Provided that, if any such Nominee Director(s) is an officer of the Lenders, the sitting fees in relation to such Nominee Director(s) shall also accrue to the Lenders and the same shall accordingly be paid by the Borrower directly to the Lead Institution for the account of the concerned Lender. Any expenditure incurred by the Lenders or the Nominee Director(s) in connection with his appointment or directorship shall be borne by the Borrower. (iv) The Nominee Director(s) shall be appointed a Member of the Management Committee or other Committees of the Board, if so desired by the Lenders. (v) The Nominee Director(s) shall be entitled to receive all notices, agenda, etc. and to attend all General Meetings and Board Meetings and Meetings of any Committees of the Board of which he is a member. (vi) If, at any time, the Nominee Director(s) is not able to attend a meeting of the Board of Directors or any of its Committees of which he is a member, the Lenders may depute an observer to attend the meeting. The expenses incurred by the Lenders in this connection shall be borne by the Borrower. SECTION 7.5 - MANAGEMENT Unless the Lead Institution otherwise agrees: 35 15 (i) EXISTING MANAGEMENT The Borrower shall not remove any person, by whatever name called, exercising substantial powers of management of the affairs of the Borrower at the time of execution of the Loan Agreement. (ii) PAYMENT OF REMUNERATION The person(s) referred to in (i) above shall not be paid any commission in any year unless all the dues of the Lenders in that year have been paid to the satisfaction of the Lead Institution. (iii) PAYMENT OF COMPENSATION The Borrower shall not pay any compensation to any of the persons mentioned in (i) above in the event of loss of his/their office(s) for any reason whatsoever if there is a default in repayment of dues to the Lenders. (iv) UNDERTAKINGS The Borrower shall obtain suitable undertakings for giving effect to (ii) and (iii) above from the persons mentioned in (i) above. The appointment/reappointment including terms of appointment (or alteration in such terms) of the persons mentioned in (i) above shall be subject to the prior approval of the Lead Institution. (v) FUTURE ARRANGEMENT The Borrower shall, as and when required by the Lead Institution, appoint and change to the satisfaction of the Lead Institution suitable technical, financial and executive staff of proper qualifications and experience for the key posts. The terms of such appointments including any changes therein, shall be subject to prior approval of the Lead Institution. (vi) REVIEW OF MANAGEMENT In case of default in payment of any dues to the Lenders or if in the opinion of the Lead Institution the business of the Borrower is conducted in a manner opposed to the public policy or in a manner prejudicial to the Lenders' interest, the Lead Institution shall have the right to review the management set up or organisation of the Borrower and to require the Borrower to restructure it as may be considered necessary by the Lead Institution, including the formation of Management Committees with such powers and functions as may be considered suitable by the Lead Institution. (vii) APPOINTMENT OF TECHNICAL/MANAGEMENT CONSULTANTS/CHARTERED ACCONTANTS The Lead Institution shall have the right to appoint, whenever it considers 36 necessary, any person, firm, company or association of persons engaged in technical, management or any other consultancy business to inspect and examine the working of the Borrower and its factory and to report to the Lead Institution. The Lead Institution shall have the right to appoint, whenever it considers necessary, any Chartered Accountants/Cost Accountants as auditors for carrying out any specific assignments) or to examine the financial or cost accounting systems and procedures adopted by the Borrower for its working or as concurrent or internal auditors, or for conducting a special audit of the Borrower. The costs, charges and expenses including professional fees and travelling and other expenses of such consultants or auditors shall be payable by the Borrower. (viii) COMMITTEES OF BOARD The Borrower shall constitute such committees of the Board with such composition and functions as may be required by the Lead Institution for close monitoring of different aspects of its working. (ix) UNDERTAKINGS FOR NON-DISPOSAL OF SHAREHOLDINGS The Borrower shall not recognise or register any transfer of shares in the Borrower's capital made or to be made by promoters, their friends or associates as may be specified by the Lead Institution. The Borrower shall obtain and furnish to the Lead Institution suitable undertakings from such person for giving effect to the above. ARTICLE VIII REPORTS Section 8 - The Borrower shall furnish to the Lenders such reports at may be required by the Lenders. ARTICLE IX INSPECTION Section 9 - The Borrower shall, a) PROJECT EXPENDITURE RECORDS Maintain records and procedures adequate to record and monitor the progress of the Project (including its cost and the benefits to be derived from it) to identify the goods and services financed out of the Loan, to disclose their use in the Project and the operations and financial condition of the 37 17 Borrower and such records shall be open to examination by the Lenders, the Foreign Lending Agency and their authorised representatives. b) TECHNICAL, FINANCIAL AND LEGAL INSPECTIONS (i) Permit the Lenders, by themselves or jointly with the Foreign Lending Agency and their authorised representatives, to carry out technical, financial and legal inspections of the goods purchased out of the Loans and to visit any facilities and construction sites included in the Project and to examine any plants, installations, sites, works, buildings, property, equipment, records and documents relevant to the performance of the obligations of the Borrower under the Loan Agreement. Any such representative of the Lenders and/or the Foreign Lending Agency shall have free access at all reasonable times to the Borrower's properties and shall receive full cooperation and assistance from the employees of the Borrower. (ii) Permit any whole-time officer of the Lenders or any authorised representative of the Foreign Lending Agency or a qualified practising Auditor to examine the Borrower's books and papers and will give all facilities to enable any technically qualified person chosen by tile Lenders or the Foreign Lending Agency to report on the business of the Borrower at any time. Provided that, if the technically qualified person is not a whole-time employee of the Lenders or an authorised representative of the Foreign Lending Agency such technically qualified person shall be reasonably acceptable to the Borrower having regard to his other activities, if any. (iii) The cost of inspection, including travelling and all other expenses, shall be payable by tile Borrower to the Lenders/the Foreign Lending Agency in this behalf. ARTICLE X EVENTS OF DEFAULT AND REMEDIES Section 16.1 If one or more of the events specified in this Section (hereinafter called 'events of default') happen(s), the Lead Institution or the Lenders or any of them may, by a notice in writing to the Borrower, declare the principal of and all accrued interest on the Loans to be due and payable forthwith and the security created in terms of Article III of, the Loan Agreement shall become enforceable and the Lenders shall have the following rights (anything in the Loan Agreement to the contrary notwithstanding) namely: (i) to enter upon and take possession of the assets of the Borrower; and (ii) to transfer the assets of the Borrower by way of lease or leave and licence or sale. 38 18 EVENTS OF DEFAULT a) DEFAULT IN PAYMENT OF PRINCIPAL SUMS OF THE LOANS Default has occurred in the payment of principal sums of the Loans on the due dates. b) DEFAULT IN PAYMENT OF INTEREST Default has been committed by the Borrower in payment of any instalment of interest on the Loans and such default has continued for a period of thirty days. c) ARREARS OF INTEREST Interest amounting to at least Rs. 500 has been in arrears and unpaid for thirty days after becoming due. d) DEFAULT IN PERFORMANCE OF COVENANTS AND CONDITIONS Default has occured in the performance of any other covenant, condition or agreement on the part of the Borrower under the Loan Agreement or any other agreement and such default has continued for a period of thirty days after notice in writing thereof has been given to the Borrower by the Lenders/Lead Institution. e) SUPPLY OF MISLEADING INFORMATION Any information given by the Borrower in its Loan Application, in the reports and other information furnished by the Borrower in accordance with the Reporting System and the warranties given/deemed to have been given by the Borrower to the Lenders/Lead Institution is misleading or incorrect in any material respect. f) INABILITY TO PAY DEBTS If, there is reasonable apprehension that the Borrower is unable to pay its debts or proceedings for taking it into liquidation, either voluntarily or compulsorily, may be or have been commenced. g) INADEQUATE INSURANCE If, the properties and assets offered to the Lenders as security for the Loans have not been kept insured by the Borrower or depreciate in value to such an extent that, in the opinion of the Lead Institution, further security to the satisfaction of the Lead Institution should be given and on advising the Borrower to that effect such security has not been given to the Lenders. 39 19 h) SALE, DISPOSAL AND REMOVAL OF ASSETS If, without the prior approval of the Lead Institution any land, buildings, structures or plant and machinery of the Borrower are sold, disposed of, charged, encumbered or alienated or the said buildings, structures, machinery, plant or other equipment are removed, pulled down or demolished. i) REFUSAL TO DISBURSE LOANS BY OTHER FINANCIAL INSTITUTIONS If the other financial institutions or bank(s) with whom the Borrower has entered into agreements for financial assistance have refused to disburse its/their loan(s) or any part thereof or have recalled its/their loan(s) under their respective loan agreement(s) with the Borrower. j) PROCEEDINGS AGAINST BORROWER The Borrower has voluntarily or involuntarily become the subject of proceedings under any bankruptcy or insolvency law or the Borrower is voluntarily or involuntarily dissolved. k) INABILITY T0 PAY DEBTS ON NATURITY The Borrower is unable or has admitted in writing its inability to pay its debts as they mature. l) LIQUIDATION OR DISSOLUTION OF THE BORROWER The Borrower has taken or suffered to be taken any action for its reorganisation, liquidation or dissolution. m) APPOINTMENT OF RECEIVER OR LIQUIDATOR A receiver or liquidator has been appointed or allowed to be appointed of all or any part of the undertaking of the Borrower. n) ATTACHMENT OR DISTRAINT ON MORTGAGED PROPERTIES If, an attachment or distraint has been levied on the mortgaged properties or any part thereof or certificate proceedings have been taken or commenced for recovery of any dues from the Borrower. o) EXTRAORDINARY CIRCUMSTANCES If, extraordinary circumstances have occured which make it improbable for the Project to be carried out and for the Borrower to fulfill its obligations under the Loan Agreement. Section 10.2 CONSEQUENCES OF DEFAULT On the happening of any of the events of default, in addition to 40 20 the rights specified in Section 10.1 hereof, each of the Lenders shall be entitled to appoint and remove from time to time Whole-time Director(s) on the Board of Directors of the Borrower (such Director (s) are hereinafter referred to as "the Whole-time Nominee Director(s)"). Such Whole-time Nominee Director(s) shall exercise such powers and duties as may be approved by the Lenders and have such rights as are usually exercised by or are available to a Whole-time Director in the management of the affairs of the Borrower. Such Whole-time Nominee Director(s) shall not be required to hold qualification shares nor be liable to retire by rotation and shall be entitled to receive such remuneration, fees, commission and monies as may be approved by the Lead Institution. Such Whole-time Nominee Director(s) shall have the right to receive notices of and attend all General meetings and Board Meetings or any committee(s) of the Borrower of which they are members. Any expense that may be incurred by the Lenders or such Whole-time Nominee Director(s) in connection with their appointment or directorship shall be paid or reimbursed by the Borrower to the Lenders or as the case may be, to such Whole-time Nominee Director(s). Section 10.3 NOTICE TO THE LENDERS ON THE HAPPENING OF AN EVENT OF DEFAULT If, any event of default or any event which, after the notice, or lapse of time, or both, would constitute an event of default has happened, the Borrower shall, forthwith give notice thereof to the Lead Institution in writing specifying the nature of such event of default, or of such event. Section 10.4 EXPENSES OF PRESERVATION OF ASSETS OF BORROWER AND OF COLLECTION All expenses incurred by the Lenders after an event of default has occurred in connection with:- (i) preservation of the Borrower's assets (whether then or thereafter existing) and (ii) collection of amounts due under the Loan Agreement shall be payable by the Borrower. ARTICLE XI CANCELLATION, SUSPENSION AND TERMINATION Section 11.1 CANCELLATION BY NOTICE TO THE LENDERS The Borrower may, by notice in writing to the Lead Institution, cancel the Loans or any part thereof which the Borrower has not withdrawn prior to the giving of such notice. Provided that such cancellation shall be pro-rata for each Lender. 41 21 Section 11.2 SUSPENSION Further access by the Borrower to the use of the Loans may be suspended or terminated by the Lenders/Lead Institution: a) NON-COMPLIANCE OF TERMS AND CONDITIONS Upon failure by the Borrower to carry out all or any of the terms of the Loan Agreement or on the happening of any event of default referred to in Article X hereof. b) EXTRAORDINARY SITUATION If, any extra ordinary situation makes it improbable that the Borrower would be able to perform its obligations under the Loan Agreement. c) ASSIGNMENT OR TRANSFER OF PROPERTIES T0 RECEIVER, ASSIGNEE, ETC. If, the Borrower takes or permits to be taken any action or proceedings whereby any of its properties shall or may be assigned or, in any manner, transferred or delivered to any receiver, assignee ' liquidator or other person, whether appointed by the Borrower or by any Court of Law, whereby such property shall or may be distributed among the creditors of the Borrower or the Borrower suffers any charge to be created over its properties in any legal proceedings. d) CHANGE IN THE BORROWER'S SET-UP If, any chance in the Borrower's set-up has taken place which, in the opinion of the Lead Institution (which shall be final and binding on the Borrower), would adversely affect the conduct of the Borrower's business or the financial position or the efficiency of the Borrower's management or personnel or the execution of the Project. e) DENIAL OF ACCESS If, for any reason, the Lenders are denied further access to their loan(s) facility from the Foreign Lending Agency. Section 11.3 SUSPENSION TO CONTINUE TILL DEFAULT REMEDIED The right of the Borrower to make withdrawals from the Loans shall continue to be suspended until the Lead Institution has notified the Borrower that the right to make withdrawals has been restored. Section 11.4 TERMINATION If any of the events described above or in Article X hereof has been continuing or if the right of the Borrower to make withdrawals from the Loans shall have been suspended with respect to any amount of the Loans 42 22 for a continuous period of thirty days or if the Borrower has not withdrawn the Loans by the date referred to in the Loan Agreement or such later date as may be agreed to by the Lenders or if the Lenders are denied access to their loan(s) by the Foreign Lending Agency, then, in such event, the Lead Institution may, by notice in writing to the Borrower, terminate the right of the Borrower to make withdrawals. Upon such notice, the undrawn amount of the Loans shall stand cancelled. Notwithstanding any cancellation, suspension or termination pursuant to the aforesaid provisions, all the provisions of the Loan Agreement shall continue to be in full force and effect as herein specifically provided. ARTICLE XII WAIVER Section 12. WAIVER NOT TO IMPAIR THE RIGHTS OF THE LENDERS No delay in exercising or omission to exercise any right, power or remedy accruing to the Lenders/Lead Institution upon any default under the Loan Agreement, security documents or any other agreement or document shall impair any such right, power or remedy or shall be construed to be a waiver thereof or any acquiescence in such default, nor shall the action or inaction of the Lenders/Lead Institution in respect of any default or any acquiescence by them in any default, affect or impair any right, power or remedy of the Lenders/Lead Institution in respect of any other default. ARTICLE XIII APPLICABILITY OF OTHER STATUTES Section 13. APPLICATION OF OTHER STATUTES Nothing contained in the Loan Agreement shall prejudice or in any way affect the rights vested in the Lenders under the Industrial Development Bank of India Act, 1964 (18 of 1964), Industrial Finance Corporation Act, 1948 (15 of 1948), or any other statute. ARTICLE XIV MISCELLANEOUS Section 14.1 SERVICE OF NOTICE Any notice or request to be given or made to the Lenders/Lead Institution or to the Borrower or to any other party shall be in writing. Such notice or request shall be deemed to have been given or made when it 43 23 is delivered by hand or despatched by mail or telegram to the party to which it is required to be given or made at such party's designated address. Section 14.2 EVIDENCE OF DEBT a) Each of the Lenders shall maintain, in accordance with their usual practice, accounts evidencing the amounts from time to time lent by and owing to them under the Loan Agreement. b) In any legal action or proceedings arising out of or in connection with the Loan Agreement, the entries made in the accounts maintained pursuant to sub-clause (a) above shall be prima-facie evidence of the existence and amount of obligations of the Borrower as therein recorded. Section 14.3 BENEFIT OF THE LOAN AGREEMENT The Loan Agreement shall be binding upon and enure to the benefit of each party thereto and its successors and assigns. Section 14.4 HEADINGS The headings of various Articles and Sections herein and in the Loan Agreement are inserted for convenience of reference and are not deemed to affect the construction of the relative provisions. 44 The Industrial Credit and Investment Corporation of India Limited Dear Sirs, Foreign Currency Loan aggregating US$ 2550,000 equivalent to about Rs.803 lacs sanctioned by your Corporation to us With reference to the circular sent by you alongwith your sanction letter 07??400?? dated October 5, 1994 for the above mentioned Foreign Currency Loan, we do hereby undertake to your Corporation that we shall submit to your Corporation (Foreign Exchange Department) quarterly statement in the prescribed form as and when any part of the Foreign Currency Loan is drawn by us. We are aware that on the faith of the above undertaking given by us, you have agreed to consider our eligibility, inter alia, to provide the above mentioned Foreign Currency Loan and to sign the Heads of Agreement with your Corporation in respect of the same. Yours faithfully, Shri [*] Director Dated this 11th day of October, 1994. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.21 41 LOAN AGREE MODULAR ELECTRONIC/CREDIT INVEST INDIA 1 Exhibit 10.21 LOAN AGREEMENT (FOREIGN CURRENCY LOAN) BETWEEN MODULER ELECTRONICS (INDIA) PVT. LTD. AS BORROWER AND THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED AS LENDERS 2 LOAN AGREEMENT -------------- FC-Foreign Currency ------------------- THIS AGREEMENT made this 18th day of March One Thousand Nine Hundred and Ninety Six at Bombay between MODULER ELECTRONICS (INDIA) PVT. LTD. a Company within the meaning of the Companies Act, 1956 (1 of 1956) and having its Registered Office at 406, Dalamal Towers, Nariman Point, Bombay 400 021 (hereinafter referred to as "the Borrower" which expression shall, unless it be repugnant to the subject or context thereof, include its successors and assigns); AND THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED, a public company incorporated under the Indian Companies Act, 1913 (7 of 1913) and having its registered office at 163, Backbay Reclamation, Bombay 400 020 (hereinafter referred to as "the Lenders" which expression shall, unless it be repugnant to the subject or context thereof, include its successors and assigns); 3 2 ARTICLE - I DEFINITIONS 1.1 The following terms shall have the following meanings:- (a) "Due Date" means, in respect of i) an instalment of principal -- the date on which the instalment falls due as stipulated in Schedule V hereto. ii) interest -- the date on which interest falls due as stipulated in Schedule V hereto. iii) commitment charge -- the date on which commitment charge falls due as stipulated in Section 2.3 of Article II hereof. [SEAL] 4 (b) "Financing Plan" means the financing plan as described in Schedule III hereto. (c) "General Conditions" means the GENERAL CONDITIONS No. GC-FC-88 APPLICABLE TO FOREIGN CURRENCY LOANS PROVIDED BY FINANCIAL INSTITUTIONS. (d) "Loan" or "Loans" means the amounts of various foreign currencies specified in Section 2.1 of Article II hereof or their equivalents in other foreign currencies used for their purchase, agreed to be provided by the Lenders for the Project or (as the context requires) so much thereof as may be outstanding from time to time. (e) "Project" means the project to be financed as described in Schedule II hereto. 1.2 GENERAL CONDITIONS The Loan(s) hereby agreed to be granted by the Lenders shall be subject to the Borrower complying with the terms and conditions set out herein and also in the General Conditions a copy of which is annexed hereto. The General Conditions shall be deemed to form part of this Agreement and shall be read as if they are specifically incorporated herein. ARTICLE - II AGREEMENT AND TERMS OF LOAN 2.1 AMOUNT AND TERMS OF LOAN The Borrower agrees to borrow from the Lenders and the Lenders agree to lend to the Borrower out of foreign currencies specified in Schedule IV hereto, on the terms and conditions contained herein as also in the General Conditions, the sums to the maximum extent in various foreign currencies set out in Schedule I equivalent in the aggregate to about Rs.2520 lacs. 2.2A. INTEREST i) The Borrower shall pay to the Lenders interest on the Loan(s) at the rate(s) and in the manner provided in Schedule V hereto. ii) Disbursements made pending creation of final security as stipulated in Article III hereof shall carry further interest at the rate of 1% per annum till creation of such security. iii) Provided however, interest on rupees: defaulted amounts, arrears of liquidated damages and sums incurred by the Lenders by way of expenses in terms of Sections 4.11, 4.5 and 4.7 respectively of the General Conditions shall be payable quarterly on February 20, May 20, August 20 and November 20. [SEAL] 5 2.2B INTEREST RATE SURCHARGE "The Borrower shall pay to the Lenders interest rate surcharge at the rate of 25% per annum or such other rate Reserve Bank of India (RBI) may indicate from time to time on the lending rate. The interest rate surcharge will be payable by the Borrower from the date of drawal of the loan. Such interest rate surcharge shall be payable quarterly each year along with the interest payable on the outstanding amounts of the Loan." 2.3 FRONT END FEE The Borrower shall pay to the Lenders Front End Fee of 1.05% of the Loan on or before signing this Agreement. 2.4 LAST DATE OF WITHDRAWALS Unless the Lenders otherwise agree, the right to make drawals from the Loan(s) shall cease on March 31, 1997. 2.5 REPAYMENT The Borrower undertakes to repay the principal amount of the Loan(s) in accordance with the Amortization Schedule set forth in Schedule VI hereto. 2.6 CONVERSION RIGHT IN CASE OF DEFAULT If the Borrower commits a default in payment or repayment of any instalment of principal amount of the Loans or interest thereon or any combination thereof, then, the Lenders shall have the right to convert (which right is hereinafter referred to as "the conversion right") at its option 20% of the rupee equivalent of the defaulted amount determined in accordance with Section 4.11 of Article IV of the General Conditions into fully paid up equity shares of the Borrower, at par, in the manner specified in a notice in writing to be given by the Lenders to the Borrower (which notice is hereinafter referred to as the "notice of conversion") prior to the date on which the conversion is to take effect, which date shall be specified in the said notice (hereinafter referred to as the "date of conversion"). i) On receipt of notice of conversion, the Borrower shall allot and issue the requisite number of fully paid-up equity shares to the Lenders as from the date of conversion and the Lenders shall accept the shares in satisfaction of the said defaulted amount(s) in respect of the Loans to the extent so converted. The amount so converted shall cease to carry interest as from the date of conversion and the outstanding amount in respect of the Loans shall stand correspondingly reduced. The equity shares so allotted and issued to the Lenders shall cease from the date of conversion, the right to receive proportionately the dividends and other distributions declared or to be declared in respect of the equity capital of the Borrower. Save as aforesaid, the said shares shall rank pari passu with the existing equity shares of the Borrower in all respects. The Borrower shall, at all times, maintain sufficient unissued equity shares for the above purpose. [SEAL] 6 (i) The conversion right reserved as aforesaid may be exercised by the Lenders on one or more occasions during the currency of the Loan(s) on the happening of the default as specified in this Section. (ii) The Borrower assumes and undertakes that in the event of the Lenders exercising the right of conversion as aforesaid, the Borrower shall get the equity shares which will be issued to the Lenders as a result of the conversion, listed with the Bombay Stock Exchange. ARTICLE III SECURITY 3.1 SECURITY FOR THE LOAN (A) The Loan(s) together with all interest, liquidated damages, commitment charges premia on prepayment or on redemption, costs, expenses and other monies whatsoever stipulated in this Agreement shall be secured by: a) a first charge by way of hypothecation in favour of the Lenders of all the Borrower's moveables (save and except book debts), including moveable machinery, machinery spares, tools and accessories present and future, subject to prior charges created and/or to be created: i) in favour of the Borrower's Bankers on the Borrower's stocks of raw materials, semi-finished and finished goods, consumable stores and such other moveables as may be agreed to by the Lead Institution for securing the borrowings for working capital requirements in the ordinary course of business; and The mortgages and charges referred to above shall rank pari passu with the mortgages and charges created and/or to be created in favour of: i) ICICI for its Rupee Loan of Rs.84 lacs. ii) ICICI for its Foreign Currency Loan equivalent to US $7.55 million. (B) The Borrower shall make out a good and marketable title to its properties to the satisfaction of the Lenders and comply with all such formalities as may be necessary or required for the said purpose. [SEAL] 7 3.2 CREATION OF ADDITIONAL SECURITY If at any time during the subsistence of this Agreement, the Lenders is of the opinion that the security provided by the Borrower has become inadequate to cover the balance of the Loans then outstanding, then, on the Lenders advising the Borrower to that effect, the Borrower shall provide and furnish to the Lenders, to the satisfaction of the Lenders, such additional security as may be acceptable to the Lenders to cover such deficiency. 3.3 ACQUISITION OF ADDITIONAL IMMOVEABLE PROPERTIES So long as any monies remain due and outstanding to the Lenders, the Borrower undertakes to notify the Lenders in writing of all its acquisitions of immoveable properties and as soon as practicable thereafter to make out a marketable title to the satisfaction of the Lenders and charge the same in favour of the Lenders by way of first charge the same in favour of the Lenders by way of first charge in such form and manner as may be decided by the Lenders. 3.4 GUARANTEE The Borrower shall procure irrevocable and unconditional personal guarantee(s) from [*] in favour of the Lenders for the due repayment of the Loans and the payment of all interest and other monies payable by the Borrower in the form prescribed by the Lenders and to be delivered to the Lenders before any part of the Loan is advanced. The Borrower shall not pay any guarantee commission to the said Guarantor(s). ARTICLE - IV APPOINTMENT OF NOMINEE DIRECTOR(S) The Borrower agrees that the Lenders shall be entitled to appoint and withdraw from time to time one Director on the Board of Directors of the Borrower during the currency of this Agreement. ARTICLE - V SPECIAL CONDITIONS The Loan(s) hereby granted shall also be subject to the Borrower complying with the special conditions set out in Schedule VII hereto. [SEAL] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 ARTICLE - VI EFFECTIVE DATE OF AGREEMENT This Agreement shall become binding on the Borrower and the Lenders on and from the date first above written. It shall be in force till all the monies due and payable under this Agreement are fully paid off. [SEAL] 9 SCHEDULE I PARTICULARS OF LOANS
Name of the Lender Loan - ------------------ ---- (Equivalent) RC Equal US$ (Rs. in lacs) ---- --------- ------------- The Industrial Credit and US 7,000,000 2520 Investment Corporation of India Dollars Limited (ICICI) 163 Backbay Reclamation Bombay 400 020
[SEAL] 10 9 SCHEDULE II PROJECT The Borrower proposes to expand existing facilities for manufacture of Winchester Disk drives for computers from 500,000 nos. per annum to 1,200,000 nos. per annum, at Madras Export Processing Zone, Madras. The Loan(s) shall be utilised by the Borrower for import of Capital Goods. 11 10 SCHEDULE III FINANCING PLAN A. The total estimated cost of the project is Rs.8290 made up as under:
(Rs in lacs) Rupee equivalent Rupee of foreign currency Total Cost cost cost ----- ------------------- ------ Land & Site Development Buildings Plant & Machinery - a) Imported i) CIF value 6705 6705 ii) Import Duty iii) Clearing & Forwarding Charges b) Indigenous c) Foundation & Erection Charges Miscellaneous fixed assets 190 190 Preliminary and Capital Issue expenses including interest during construction period 344 344 Contingencies Margin money for working 1051 1051 capital ---- Total of Rupee & foreign currency cost 8290 ====
B. The proposed sources of financing are as follows:
(Rs. in lacs) SHARE CAPITAL 1990 FOREIGN CURRENCY LOANS ICICI 3600 INTERNAL RESOURCES 1319 UNSECURED LOANS/DEPOSITS 1296 SUBSIDY 85 ---- TOTAL 8290 ====
The Rupee figure has been arrived at on the basis of rates of exchange of the foreign currencies involved prevailing at the time of sanction of the Loan(s) and is subject to revision based on the fluctuations in foreign currency rates. [SEAL] 12 11 SCHEDULE IV The Loan referred to in section 2.1 herein is comprised of the following: (i) USD 7,000,000 which is agreed to be provided as follows: (i) USD 7,000,000 equivalent in the aggregate to US$ 7,000,000 (hereinafter referred to as the ("Bayerische Loan") (which expression shall, unless expressly provided otherwise, mean the aggregate of the amounts of various foreign currencies of their equivalents in other foreign currencies used for their purchase expressed in US$ equivalent or so much thereof as may be outstanding from time to time) out of the facility available to ICICI in terms of the Facility Agreement entered into between ICICI, Bayerische Landesbank Cirozentrale and other Banks mentioned in the Facility Agreement. [SEAL] 13 : 12 : SCHEDULE V PART I SUB PART h (BAYERISCHE LOAN) The following provisions shall apply to the Bayerische Loan: 1. APPLICATION OF PROCEEDS ----------------------- No part of the Bayerische Loan shall be used for any purpose other than for the import of capital goods. 2. INTEREST -------- The Borrower shall pay to ICICI interest on the principal amount of the Bayerische Loan outstanding from time to time quarterly on February 20, May 20, August 20, and November 20 at a floating rate of 4% over and above the US$ LIBOR plus applicable interest tax as may be advised by ICICI to the Borrower. However, the last interest payment date shall be on February 20, 20003. 3. COMPUTATION OF INTEREST & OTHER CHARGES --------------------------------------- Interest and other charges shall accrue from day to day and shall be calculated on the basis of a year of 360 days and the actual number of days elapsed. [SEAL] 14 13 4. REPAYMENT Bayerische Loan is repayable in accordance with the Amortization Schedule set forth in Schedule VI Part I Sub part - h hereto. The Amortization Schedule has been drawn up on the basis of the aggregate U.S. equivalent of the foreign currencies involved at the rates of exchange prevailing at the time of sanction of the Bayerische Loan and is subject to revision on the basis of rates of exchange prevailing at the time of each disbursement. 5. PREPAYMENT AND FORWARD CONTRACTS Unless expressly agreed to by ICICI and subject to payment of such premium as may be stipulated by ICICI the Borrower shall not be entitled to prepay in whole or in part of the Bayerische Loan before the due date nor shall be entitled to enter into forward contracts to buy foreign currencies in respect of the Bayerische Loan or in respect of payment of interest or other payments herein. 6. DUE DATE If the Due Date referred to herein falls on a day which is not a business day, Due Date shall be extended to the next succeeding business day, unless such day falls in the next succeeding calendar month, in which event, such due date shall be immediately preceding business day. Business day shall be construed as a reference to a day (other than Saturday or Sunday) on which banks are generally open for business in Singapore, London, New York City, Hong Kong and Bombay. [SEAL] 15 7. LAST DATE OF WITHDRAWAL ----------------------- Unless otherwise agreed to by ICICI, no part of the Bayerische Loan shall be drawn after January 15, 1997. [SEAL] 16 15 SCHEDULE VI PART I SUB PART h AMORTISATION SCHEDULE (BAYERISCHE LOAN)
IN US$ Principal amount Date payment outstanding due Payment of Principal after each payment - ------------------------------------------------------------------------------- 7,000,000 May 20, 1998 583,333 6,416,667 August 20, 1998 583,333 5,833,334 November 20, 1998 583,333 5,250,001 February 20, 1999 583,333 4,666,668 May 20, 1999 583,333 4,083,335 August 20, 1999 583,333 3,500,002 November 20, 1999 583,333 2,916,669 February 20, 2000 583,333 2,333,236 May 20, 2000 583,333 1,750,003 August 20, 2000 583,333 1,166,670 November 20, 2000 583,333 583,337 February 20, 2001 583,333 --- [SEAL] 17 16 SCHEDULE - VII SPECIAL CONDITIONS 1. The Company shall implement the Project within the overall project cost of Rs.8290 lacs ("the Project Cost") and in accordance with the financing plan ("the Financing Plan") both as agreed to between the Company and ICICI and which will be set out in the loan Agreement and shall commence commercial production on or before April 1, 1997 ("the Completion Date"). 2. The Company shall, out of the envisaged cash accruals of Rs.2330 lacs during the period 1/4/96 to 31/3/97, utilise a sum of Rs.1977 lacs for meeting a part of the cost of the Project and/or other requirements of funds. 3. The Company shall raise Rs.2010 lacs by issue of Equity Shares to promoters to the satisfaction of ICICI for meeting a part of the cost of the Project and/or other requirements of funds. 4. Before the loans become effective - The Company shall raise at least 50% of the abovementioned equity capital of Rs.2010 lacs, i.e. at least Rs.1005 lacs, to the satisfaction of ICICI for meeting a part of the cost of the project. 5. The Company shall obtain State Subsidy of Rs.85 lacs for meeting a part of the cost of the Project. In the event the Company is unable to obtain the subsidy, the Company shall raise funds on terms satisfactory to ICICI to meet the shortfall. 6. The Company shall raise unsecured loan of Rs.1296 lacs, to the satisfaction of ICICI for meeting a part of the cost of the project. The unsecured loans shall not carry any interest till the Company commences payment of dividend. Thereafter, the interest on such loan shall be equal to the interest on secured loans or the percentage of dividend, whichever is lower. Before the loans become effective - The Company shall raise at least 50% of the abovementioned unsecured loans of Rs.1296 lacs, i.e. at least Rs.648 lacs, to the satisfaction of ICICI for meeting a part of the cost of the project. [SEAL] 18 17 7. The Company shall undertake/furnish an undertaking from [*] in terms of Section 8(g) of GC-FC-88. 8. The Company shall make satisfactory arrangements with its bankers for meeting its additional working capital requirements and shall furnish a letter from its bankers in this regard. 9. The Company shall satisfy ICICI that the physical progress as well as expenditures incurred on the Project are as per the original schedule. To this end, the Company agrees and undertakes to furnish to ICICI such information and data as may be required by ICICI. 10. The Company shall suitably among its Articles of Association to provide for appointment of nominee director by ICICI on the Board of the Company. 11. ICICI shall be entitled to appoint one nominee of the Board of Directors of the Company during the currency of ICICI's assistance. [SEAL] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 19 18 IN WITNESS WHEREOF the Borrower has caused its Common Seal to be affixed hereto and to duplicate hereof and ICICI has caused this Agreement to be executed in duplicate on the day, month and year first above written as hereinafter appearing: THE COMMON SEAL of Moduler Electronics (India) Pvt. Ltd. has pursuant to the Resolution of its Board of Directors passed in that behalf on the 29th day of February 1996 hereunto been affixed in the presence of Shri M.I. Trade Director who have signed these presents in token thereof and Shri Bhupendra V. Shah authorized person who has countersigned the same in token thereof. /s/ Bhupendra V. Shah SIGNED AND DELIVERED by the within named Lenders by the hand of Shri I. Raghacudran an authorized official of ICICI, ICICI acting as the Lender. /s/ Shri I. Raghacudran
EX-10.22 42 AGREED ORDER COMPRISING CONTROVERSIES 2/4/94 1 EXHIBIT 10.22 JEFF J. MARWIL KATTEN MUCHIN & ZAVIS 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661-3693 Telephone: (312) 902-5200 L. DONALD RAUB, JR. (Cal. Bar No. 111973) THOMAS M. GAA (Cal. Bar No. 130720) BROOKS & RAUB 505 Hamilton Avenue, Suite 300 Palo Alto, California 94301-2009 Attorneys for TEAC CORPORATION UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA (San Jose Division) In re ) Chapter 11 ) Case No. 93-54027-MM KALOK CORPORATION, a California ) corporation ) AGREED ORDER COMPROMISING ) CONTROVERSIES Debtor. ) ) Date: February 4, 1994 Employer's Tax ID 77-0146015 ) Time: 11:00 a.m. ) Place: 280 South First Street, ) Rm. 3070 ) San Jose, California ) ) The Honorable Marilyn Morgan ) - -------------------------------------------------------------------------------- THIS CAUSE, coming to be heard on the Motion of Kalok Corporation, Debtor and Debtor-in-Possession, seeking entry of an Order compromising certain controversies in this case ("Motion") and the Court having conducted a hearing on the Motion, Kalok being represented by Gray Cary Ware & Freidenrich, by Lillian G. Stenfeldt and Nels R. Nelsen, TEAC Corporation ("TEAC") being represented by Katten, Muchin & Zavis, by Jeff J. Marwil and Mark D. Gerstein, DZU-AD ("DZU") and DZU Corporation ("DZU Corp.") being represented by Fulbright & Jaworski, L.L.P., by William J. Rochelle III, Courtney S. Katzenstein and Mark N. Mutterperl, Dan Dooley ("Dooley"), individually, Steven Kaczeus ("Kaczeus"), individually, JT Storage, Inc. ("Newco") and The Official AGREED ORDER TO COMPROMISE CONTROVERSY 2 Unsecured Creditors Committee (the "Committee") being represented by Murray & Murray, by Janice Murray. THE COURT HEREBY MAKES THE FOLLOWING FINDINGS OF FACT: 1. Each of TEAC, DZU, DZU Corp., Kalok, the Committee, Kaczeus, Dooley, and Newco have negotiated in good faith to resolve all pending controversies in this case pursuant to the terms of this Order. 2. Kalok filed a voluntary petition for relief on June 21, 1993 ("Petition Date"). Since that time, the Debtor has operated its business pursuant to Sections 1107 and 1108 of the Bankruptcy Code. 3. On June 30, 1993, the Committee was appointed in the Debtor's bankruptcy case. 4. Kalok is engaged in the business of designing, manufacturing and selling hard disk drives for computers. 5. TEAC holds all of the issued and outstanding shares of Kalok Series E Preferred Stock ("Series E") which shares were purchased by TEAC pursuant to a Stock Purchase Agreement with Kalok dated as of December 18, 1992. Simultaneous with the purchase of the Series E by TEAC, TEAC and Kalok entered into a Licensing Agreement dated as of December 18, 1992 ("TEAC Licensing Agreement"), whereby Kalok agreed to license certain of its disk drive technology to TEAC, and a Manufacturing and Sales Agreement dated as of December 18, 1992 ("Manufacturing Agreement"), whereby TEAC agreed to manufacture disk drives for Kalok on certain terms and conditions. 6. Prior to the filing date, TEAC provided Kalok with a credit line of up to $5,000,000 ("TEAC Credit Line") for purchases made by Kalok pursuant to the Manufacturing Agreement. Pursuant to the terms of the Manufacturing Agreement, Kalok was in default under the TEAC Credit Line in the amount of $1,159,828.23 ("Credit Line Default Indebtedness") on the Petition Date. 2 AGREED ORDER TO COMPROMISE CONTROVERSY 3 7. DZU holds all or substantially all of the issued and outstanding shares of the Debtor's Series D Preferred Stock ("Series D") which shares were purchased by DZU pursuant to a Stock Purchase Agreement with Kalok dated as of May 15, 1992 for a cash purchase price of approximately $5,000,000. On May 15, 1992, DZU and Kalok entered into a Subcontract Manufacturing Agreement (the "DZU Manufacturing Agreement") of even date, whereby DZU agreed to manufacture disk drives for Kalok and Kalok agreed to purchase such disk drives from DZU. On account of pre-petition inventory purchases DZU alleges that Kalok owes DZU no less than approximately $1,383,390.28 (the "Pre-Petition Debt") and that the Pre-Petition Debt is an administrative claim arising under the DZU Manufacturing Agreement. The Debtor and the Committee dispute the validity, amount and priority to be accorded to the debt. 8. On June 10, 1993 Kalok obtained a loan from Steven Kaczeus in the principal amount of $200,000 (the "Kaczeus Loan"). Kaczeus is an officer, director and shareholder of Kalok. On June 11, 1993 Kalok obtained a loan from TEAC in the principal amount of $150,000 ("TEAC Loan"). On June 14, 1993 Kalok obtained from Dr. Richard I. Emori a loan in the principal amount of $100,000 ("Emori Loan"). The TEAC Loan, the Kaczeus Loan and the Emori Loan are secured by, among other things, the following wheresoever located and whether then existing or thereafter arising or acquired by Kalok (collectively referred to as the "Pre-Petition Collateral"): All personal property of Kalok, including without limitation, all goods and equipment, inventory, contract rights, general intangibles, accounts receivable, patents, trademarks, tradenames, licenses, documents, securities, cash, Kalok's books and records and all proceeds of any of the foregoing, all as more fully described in the "Pre-Petition Documents" (as defined below). The security interests and liens granted TEAC, Kaczeus and Emori were evidenced by various agreements, instruments and documents all as may have been amended from time to time (collectively referred to as the "Pre-Petition Documents"). 3 AGREED ORDER TO COMPROMISE CONTROVERSY 4 9. With respect to the TEAC Loan, the Kaczeus Loan and the Emori Loan (collectively referred to as the "Pre-Petition Loans"), TEAC, Emori and Kaczeus hold, on a pro rata and equal priority basis, first priority, valid and duly perfected liens upon and security interests in the Pre-Petition Collateral. 10. Pursuant to that certain Order entered by this Court on or about June 23, 1993, Kalok borrowed a total of $500,000, $250,000 from TEAC and $250,000 from DZU ("First Financing Order") secured by an equal first priority lien upon and security interest in Kalok's accounts and accounts receivable, and proceeds thereof ("Accounts Receivable"). Pursuant to this Court's Order entered on July 24, 1993 Kalok borrowed an additional $450,000, $225,000 from TEAC and $225,000 from DZU, ("Second Financing Order") secured by equal first priority security interests in and liens upon Kalok's inventory and proceeds thereof together with Kalok's Accounts Receivable, subject only to the first priority liens upon and security interests in the Pre-Petition Collateral held on an equal priority basis by TEAC, Kaczeus and Emori to the extent of $450,000 plus interest. In addition, the Second Financing Order granted TEAC and DZU an equal first priority security interest in and lien upon Kalok's inventory to further secure Kalok's obligations to TEAC and DZU under the First Financing Order. Pursuant to this Court's Order entered on August 13, 1993 ("Third Financing Order"), and in accordance with Section 365 of the Bankruptcy Code, Kalok modified and assumed (i) its Manufacturing Agreement with TEAC ("TEAC Assumed Manufacturing Agreement"), and (ii) the TEAC License Agreement ("TEAC Assumed License Agreement"), and further borrowed up to $900,000 from TEAC, secured by a valid, duly perfected security interest in and lien upon all of Kalok's assets, including the Pre-Petition Collateral, with priority (a) senior to all other such liens and security interests except those held by TEAC, Kaczeus and Emori to secure the Pre-Petition Loans and OPC, to the extent of approximately $2,000, (to the extent such liens and security interest were valid, perfected and enforceable) and (b) equal in priority to all liens and security 4 AGREED ORDER TO COMPROMISE CONTROVERSY 5 interests in any portion of Kalok's assets granted to DZU pursuant to the First, Second or Third Financing Orders. Upon entry of the Third Interim Financing Order, Kalok and TEAC executed the TEAC Assumed Manufacturing Agreement and the TEAC Assumed License Agreement, and accordingly each such agreement is, in accordance with their respective terms, fully binding upon and enforceable against each of Kalok and TEAC. Pursuant to the terms of the Third Financing Order, TEAC advanced $400,000 on a revolving basis to Kalok to fund costs and expenses associated with operation of Kalok's business, and further extended to Kalok a credit line of $500,000 to fund purchase of product by Kalok from TEAC. 11. On September 10, 1993 this Court entered that certain Stipulated Final Financing Order pursuant to 11 U.S.C. Section 364(d) ("TEAC Final Order") pursuant to which TEAC loaned to Kalok the amount of $175,000 (to satisfy operating expenses), and extended to Kalok a credit line in the amount of approximately $300,000 to purchase disk drive inventory. In addition, the TEAC Final Order granted TEAC a lien upon and security interest in all of Kalok's assets, including the Pre-Petition Collateral, on the same basis and priority as the liens granted TEAC under the Third Financing Order, to secure all post Petition Date loans and extensions of credit made by TEAC to Debtor. 12. On or about September 23, 1993 the Court entered that certain Stipulated Final Financing Order Pursuant to 11 U.S.C. Section 364(c) and Order Authorizing Debtor to Enter into a License and Manufacturing Agreement with DZU AD ("DZU Final Order"). Pursuant to the terms of the DZU Final Order, DZU loaned Kalok $1,525,000 ("DZU Final Loan"), which funds Kalok used to satisfy ongoing operating expenses. The DZU Final Order further granted DZU a lien upon and security interest in all of the Kalok's assets, including the pre-petition collateral, on the same basis and priority as the security interests and liens granted TEAC under the TEAC Final Order to secure all Post Petition Date indebtedness owing by Kalok to DZU. In addition, Kalok and DZU 5 AGREED ORDER TO COMPROMISE CONTROVERSY 6 entered into that certain Subcontract Manufacturing Agreement dated September 22, 1993 ("DZU License"). 13. Pursuant to the terms of the TEAC Assumed Manufacturing Agreement, Kalok was required to pay TEAC for all advances under the TEAC Credit Line within 60 days of the date inventory was delivered to Kalok by TEAC. In September 1993 Kalok obtained an advance of credit under the TEAC Credit Line in an amount in excess of $1,000,000. Thereafter, Kalok, with the consent of TEAC, returned substantial amounts of inventory as a credit against amounts owing TEAC by Kalok under the TEAC Credit Line. Nonetheless, as of 60 days after the advance of such credit, Kalok was still indebted to TEAC in the approximate amount of $338,813.13. Accordingly, on November 5, 1993, and again on December 23, 1993, TEAC declared a default under the terms of the TEAC Manufacturing Agreement, and pursuant to the terms of that agreement, the Final Financing Order, and subsequent agreements between Kalok and TEAC, all obligations due and owing by Kalok to TEAC became due and owing TEAC on January 21, 1994. All such amounts, which aggregate approximately [$1,500,000], not including the Credit Line Default Indebtedness, are currently due and owing by Kalok to TEAC. TEAC has asserted an administrative claim against Kalok in an amount equal to the Credit Line Default Indebtedness based on Section 365(b)(1)(A) of the Bankruptcy Code. Accordingly, TEAC holds valid, duly perfected, enforceable priority security interests in and liens upon all of Kalok's assets to the extent of approximately $1,500,000 plus interest, costs and expenses ("TEAC Secured Claim"). 14. Pursuant to the terms of the DZU Final Order, all amounts due and owing by Kalok to DZU ($2,000,000 plus interest, costs and expenses) were due and owing DZU on or before December 30, 1993. Kalok has not paid DZU, but has alleged no such payments are due or owing. Although DZU purchased $160,000 in parts, Kalok provided DZU prior to December 30, 1993, with two purchase orders and subsequent change orders pursuant to which Kalok purported to order assembled disk drives from 6 AGREED ORDER TO COMPROMISE CONTROVERSY 7 DZU pursuant to the DZU License. Pursuant to the terms of the DZU License, DZU was allegedly required, subject to specified conditions, to purchase from Kalok the piece parts necessary to build assembled disk drives. Kalok alleged that DZU's failure to sell disk drives and purchase parts from Kalok within a specified time period constituted a default under the DZU License and the DZU Final Order, resulting in DZU's loss of all license rights under the DZU Agreement and all collateral rights and other rights under the DZU Final Order. Kalok filed formal notices with this Court declaring these defaults and remedies. DZU thereafter formally noticed Kalok of its default under the DZU Final Order in a writing dated January, 1994, and filed a notice with the Court formally setting forth Kalok's default and disputing Kalok's allegation of default by DZU. Thereafter, DZU filed an adversary proceeding in this case seeking a declaratory judgment that Kalok had defaulted under the DZU Final Order and that DZU's liens, claims, security interests and licenses were valid, perfected, and enforceable. Simultaneously, DZU filed a motion for authority to move for summary judgment. DZU's motion for summary judgment was postponed as a consequence of the agreement among the parties leading to the Motion. By virtue of the settlement, Kalok will withdraw its claims and defenses against DZU, and it is found, for the purposes of 11 U.S.C. Section 363(k) and otherwise, (a) that DZU holds a valid, duly perfected and enforceable security interest in and lien upon all of Kalok's assets to the extent of approximately $2,000,000 plus interest ("DZU Secured Claim"), and (b) that the DZU License is valid and enforceable. DZU has assigned the DZU Secured Claim to DZU Corp. 15. On or about December 10, 1993 Kalok filed that certain Adversary Proceeding, No. 93-5624, against Dooley ("Dooley Adversary") (a) seeking among other things to enjoin Dooley or his agents, employees, servants and all other persons who act or participate with him from (i) gaining access to Kalok's business premises; (ii) using, disclosing or otherwise disseminating Kalok's confidential intellectual property; and (iii) retaining any confidential and proprietary Kalok intellectual property to which he was not 7 AGREED ORDER TO COMPROMISE CONTROVERSY 8 entitled; and (b) monetary damages. On December 10, 1993 this Court entered a temporary restraining order granting Kalok's requested relief, pending a final hearing, which is scheduled for March 11, 1994. 16. In January, 1994, DZU moved to intervene in the Dooley Adversary, and, simultaneously, Dooley and DZU moved in the District Court to withdraw the reference of the Dooley Adversary. In addition, DZU and Dooley have asserted that the Dooley Adversary fails to state a claim and that the temporary restraining order should be vacated because, among other things, Dooley is a United States citizen who, regardless of whomever his employer may be, is entitled under export laws to be in possession of the subject technology and because the statute under which Kalok initiated the case does not give rise to a private right of action. The litigation in connection with the Dooley Adversary is being terminated in accordance with this order. By virtue of this order, DZU and Dooley, among other things, will waive any claims they may have against Kalok on the grounds that the temporary restraining order against Dooley was improperly issued. 17. On December 23, 1993, TEAC filed a Motion for Relief from Automatic Stay and for Conversion of this Case to one under Chapter 7 ("TEAC Stay Relief Motion"), based on Kalok's defaults under the TEAC Final Order and the TEAC Assumed Manufacturing Agreement. Thereafter, DZU filed a Motion for Relief From Automatic Stay ("DZU Stay Relief Motion") based on, among other things, Kalok's defaults under the DZU Final Order. Kalok filed responses to each of the TEAC and DZU Stay Relief Motions. The granting of the motions for relief from the stay would have allowed the foreclosure of substantially all of Kalok's assets, leaving for creditors only funds generated pursuant to carve out provisions in prior Orders of this Court. Hearings on these motions have been continued for status on February 4, 1994. 18. Kalok cannot generate sufficient sales of its current products to satisfy the obligations due and owing TEAC, Kaczeus, Emori and DZU under the various Financing 8 AGREED ORDER TO COMPROMISE CONTROVERSY 9 Orders and loan agreements by and between those parties and Kalok, and has further determined that the compromise of controversies is in the best interest of the estate and its creditors. The Committee has represented that it has reviewed Kalok's business operations and also has determined that the proposed compromises are in the best interest of the estate and its creditors. 19. The best interest of creditors of this estate mandates a settlement in which: (a) TEAC and DZU bid in their liens under Section 363(k) to take title to certain of Kalok's assets as more fully set forth herein; (b) TEAC extends to Newco a license, in substantially the form attached hereto as Exhibit A, with respect to certain intellectual property which TEAC acquires from Kalok's bankruptcy estate, and TEAC contributes other property acquired from the Kalok bankruptcy estate to Newco in exchange for an equity interest in Newco; (c) The parties dismiss the DZU Adversary and the Dooley Adversary with prejudice; (d) Kaczeus release all liens, claims and interests in to or against Kalok and Kalok's assets; (e) Kalok, TEAC, Kaczeus, DZU, DZU Corp. and Dooley each release the other of all existing and potential claims, rights and causes of action, as set forth in Paragraph R of this Order; (f) DZU pays to the Kalok estate the sum of $275,000; (g) Newco executes a promissory note in favor of the Kalok estate in the amount of $225,000; (h) Newco issues to the Kalok estate for the benefit of unsecured creditors, warrants entitling the unsecured creditors of Kalok's estate to 2% ownership interest in Newco; (i) All of Kalok, TEAC, DZU, DZU Corp., Newco, Kaczeus and Dooley execute and consummate all of the agreements attached hereto as group Exhibit B, and all other reasonable necessary documents to effect the intended transactions (collectively referred to as "Agreements"); (j) The Kalok estate shall pay to David Pearce, current President of Kalok, but as an independent contractor, an amount equal to 3% of gross accounts receivable of the Kalok estate to a maximum of $350,000, 10% of gross accounts receivable in excess of $350,000, but not greater than $400,000, and 25% of gross accounts receivable in excess of $400,000, all of which are actually collected by Pearce after the date hereof; 9 AGREED ORDER TO COMPROMISE CONTROVERSY 10 (k) The Kalok estate will not incur payroll expenses after February 4, 1994; (l) Newco will reimburse the Kalok estate pro rata for rent and other expenses paid by Kalok for the period from and after February 4, 1994; and (m) Kaczeus will receive an agreed upon percentage equity interest in Newco. 20. Pursuant to the terms hereof, Kalok, TEAC, DZU, DZU Corp., Kaczeus, the Committee and Dooley have agreed to resolve all disputes affecting such parties which currently exist in this case and other related proceedings, and further agree to fully release each other on the terms specified in Paragraph R of this Order. NOW, THEREFORE, based on the foregoing, and the agreement of TEAC, DZU, DZU Corp., Kalok, the Committee, Newco, Kaczeus and Dooley, the COURT HEREBY ORDERS AS FOLLOWS: A. All of the foregoing findings of fact in Paragraphs 1 though 20 are incorporated herein by this reference thereto. B. Pursuant to Section 363(k) of the Bankruptcy Code, in consideration of the release and offset by (i) TEAC, and (ii) DZU and DZU Corp. of the TEAC Secured Claim and the DZU Secured Claim, respectively, Kalok shall transfer, assign and convey to each of TEAC and DZU Corp., free and clear of any liens, claims and encumbrances of whatsoever type or description, except as otherwise expressly provided in this Order, separate but equal right, title and interest in and to all of Kalok's right, title and interest in and to the following property, exclusive of the Nordic II Series technology, as more fully described in Exhibit C hereto, which is incorporated herein ("Nordic II"): (1) all Kalok products, including the Point5 Series (consisting of models P-3125, P-3250, P-3360 and P-3540), the Kalok K-Stor Products (consisting of the P5DM Series, support software, controllers, docking modules, carrying cases, and cables), the Kalok K-Port Products, and the Kalok K-RAID Products (collectively, the "Products"); (2) all technical information, and intellectual property and documents (except the trademarks as hereinafter provided for) of Kalok relating to all aspects of Kalok's business, products, developments, 10 AGREED ORDER TO COMPROMISE CONTROVERSY 11 and projects, including without limitation, patents and patent applications, including those provided for in those certain assignments, copies of which are attached hereto as Exhibit E and incorporated herein ("Patents"), copyrights, trade secrets, inventions, source codes, object codes, flow charts, engineering notebooks, processes, techniques, specifications, drawings, parts layouts, parts lists, circuitries, tooling and testing requirements, know-how, manuals and other technical data and support documentation, and all technical information and other intellectual property pertaining to the parts, components, and manufacturing of all Kalok products, developments and projects (collectively referred to as "Intellectual Property"); notwithstanding the foregoing, any ambiguity between the terms hereof and the Agreement regarding the Patents (attached as Exhibit E) shall be resolved in favor of the terms set forth in that Agreement; (3) Any improvements in, modifications on, derivative works of, variations of, new designs of, discoveries related to, or developments useful in any of the technology or other intellectual property described in (2) above, whether separately developed, licensed or otherwise obtained by or on behalf of Kalok, all as of the date hereof, and not hereafter (collectively referred to as "Developments"); (4) Pursuant to the Assignment of Trademarks attached hereto as Exhibit D and incorporated herein, the trademarks, trade names, trademark registrations, and applications for registration of trademarks of Kalok, including all other trademark rights, whether registered or unregistered, and good will of Kalok, associated with such trademark, (collectively referred to as "Trademarks"), together with labels, stickers and other items using such Trademark (on a 50/50 basis) except that TEAC shall, for the benefit of Newco retain an exclusive right to the "K-Stor" tradename and trademark in the United States; and (5) The goodwill of Kalok, its business and its products ("Goodwill"). (Collectively referred to as "IP Assets.") With respect to the transfer, sale, conveyance and assignment of the IP Assets: (i) TEAC shall be entitled to the originals thereof, and DZU Corp. shall be entitled to an exact duplicate of all such original IP Assets; (ii) Kalok shall simultaneously with the execution of this order deliver or cause its counsel to deliver both to TEAC and DZU (a) a complete list of all of the Intellectual Property, applications, and registrations showing the status of each and all deadlines, including those pertaining to documents to be filed to obtain protection or registration, and to renew any registrations; (b) all files used in connection with the prosecution of applications for any of the Intellectual Property, except that Kalok shall deliver to TEAC the K- 11 AGREED ORDER TO COMPROMISE CONTROVERSY 12 STOR trademark file, and Kalok shall deliver to each of TEAC and DZU Corp. all other trademark and tradename files with TEAC to retain the originals in accordance with subparagraph (i) above. (iii) Kalok shall assign to both DZU Corp. and TEAC any and all employee confidentiality agreements, and consistent with the terms hereof, agreements of employees to assign to Kalok discoveries and inventions with TEAC to retain the originals in accordance with subparagraph (i) above. C. Pursuant to Section 363(k) of the Bankruptcy Code, in further consideration of the release and offset by TEAC of the TEAC Secured Claim, Kalok shall and does hereby assign, transfer and convey to TEAC free and clear of any and all liens, claims and encumbrances of whatsoever type or description, including those asserted by DZU (except as otherwise provided herein or in agreements attached hereto): (1) All of Kalok's right, title and interest in and to all personal property of Kalok (except the IP Assets, the Piece Part Inventory (as defined below) and rights under any unexpired lease or executory contract) including, without limitation, the TEAC Parts (as hereinafter defined), Kalok's interest as licensee in the Software Licenses identified on Exhibit F, and Kalok's books and records (provided, however, Kalok shall retain an absolute right to access such books and records). (Collectively referred to as "Hard Assets."); and (2) The trademark K-STOR and the goodwill related thereto, including a customer list pertaining to K-STOR and any labels, stickers, and other items using the K-STOR trademark, provided, however, that TEAC and Newco shall allow DZU to use the trademark K-STOR in connection with the sale of those Kalok products which DZU holds in its inventory as of the date of the entry of this order or which it will manufacture utilizing the Piece Parts Inventory (defined below) conveyed to DZU under this Agreed Order. (3) All of Kalok's right, title and interest in or to the Intellectual Property pertaining exclusively to Nordic II, including, without limitation, all glass disk technology, drawings pertaining to the design or construction, shockproof technology, firmware, the ASIC, the spindle motor and related technology, provided, however, that any Intellectual Property that is in common with the Nordic II and any other products, developments or technology of Kalok shall not be deemed part of Nordic II but shall be and be deemed part of the IP Assets transferred to both TEAC and DZU pursuant to paragraph B above. 12 AGREED ORDER TO COMPROMISE CONTROVERSY 13 D. Pursuant to Section 363(k) of the Bankruptcy Code, in further consideration of the release and offset by DZU Corp. of the DZU Secured Claim, Kalok shall and does hereby transfer, assign and convey to DZU Corp. free and clear of any and all liens, claims, and encumbrances (except as otherwise provided herein or in agreements attached hereto), including those asserted by TEAC, all of Kalok's right, title and interest in and to all piece parts inventory and only such related products tooling owned by Kalok which may be used in connection with Kalok's products other than Nordic II, (provided, however, that any parts, tooling or other related property paid for by TEAC ("TEAC Parts") shall not be transferred to DZU pursuant hereto) including without limitation the piece parts set forth on the Inventory Schedule and Notes thereto, attached hereto as Exhibit G ("Piece Part Inventory"). The foregoing sentence notwithstanding, the transfer of the Piece Parts Inventory to DZU Corp. shall be subject to any liens, claims or encumbrances asserted by Reliance Technical Services, Inc., to the extent that such liens, claims or encumbrances are valid, perfected, and enforceable and were, prior to the entry of this Order, prior in lien to the DZU Secured Claim. Any prior agreements or understandings by Kalok to the contrary notwithstanding, DZU and DZU Corp. are authorized to have access to and purchase goods and services from Kalok's vendors and suppliers of the Point5 Series products for the purpose of purchasing additional drive materials on such terms as may be agreed by such vendors or suppliers and DZU or DZU Corp. DZU Corp. shall be provided reasonable access to the Piece Part Inventory for purposed of packing and shipping the Piece Part Inventory to a destination of DZU Corp.'s choice, all at the costs and expense of DZU Corp. E. Immediately subsequent to the entry of this Order, each of TEAC, DZU, DZU Corp. and Newco (in accordance with its license from TEAC) shall be and are hereby forever prohibited from using, manufacturing, selling and/or sublicensing the Intellectual Property, the Developments, the Trademarks and the Patents in conflict with the certain 13 AGREED ORDER TO COMPROMISE CONTROVERSY 14 exclusive territories, set forth in the Agreement between TEAC, DZU, DZU Corp. and Newco, a copy of which is attached hereto and incorporated herein as Exhibit H. F. Immediately subsequent to entry of this Order, notwithstanding any provision herein, neither TEAC (or Newco) or DZU shall have the right to sublicense or otherwise transfer their rights in or to any of the IP Assets to Seagate Technology Conor, Western Digital Corporation, Quantum Corporation, Maxtor Corporation, IBM Corporation and Hewlett-Packard Company, together with all of their affiliates, subsidiaries successors, (collectively referred to as the "HDD Companies"), except that TEAC (and Newco) and/or DZU shall be entitled to (a) sell finished products to the HDD Companies; (b) allow the HDD Companies to manufacture products to be sold by TEAC (or Newco) or DZU; and (c) cross-license any of the IP Assets (only to the extent reasonably necessary) to the HDD Companies solely for the purposes of resolving bona fide patent infringement claims, ("Settlement Licenses") provided however, no such Settlement License shall be granted without 30 days prior written notice to the other parties (TEAC, DZU) and such parties' consent in writing thereto, which consent will not be unreasonably withheld, but consent shall be deemed given if no written response to such notice is received within such 30 day period. G. TEAC shall (i) license to Newco the Intellectual Property, the Developments and the Trademarks on the terms and conditions set forth in the License Agreement attached hereto as Exhibit A; and (ii) contribute the Hard Assets, to Newco in exchange for a 10% equity interest in Newco. H. Each of DZU, TEAC, DZU Corp., Dooley and Newco shall, and are hereby bound and required to maintain in confidence all trade secrets of or pertaining to the Point5 Series Technology, the Intellectual Property, the Trademarks and the Developments, and shall only disclose the portion of such information, on a need to know basis, as is essential for the manufacture of products using such trade secrets. 14 AGREED ORDER TO COMPROMISE CONTROVERSY 15 I. Kalok shall retain, free of any lien, claim or encumbrance of TEAC, DZU, DZU Corp., Kaczeus, Dooley and Emori, the following property for the benefit of the estate which shall have with the Committee, joint power of direction with respect to such property: (a) all of Kalok's accounts receivable, in the approximate amount of $300,000; (b) all current cash balances in Kalok's bank accounts in the approximate amount of $50,000; (c) all avoidance actions under the Bankruptcy Code except those actions released pursuant to Paragraph R hereof; and (d) any other causes of action against any party, except those actions released pursuant to Paragraph R hereof. J. Kaczeus shall and does hereby release and waive any lien, claim or encumbrance he may have in, to or against Kalok or any property of Kalok, including the Pre-Petition Collateral, on account of the Kaczeus Loan or any other obligations due or owing by Kalok to Kaczeus. K. TEAC shall and does hereby waive and release any and all liens, claims or encumbrances it has in, to or against Kalok or any property of Kalok under the First, Second or Third Financing Order the TEAC Final Order, the Credit Line Default Indebtedness and any other claim TEAC may have against Kalok or its estate. L. DZU and DZU Corp. shall and does hereby waive and release any and all liens, claims or encumbrances it has in, to or against Kalok or any property of Kalok on account of the First, Second or Third Financing Order, the DZU Final order, the Pre-Petition Debt and any other claim DZU and DZU Corp. may have against Kalok or its estate. M. DZU shall pay $275,000 to Kalok, and the assets and properties shall be transferred, conveyed, and assigned to DZU Corp. as follows: (1) Kalok or whoever is in control of the premises at which Kalok conducted business ("Premises") shall forthwith cause the IP Assets, or duplicates thereof (the "Deposit Material"), to be removed to a room 15 AGREED ORDER TO COMPROMISE CONTROVERSY 16 (the "Secure Room") on the Premises. No one shall have access to the Secure Room except DZU, DZU Corp. or their agents, except Kalok or Newco shall be entitled to supervise all activity in the Secure Room. (2) Upon the determination made by DZU in its reasonable judgment that all or substantially all of the Deposit Material has been removed to the Secure Room, DZU shall cause a cashiers check in the sum of $275,000 to be wire transferred to an escrow account held by Murray & Murray counsel for Kalok's Official Creditors' Committee, in satisfaction of DZU's payment obligations under this Order. (3) Upon Murray & Murray receipt of the $275,000, DZU Corp. shall be entitled to take immediate possession of the Deposit Materials, remove the Deposit Materials from the Secure Room, and have all of Kalok's right, title and interest in the Deposit Materials free of liens, claims and encumbrances as provided in this Order. Contemporan- eous with the removal by DZU Corp. of the Deposit Materials from the Premises, Murray & Murray shall pay the $275,000 (plus accrued interest) to Kalok. Upon Murray & Murray's receipt of the $275,000, Kalok shall also cause all other assets and properties provided for in this order to be transferred, conveyed, and assigned to DZU Corp. free of liens, claims and encumbrances as provided in this Order. DZU shall remove from Kalok's premises all Piece Part Inventory within a reasonable time with the transfer of the $75,000 to Murray & Murray. DZU shall remove from the Premises all Piece Part Inventory within a reasonable time after that date of the transfer of the $275,000 to Murray & Murray. (4) At reasonable times and in reasonable manners subsequent to the payment of the $275,000 to Murray & Murray, DZU shall have the right to conduct an audit (the "Audit") to determine whether the properties received constituted all of the assets and properties which DZU Corp. was entitled to receive under the terms of this Order. Upon notification by DZU of its determination, made pursuant to an Audit or otherwise, that any assets or properties were not turned over, Kalok, TEAC, and Newco shall use their reasonable best efforts to cause such assets or properties, or copies thereof, to be turned over to DZU Corp. within five (5) business days after such notification. (5) Kalok, TEAC and Newco shall, if requested by DZU, cooperate with and assist DZU in performing the Audit and, in connection with DZU's performance of the Audit, Kalok, TEAC and Newco shall provide DZU with reasonable access to all books, records, documents, and technology relating to the IP Assets as are in Kalok's, TEAC's and/or Newco's possession. Kalok, TEAC and Newco shall also provide DZU with reasonable access to any of Kalok's TEAC's or Newco's employees that were formerly employed by Kalok and that have knowledge, information or experience with respect to the IP Assets. DZU and/ or DZU Corp. 16 AGREED ORDER TO COMPROMISE CONTROVERSY 17 shall also be entitled to and are hereby authorized to contract and transact business with any prior vendor or supplier of Kalok. (6) If there is a dispute between the parties of this Order with respect to this Paragraph M, this Court shall, upon appropriate Motion, resolve such disputes. N. Newco shall tender to Kalok's bankruptcy estate (a) a promissory note in the amount of (U.S.) $225,000, payable in ten (10) equal quarterly installments, without interest, a copy of which is attached hereto as Exhibit I; and (b) warrants to acquire 2% of the common stock of Newco at a price equal to 25 % of the initial offering price when Newco goes public, said warrants to be exercisable up to one year after the date of Newco goes public, to be set forth in a Warrant Agreement between Kalok and Newco. O. Emori shall and does hereby immediately release and waive any and all liens, claims or encumbrances he may have into or against Kalok or Kalok's assets, including, without limitation, the Pre-Petition Collateral. Upon receipt of $275,000 by Murray & Murray in accordance with Paragraph M hereof, Kalok shall pay to Emori the sum of $100,000 plus interest accrued under the Emori Loan to the extent Emori has not already been paid by Kalok. P. The Bankruptcy Court shall enter in accordance herewith the orders annexed hereto as Group Exhibit J dismissing with prejudice the Dooley Adversary (including any related case pending in the Federal District Court) and the DZU Adversary Proceeding, which shall become effective when Murray & Murray receive $275,000 in accordance with Paragraph M. Q. Contemporaneous with the transfers and conveyances required under Paragraph B, C and D hereof, of all property, including without limitation the IP Assets the Hard Assets Nordic II, and the Piece Part Inventory, each of the DZU License, the TEAC Assumed License Agreement and the TEAC Assumed Manufacturing Agreement shall be canceled and terminated. R. Except with respect to those obligations specifically created by, or arising out of this Agreed Order, each of (i) Kalok on its own behalf, and on behalf of the 17 AGREED ORDER TO COMPROMISE CONTROVERSY 18 Kalok Bankruptcy estate, its creditors, and all parties in interest (including any subsequently appointed Trustee) ("Kalok Estate"), (ii) TEAC, (iii) DZU and DZU Corp. (iv), Kaczeus and (v) Dooley do hereby, for themselves and their respective legal successors and assigns, fully and forever remise, release and discharge each other and their respective parents, subsidiaries and affiliated corporations, companies, divisions or other entities together with its or their predecessors, successors and assigns, and each and all of its or their shareholders, directors, officers, employees, attorneys, accountants, consultants, and other agents of and from any and all claims, demands, agreements, contracts, covenants, actions, suits, causes of action, obligations, controversies, costs, expenses, accounts, damages, judgments, losses, liabilities, and defenses, of whatsoever kind and nature, in law, equity or otherwise, whether known or unknown, whether or not concealed or hidden which each such party have had, may have had or now have, or which any of their predecessors, successors or assigns hereafter can, shall or may have against any other such party, based upon or arising out of any matter, cause, facts, thing, act, omission whatsoever, occurring or existing at any time to and including the date this Agreed Order is entered, including, but without in any respect limiting the generality of the foregoing, any and all claims or causes of action against any of (i) the Kalok Estate, (ii) DZU Corp. and DZU, (iii) TEAC, (iv) Dooley, and (V) Kaczeus by the other, including, without limitation, any such claims which were or might have been asserted in this Chapter 11 case, or in any adversary proceeding that may be commenced or may have been commenced in connection herewith. S. TEAC, Newco, DZU Corp. and DZU are each purchasers in good faith for purposes of Section 363(m) of the Bankruptcy Code. T. The purchase of certain of Kalok's assets by each of DZU and TEAC was not controlled by any type of agreement that would be grounds to avoid such sale under Section 363(n) of the Bankruptcy Code. 18 AGREED ORDER TO COMPROMISE CONTROVERSY 19 U. This Court retains jurisdiction over the parties hereto to enforce the term and conditions hereof. V. Kalok is authorized, pursuant to Section 365(a), to assume, and assign to TEAC, each of the software licenses identified on Exhibit __ hereto. W. Kalok, DZU, TEAC, DZU Corp., Dooley, Kaczeus and the Committee shall issue, execute, and deliver such other and further documents and instruments as may be reasonably necessary to carry out the transactions approved or provided for in this Agreed Order. X. Kalok's motions to enter into license agreements with JRA, Inc., Kaczeus, Richard Emori, and others shall be withdrawn and dismissed with prejudice. Y. The rights and obligations of DZU and DZU Corp., under and pursuant to all transaction contemplated hereby shall not be limited or impaired by Exhibit A and B hereto. Z. Kalok and Newco shall provide DZU and DZU Corp. with reasonable access to Kalok's books and records, specifically excluding all customer lists and related 19 AGREED ORDER TO COMPROMISE CONTROVERSY 20 information and documents. ENTER: Kalok Corporation, Debtor and Debtor-in-Possession BANKRUPTCY COURT By: /s/ David B. Pearce -------------------------------- Its Duly Authorized Signatory - ---------------------------- Dated this 4th day TEAC Corporation of February, 1994. By: /s/ [sig] -------------------------------- Its Duly Authorized Signatory DZU AD, a Bulgarian corporation By: /s/ Eftim Pandeff -------------------------------- Its Duly Authorized Signatory DZU Corporation By: /s/ Eftim Pandeff -------------------------------- Its Duly Authorized Signatory Daniel Dooley, Individually /s/ Daniel Dooley ------------------------------------ Steven Kaczeus, Individually /s/ Steven L. Kazeus ------------------------------------ The Official Committee of Unsecured Creditors Kalok Corporation By: /s/ J.M. Murray -------------------------------- Its Duly Authorized Signatory ATTORNEYS FOR OFFICIAL COMMITTEE OF UNSECURED CREDITORS JT Storage, Inc. By: /s/ J. Tanden -------------------------------- Its Duly Authorized Signatory 20 AGREED ORDER TO COMPROMISE CONTROVERSY 21 Exhibit H Agreement Between TEAC, DZU and JT Storage, Inc. With Respect to Exclusive Sales and Manufacturing Territories Notwithstanding any other term or condition in the Agreed Order to which this is attached, any other agreement attached to the Agreed Order (not including the License Agreement between Newco and TEAC attached to the Agreed Order as Exhibit A), any other Order of the Bankruptcy Court presiding over the Kalok case, or any other, document, license or other writing by or between TEAC Corporation ("TEAC"), DZU-AD, a Bulgarian corporation ("DZU"), DZU Corporation ("DZU Corp"), JT Storage, Inc. ("Newco") and Kalok Corporation ("Kalok") each of TEAC, DZU, Newco and Kalok, hereby agree as follows: 1. TEAC shall have exclusive sales rights with respect to the IP Assets in Japan, and nonexclusive sales rights throughout the remainder of the world except India and the "Eastern Block Countries" (Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria and former Yugoslavia). 2. TEAC shall have exclusive use and manufacturing rights with respect to the IP Assets in Japan and (co-extensive with [Newco]) "Asia" (the entire Asian Continent and other countries and territories illustrated on the attached Map, excluding the countries which constituted the former Soviet Union,), and nonexclusive manufacturing rights throughout the remainder of the world except the Eastern Block Countries, the former Soviet Union, India and Korea. 3. DZU and DZU Corp. shall exclusive sales rights with respect to the IP Assets in the Eastern Block Countries, and nonexclusive sales rights throughout the remainder of the world except Japan and India. 4. DZU and DZU Corp. shall have exclusive use and manufacturing rights with respect to the IP Assets in the Eastern Block Countries and the countries which constituted the former Soviet Union, and nonexclusive manufacturing rights throughout the remainder of the world except Japan, India and Korea. 5. [Newco] shall have exclusive sales rights with respect to the IP Assets in India, and nonexclusive sales rights throughout the remainder of the world except Japan and the Eastern Block Countries. 6. [Newco] shall have exclusive use and manufacturing rights with respect to the IP Assets in India, Korea and (co-extensive with TEAC) Asia, and nonexclusive manufacturing rights throughout the remainder of the world except Japan, the Eastern Block Countries and the countries which constituted the former Soviet Union. 7. For purposes of enforcing the terms hereof, TEAC, DZU, DZU Corp., [Newco] and Kalok each (a) consent to exclusive jurisdiction in the District Court for the ________ District of California; (b) are entitled to money damages and injunctive relief on account of, as a result of or upon the occurrence of any breach of the terms hereof; 22 JEFF J. MARWIL KATTEN MUCHIN & ZAVIS 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661-3693 Telephone No. (312) 902-5200 Attorneys for TEAC CORPORATION UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA (San Jose Division) In re ) Chapter 11 ) KALOK CORPORATION, a California ) Case No. 93-54027-MM corporation, ) ) NOTICE OF ENTRY OF ORDER Debtor. ) APPROVING AMENDMENT TO ) AGREED ORDER COMPROMISING Taxpayer I.D. No. 77-0146015 ) CONTROVERSIES ) - -------------------------------------------------------------------------------- Date: January 20, 1995 Time: 10:00 a.m. Place: 280 S. First St., Rm. 3070 San Jose, California The Honorable Marilyn Morgan TO ALL PARTIES IN INTEREST: PLEASE TAKE NOTICE that the United States Bankruptcy Court for the Northern District of California (San Jose Division) entered the Order Approving Amendment to Agreed Order Compromising Controversies (the "Order") on or about /// /// /// /// /// /// 1. NOTICE OF ENTRY OF ORDER APPROVING AMENDMENT TO AGREED ORDER TO COMPROMISE CONTROVERSIES 23 January 20, 1995. A true and correct copy of the Order is attached hereto as Exhibit "A" and incorporated herein by this reference. Dated: January 24, 1995 GRAY CARY WARE & FREIDENRICH A Professional Corporation By: /s/ Lillian Stenfeldt ---------------------------------- Lillian G. Stenfeldt Attorneys for Debtor/Plaintiff Kalok Corporation 2. NOTICE OF ENTRY OF ORDER APPROVING AMENDMENT TO AGREED ORDER TO COMPROMISE CONTROVERSIES 24 JEFF J. MARWIL KATTEN MUCHIN & ZAVIS 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661-3693 Telephone No. (312) 902-5200 Attorneys for TEAC CORPORATION UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA (San Jose Division) In re ) Chapter 11 ) KALOK CORPORATION, a California ) Case No. 93-54027-MM corporation, ) ) ORDER APPROVING AMENDMENT Debtor. ) TO AGREED ORDER ) COMPROMISING CONTROVERSIES Taxpayer I.D. No. 77-0146015 ) ___________________________ - ---------------------------------- Date: January 20, 1995 Time: 10:00 a.m. Place: 280 S. First St., Rm. 3070 San Jose, California The Honorable Marilyn Morgan THIS MATTER coming to be heard on the Motion of TEAC Corporation, seeking an Order approving an amendment to the Agreed Order Compromising Controversies entered by this Court on February 4, 1994 (the "Order"), and the Court having considered the Motion, and the Court having reviewed the Stipulation To Amend The Agreed Order Compromising Controversies signed by Kalok Corporation ("Kalok"), JT Storage, Inc. ("JTS"), TEAC Corp. ("TEAC"), Pont Peripherals Corporation ("Pont"), fka DZU Corporation and The Official Unsecured Creditors' Committee (the "Committee") on file herein (the "Stipulation"), and the Court having conducted a hearing on the Motion, appearances being noted on the records, and other parties being represented as indicated on the record and good cause appearing therefor, 1 ORDER APPROVING AMENDMENT TO AGREED ORDER TO COMPROMISE CONTROVERSIES 25 IT IS HEREBY ORDERED, ADJUDGED AND DECREED as follows: A. The Stipulation is approved; and B. The Order is amended as follows: 1. Paragraph F, appearing on Page 14, is modified to remove Western Digital Corporation ("WDC") from the list of collective HDD Companies as defined in the Order; and 2. JTS, TEAC, and Pont are authorized to make future modifications to the Order, with respect to other HDD Companies and other intellectual property matters as agreed between JTS, TEAC and Pont, without having to obtain additional Bankruptcy Court approval. Dated: JAN 20 1995 /s/ Marilyn Morgan ------------- ----------------------------------- The Honorable Marilyn Morgan United States Bankruptcy Judge 2 ORDER APPROVING AMENDMENT TO AGREED ORDER TO COMPROMISE CONTROVERSIES 26 I, Michelle Osiakowski, declare: I am over the age of eighteen years and not a party to the within action and am employed in Santa Clara County. I an employed with the law firm of Gray Care Ware & Freidenrich, a Professional Corporation, 400 Hamilton Avenue, Palo Alto, California 94301. I am readily familiar with the business practice at my place of business for collection and processing of correspondence for mailing with the United States Postal Service. Correspondence so collected and processed is deposited in the ordinary course of business. On January 26, 1995, at my place of business, the: ORDER APPROVING AMENDMENT TO AGREED ORDER COMPROMISING CONTROVERSIES was placed for deposit with the United States Postal Service in a sealed envelope, with postage prepaid, addressed as follows: Office of the U.S. Trustee Katherine Rosenblatt, Esq. Office of the United States Trustee 280 S. First Street, Room 268 San Jose, CA 95113 Attorneys for TEAC Corporation Jeff J. Marwil, Esq. Fulbright & Jaworski 525 West Monroe Street, Suite 1600 Chicago, IL 60661-3693 Attorneys for JT Storage, Inc. Lawrence Weeks, Esq. Riordan & McKenzie 5743 Corsa Avenue, Suite 116 Westlake Village, CA 91362 NOTICE OF ENTRY OF ORDER APPROVING AMENDMENT TO AGREED ORDER TO COMPROMISE CONTROVERSIES 27 Attorneys for Creditors Committee Craig Prim, Esq. Murray & Murray 3030 Hanson Way, Suite 200 Palo Alto, CA 94306 DZU Corporation Mr. Dan Dooley c/o Pont Peripherals Corporation 912 West Maude Avenue Sunnyvale, CA 94086 DZU A.D. Mr. Eftim Pandeff c/o Mr. Dan Dooley Pont Peripherals Corporation 912 West Maude Avenue Sunnyvale, CA 94086 and that envelope was placed for collection and mailing on that date following ordinary business practices. I declare under penalty of perjury under the laws of the State of California and the United States of America that the above is true and correct. Executed on January 26, 1995, at Palo Alto, California. /s/ Michelle Osiakowski ----------------------------------- Michelle Osiakowski 4 NOTICE OF ENTRY OF ORDER APPROVING AMENDMENT TO AGREED ORDER TO COMPROMISE CONTROVERSIES EX-10.23 43 MASTER AGREEMENT/TEAC & JT STORAGE, INC. 1 EXHIBIT 10.23 MASTER AGREEMENT MASTER AGREEMENT (the "Agreement") made as of the __ day of February, 1994, by and between TEAC CORPORATION, a corporation organized and existing under the laws of Japan having its principal place of business at 3-7-3 Naka-cho, Musashino, Tokyo, Japan ("TEAC"), and JT STORAGE, INC., a Delaware corporation (the "Corporation"). RECITALS WHEREAS, Jugi Tandon ("Tandon") has formed the Corporation for the purpose of developing, manufacturing, marketing, and selling magnetic hard disk drives initially utilizing the engineering team of Kalok Corporation ("Kalok") and the Corporation, technologies of TEAC, to be obtained by TEAC pursuant to an Agreed Order Compromising Controversies (the "Agreed Order"), to be entered the Bankruptcy Court presiding over the Bankruptcy Case No. 93-54027 MM of Kalok Corporation, a California corporation ("Kalok"), such technologies to be licensed by TEAC to the Corporation; WHEREAS, Tandon and TEAC also desire to establish among Tandon, the Corporation and TEAC certain cooperative relationships for the purpose of continuing the development of projects currently in process, developing future technologies and products and supplying of parts, components, subassemblies and finished drives; and WHEREAS, in order effect the contribution and licensing to the Corporation of certain technologies and assets requisite to the accomplishment of its purposes, to effect the licensing of certain technologies from TEAC to the Corporation, and from the Corporation to TEAC and to govern the relationships amongst Tandon, the Corporation and TEAC as customers, suppliers, investors, licensees and directors, each such party desire to enter into this agreement and other related agreements referenced herein or pertinent hereto. WHEREAS, the Agreed Order (to which TEAC and the Corporation are to be parties) authorizes certain transactions upon which this Agreement is predicated, and pursuant to which certain actions of TEAC and the Corporation will be governed. NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Formation of the Corporation. Prior to the Commencement Date (as hereinafter defined), Tandon shall have caused the Corporation to be formed under the provisions of the corporation law of the State of Delaware. The Articles of Incorporation for the Corporation shall be in the form attached hereto as Exhibit 1. 2. Bylaws. Tandon shall cause the adoption by the Corporation of the form of By-Laws attached hereto as Exhibit 2 prior to the Commencement Date. -1- 2 3. Stockholders' Agreement. Prior to the Commencement Date, TEAC and the Corporation shall execute and deliver to each other executed counterparts of the Stockholders' Agreement in the form attached as Exhibit 3 hereto (the "Stockholders' Agreement"). 4. License Agreement. On the Commencement Date, TEAC and the Corporation, shall deliver to each other executed counterparts of the License Agreement in the form attached as Exhibit 4 hereto (the "License Agreement"). 5. Representations and Warranties of TEAC. As an inducement to Tandon to enter into and perform its obligations under this Agreement and all of the other documents, instruments and agreements to be executed and delivered pursuant hereto or in connection herewith (the "Related Agreements"), TEAC hereby represents and warrants to Tandon, as of the date of this Agreement and the Commencement Date, as follows: a. Organization. TEAC is a corporation duly organized, validly existing and in good standing under the laws of Japan. b. Authorization. TEAC has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Related Agreements to be entered into by TEAC, and the consummation by TEAC of the transactions contemplated hereby and thereby have been duly and properly authorized by all requisite corporate action. This Agreement is, and each of the Related Agreements, when duly executed and delivered by TEAC will be, valid and binding obligations of TEAC, enforceable against TEAC in accordance with their respective terms. c. Investment. TEAC is acquiring its equity interest in the Corporation for investment purposes only and not with a view towards the resale thereof in connection with a distribution, it being understood, subject to the terms of the Stockholders' Agreement, that the disposition by TEAC of its interests in the Corporation shall at all times remain within its sole control. 6. Representations and Warranties of the Corporation. As an inducement to TEAC to enter into and perform its obligations under this Agreement and the Related Agreements, the Corporation hereby represents and warrants to TEAC, as of the date of this Agreement and the Commencement Date, as follows: a. Capitalization. Immediately following the Commencement Date, the issued and outstanding common capital stock of the Corporation, on a fully diluted basis, will be as follows: (i) 10% shares of the Corporation's Common Stock, par value $.00001 per share (the "Common Stock"), on a fully diluted basis, owned beneficially and of record by TEAC. -2- 3 (ii) 1,000 shares of Common Stock, owned beneficially and of record by Tandon. (iii) A warrant exercisable for 2% of the shares of Common Stock, issued by the Corporation to the Official Committee of Unsecured Creditors of Kalok Corporation. b. Organization of the Corporation. As of the Commencement Date, the Corporation will be a corporation duly organized, validly existing and in good standing under the corporation laws of the State of Delaware. c. Authorization. As of the Commencement Date, the Corporation will have full corporate power and authority to execute, deliver and perform its obligations under the Related Agreements to be entered into by the Corporation, and the consummation by the Corporation of the transactions contemplated thereby will have been duly and properly authorized by all requisite corporate action. Each of the Related Agreements, when duly executed and delivered by the Corporation will be valid and binding obligations of the Corporation, enforceable in accordance with their respective terms. 7. Contribution and Issuance of Shares. a. TEAC Contributions. In consideration of the issuance of the shares of Common Stock of the Corporation referred in Section 6a, TEAC shall contribute to the Corporation the Hard Assets (as defined in the Agreed Order) and the rights provided royalty free under Section 3.1 and 3.4 of the License Agreement. b. Commencement Date. As used herein, the "Commencement Date" shall mean 10 a.m. on the first business day following the date on which the last of the following shall have occurred: (i) the Order Date shall have occurred; (ii) Steven Kaczeus and the Engineers listed on Schedule 7B hereto shall have accepted employment with the Corporation; and (iii) all regulatory approvals requisite to the consummation of the transactions contemplated hereby shall have been waived or obtained; provided each of the parties shall undertake the best efforts to obtain approvals to which it is subject. In the event that the Commencement Date shall not occur on or before February , 1994, this Agreement shall become null and void and the parties shall be under no obligation to consummate the transactions contemplated hereby. -3- 4 c. Tandon Contributions. Tandon or his share transferees shall fund, raise funds or cause there to be funded on an non-debt basis the amounts required under Schedule 7C on the dates specified therein. Breach of this Section shall automatically be deemed to be a material breach of this Agreement for purposes hereof and of the License Agreement, subject to the sixty (60) day cure period set forth in the License Agreement. d. Order Date. As used in this Agreement, the term "Order Date" shall mean the first business day following the date upon which the Agreed Order shall be entered by the Bankruptcy Court for the Northern District of California, San Jose division, substantially in the form of Exhibit 7D hereto, notwithstanding whether an appeal shall be taken with respect to the Agreed Order. 8. Omitted. 9. Employment of Engineers. Tandon shall cause the Corporation to undertake all reasonable efforts to solicit and employ the engineers listed on Schedule 7B (the "Subject Engineers") hereto and none of the parties hereto or their respective Affiliates (other than the Corporation) shall solicit to employ, or employ, any of the Subject Engineers unless the License Agreement has been terminated in accordance with its terms. 10. Completion of Nordic Project. As essential consideration for TEAC entering into this Agreement, Tandon agrees to cause the Corporation to promptly undertake, as a first priority, its best efforts to continue and complete the development of the 540mb HDD and the hard disk drive technology known as "Nordic II". Without limiting the foregoing, such efforts shall include the dedication, as a first priority, of sufficient engineering personnel and resources, the provision of sufficient funding and materials resources and cooperation with TEAC engineers, suppliers and potential customers. 11. Bankruptcy Proceeding. The parties hereto shall fully cooperate in and undertake all reasonable efforts by themselves and their respective counsel and affiliates to effect all of the transactions contemplated by the Agreed Order (whether or not a party thereto), including prosecution of the Motion of Debtor and Debtor-In-Possession in support of Order Approving Compromise of Controversies and Authority to Enter into Contracts and the entry of the Agreed Order. 12. Public Disclosure. None of TEAC, the Corporation or Tandon, nor any of their respective agents or employees, not any persons acting on their behalf, shall make any formal or informal public release to the press or otherwise concerning the relationship or relationships of the parties hereto without the prior consent of the other parties hereto. The following description may be provided to customers and vendors (other than by press release): "Mr. Jugi Tandon has formed JT Storage, Inc., a corporation which will continue the engineering and development programs of Kalok Corporation. TEAC Corporation has licensed to JT Storage, Inc. the principal proprietary technology to be initially -4- 5 utilized by JT Storage, Inc. in its product development and has acquired a minority interest in JT Storage, Inc. The Corporation and TEAC have licensed certain of their future HDD developments to each other. Certain key engineers associated with Kalok's development programs have agreed to join JT Storage, Inc. and will be equity holders of JT Storage, Inc." 13. Confidentiality. Tandon and TEAC each agree, and Tandon agrees to cause the Corporation, to undertake all reasonable efforts to treat, and to cause each of its Affiliates, agents and employees to treat, as confidential (as if it were their own trade secrets) all proprietary information they receive from each other, whether pursuant hereto, the Related Agreements or otherwise. The parties hereto acknowledge that the parties hereto may find it necessary to disclose to third parties proprietary information in connection with the manufacturing of components, parts and accessories; in such circumstances, the party hereto may make such information available to third parties, provided that such party shall first obtain from the recipients a fully-executed confidentiality agreement which is at least as restrictive as the confidentiality agreement contained herein. The foregoing shall not restrict any party's right to provide technical information and test data that is reasonably requested by customers in the ordinary course of business. None of the parties shall be bound by the provisions of this Section 15 with respect to information which (a) is in the public domain at the time of disclosure; (b) becomes a part of the public domain after the time of disclosure, other than through disclosure by the recipient or some other third party who is under an agreement of confidentiality with respect to the subject information or obtained the information from the recipient; (c) is required to be disclosed by law or (d) is disclosed by a third party not bound by any agreement of confidentiality with respect to such information which third party did not obtain the information from the recipient. 14. Omitted. 15. Other Business Activities; Disclosure and Waiver. The parties hereto understand that any party hereto or its affiliates may be interested, directly or indirectly, in various other businesses and undertakings not included in the Corporation, which may be competitive with the business of the Corporation. Each party also understands that the conduct of the business of the Corporation may involve business dealings with such other businesses and undertakings. The parties hereto hereby agree that, except as expressly provided herein or in the Related Agreements, the creation of the Corporation and the assumption and performance by any of the parties of their duties hereunder shall be without prejudice to their rights (or the rights of their affiliates) to have such other interests and activities and to receive and enjoy profits or compensation therefrom, and each party waives and releases any rights or claims it might otherwise have to share or participate in such other interests or activities of any party or their affiliates. Except as expressly provided herein or in the Related Agreements, the parties may engage in or possess any interest in any other business venture of any nature or description independently or with others, and neither the Corporation nor any other party hereto shall have any right by virtue of this Agreement in and to such venture or the income or profits derived therefrom. -5- 6 16. General. a. Notices. All notices, demands, consents, requests, approvals, and other communications required or permitted hereunder shall be in writing and shall be deemed effective only upon delivery (whether receipt is accepted or refused) at the addresses set forth below (or at such other addresses within the United States of America as shall be given in writing by any party to the others in accordance with this Section 16(a). Notices may be delivered by hand, United States registered or certified mail, return receipt requested, bonded private courier service or by telecopier (followed immediately in writing by bonded private courier service). If to TEAC: TEAC Corporation 3-7-3 Nakacho, Musachino Tokyo, Japan Attention: General Manager Disk Drive Products Division Facsimile: 0422-52-3771 with copies to: TEAC America, Inc. 7733 Montebello Road Montebello, California 90640 Attention: Executive Vice President Facsimile: 213/727-7688 and Katten Muchin & Zavis 525 West Monroe Street Chicago, Illinois 60661 Attention: Mark D. Gerstein Facsimile: 312/902-1061 If to the JT Storage, Inc. Corporation 2125 Madera Road Simi Valley, California 93065 Facsimile: 808/582-3227 with a copy to: Riordan & McKenzie 5743 Corsa Avenue, Suite 116 West Lake Village, California 91362 Attention: Lawrence Weeks Facsimile: 818/706-2956 b. Governing Law. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation -6- 7 and performance of this Agreement shall be governed by, the laws of the State of California, without giving effect to provisions thereof regarding conflict of laws. c. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. d. Entire Agreement. This Agreement, the Related Agreements and those documents expressly referred to herein and therein embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. e. Counterparts. This Agreement may be executed on separate counterparts transmitted by telecopy, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. f. Successors; Assigns; Transferees. This Agreement is intended to bind and inure to the benefit of and be enforceable by each of the parties hereto and their respective successors and permitted assigns. No party may assign any of his, her or its rights or obligations hereunder without the written consent of the other parties. g. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. h. Amendments and Waivers. Any provision of the Agreement may be amended or waived only with the prior written consent of all of the parties hereto. i. Descriptive Headings; Interpretation. The descriptive headings in this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. The use of the word "including" in this Agreement shall be by way of example rather than by limitation. The term "Affiliate" as applied to any person or entity means any other person or entity directly or indirectly controlling, controlled by, or under common control with, that person or entity. The term "control" (including, with correlative meanings, the terms controlling, controlled by and under common control with), as applied to any entity, means the possession, directly or indirectly, of the power to vote 50% or more of the voting stock (or in the case of an entity that is not a corporation, 50% or more of the ownership interest, beneficial or otherwise) of such entity or otherwise to direct or cause the direction of the management and policies -7- 8 of that entity, whether through the ownership of voting stock or other ownership interest, by contract or otherwise. All of executive officers, 50% shareholders, directors, subsidiaries, joint ventures and partners shall be deemed to be Affiliates for purposes of this Agreement. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter genders shall include all genders, the singular shall include the plural and vice versa and shall refer solely to the parties signatory thereto unless otherwise specifically provided. j. Preamble: Preliminary Recitals. The Preliminary Recitals set forth in the Preamble hereto are hereby incorporated and made part of this Agreement. k. Consent to Jurisdiction and Service of Process. Each of TEAC and Tandon hereby consent to the jurisdiction of any state or federal court located within the County of Los Angeles, State of California and irrevocably agree that all actions or proceedings arising out of or relating to this Agreement shall be litigated in such courts. Each of the parties hereto accept for itself, himself or herself, as the case may be, and in connection with its, his or her properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each of the parties hereto designate and appoint CT Corporation System and such other persons as may hereinafter be selected by them who irrevocably agree in writing to so serve as agent to receive on their behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by each such party to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to each such party hereto as provided herein, except that unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of process. If any agent appointed by a party hereto refuses to accept service, such party hereby agrees that service upon it, him or her, as the case may be, by mail shall constitute sufficient notice. Nothing herein shall affect the right of any party hereto to serve process in any other manner permitted by law. l. WAIVER OF JURY TRIAL; ARBITRATION. (i) EACH OF TEAC AND TANDON HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREBY. EACH OF TEAC AND TANDON ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF ANY OTHER PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, -8- 9 TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH OF TEAC AND TANDON ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF TEAC AND TANDON FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS, HIS OR HER, AS THE CASE MAY BE, LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS, HIS OR HER, AS THE CASE MAY BE, JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTION CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT; (ii) (a) If any controversy or claim between the parties hereto arises out of this Agreement or dispute may, at the election of either party within 10 days of notice of breach hereunder, if any, or with respect to any matter, not the subject of such a notice, at any time prior to the filing of an action in a court of proper jurisdiction under clause (i) above, shall be submitted to binding arbitration in Los Angeles, California, under the Commercial Arbitration Rules of the American Arbitration Association; provided further that any matter provided for in this Agreement to be mutually agreed to, negotiated or otherwise discussed between the parties shall be subject to arbitration hereunder only if specifically provided in this Agreement. (b) One arbitrator shall be appointed under the Commercial Arbitration Rules of the American Arbitration Association, who shall be a business person with at least five years experience in the disk drive industry; provided, however, that if any disagreement arises concerning specialized matters such as intellectual property rights, product design or computer engineering, market conditions or importing/exporting regulations, then the arbitrator shall also have an expertise in such matters. As soon as the panel has been convened, a hearing date shall be set within 45 days thereafter. Written submittals shall be presented and exchanged by both parties 15 days before the hearing date, including reports prepared by experts upon whom either party intends to rely. At such time the parties shall exchange copies of all documentary evidence upon which they will rely at the arbitration -9- 10 hearing and a list of the witnesses whom they intend to call to testify at the hearing. Each party shall also make its respective experts available for deposition by the other party prior to the hearing date. The arbitrator shall make its award as promptly as practicable after conclusion of the hearing. (c) The arbitrator shall not be bound by the rules of evidence or civil procedure, but rather may consider such writings and oral presentations as reasonable businessmen would use in the conduct of their day-to-day affairs, and may require the parties to submit some or all of their presentations orally or in written form as the arbitrators may deem appropriate. It is in the intention of the parties to limit live testimony and cross-examination to the extent necessary to insure a fair hearing to the parties on the matters submitted to arbitration, and to provide neither party more than ten business days to present its position. The parties have included the foregoing provisions limiting the scope and extent of the arbitration with the intention of providing for prompt, economic and fair resolution of any dispute submitted to arbitration. (d) The arbitrator shall have the discretion to award the costs of arbitration, arbitrators' fees and the respective attorneys' fees of each party between the parties as they see fit. Judgment upon the award entered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall make its award in accordance with applicable law and based on the evidence presented by the parties, and at the request of either party at the state of the arbitration shall include in its award findings of fact and conclusions of law both in law and equity which would be available in a court having jurisdiction over the parties and over the subject matter of the dispute. Such powers shall include, but not be limited to, the power to require specific performance. (e) The arbitration agreement set forth herein shall not limit a court from granting a temporary restraining order or preliminary injunction in order to preserve the status quo of the parties pending arbitration. Further, the arbitrator shall have power to enter such orders by way of interim award, and they shall be enforceable in court. m. Payment of Fees. In the event of litigation or arbitration of any dispute or controversy arising from, in, under or concerning this Agreement or any Related Agreement and any amendments hereof, the prevailing party or parties in such action shall be entitled to recover from the other parties in such action, such sums as the court shall fix as reasonable attorneys' fees and expenses incurred by such parties, allocated as such court shall determine. -10- 11 n. No Broker. The parties hereto hereby represent and warrant to each other that there are no claims for brokerage or other commissions or finder's or other similar fees in connection with the transactions covered by this Agreement insofar as such claims shall be based on arrangements or agreements made by or on its behalf. The parties hereby agree to indemnify, defend and hold each other harmless from and against all liabilities, costs, damages and expenses (including reasonable attorneys' fees) from any such claims based upon the agreement or alleged agreement of the indemnifying party giving rise to such claim. o. No Waiver of Default. No consent or waiver, express or implied, by any party or of any breach or default by any other party in the performance by the other of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by any other party of the same or any other obligations of such party hereunder. Failure on the part of any party to complain of any act or failure to act of any of the other parties or to declare any other party in default, irrespective of how long such failure continues, shall not constitute a waiver by any such party of its rights hereunder. p. Remedies. Each of the parties confirms that damages at law may be an inadequate remedy for a breach or threatened breach of this Agreement and agrees that, in the event of a breach or threatened breach of any provisions hereof, the respective rights and obligations hereunder shall be enforceable by specific performance, injunction or other equitable remedy, but nothing herein contained is intended to, nor shall it limit or affect, any rights at law or by statute or otherwise of any party aggrieved as against any other party for breach or threatened breach of any provision hereof, it being the intention by this section to make clear the agreement of the parties that the respective rights and obligations of the parties shall be enforceable in equity as well as at law or otherwise. q. Future Deliveries. Each party will, from time to time, execute and deliver such further instruments and do such further acts and things as may be reasonably requested by any other party to carry out the intent and purposes of this Agreement. r. Computation of Time. In the computation of any period of time provided for in this Agreement, the day of the act or event from which said period of time runs shall be excluded, and the last day of such period shall be included unless it is a Saturday, Sunday, or national Japanese or United States holiday, in which case the period shall be deemed to run until the end of the next day which is not a Saturday, Sunday, or national Japanese or United States holiday. As used in this Agreement "business day" for any party shall be a day which is not a Saturday, Sunday or national Japanese or United States holiday. Time shall be computed based on Los Angeles local Time. -11- 12 IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. TEAC CORPORATION By: ----------------------------- a duly authorized signatory JT STORAGE, INC. By: /s/ Sirjang Tandon ----------------------------- a duly authorized signatory -12- 13 EXHIBIT TO MASTER AGREEMENT Exhibit 1 - Attached Exhibit 2 - Attached Exhibit 3 - Attached Exhibit 4 - Attached Exhibit 7b - Attached List Exhibit 7c - $125,000 per month average during each three month period commencing February 7, 1994 (prorated for such partial month) until $5,000,000 in the aggregate has been funded into the Corporation. Funding of the Corporation in excess of $125,000 in any month shall be credited toward future months and existing average funding until consumed. -13- 14 SCHEDULE 7B Teddy Hadiono - Servo Engineer Steve Harris - ASIC Engineer Larry Hewitt - Electrical Engineer Steven Kaczeus, Jr. - Mechanical Engineer Steve Kelly - Read/Write Engineer Greg Kudo - Mechanical Engineer Joe Liu - Firmware Engineer Bill Thanos - VP Engineering Don Vohar - Firmware Engineer Rich Albert - Firmware -14- 15 EXHIBIT 1 Certificate of Incorporation of JT Storage, Inc. I, the undersigned, for the purposes of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, do execute this Certificate of Incorporation and do hereby certify as follows: ARTICLE I The name of the Corporation is JT Storage, Inc. ARTICLE II The registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, 19801, County of New Castle. The name of the Corporation's registered agent is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The total number of shares of stock which the Corporation shall have authority to issue is two thousand (2,000). All such shares are to be common stock, par value of $.000001 per share, and are to be of one class. 16 ARTICLE V The name and mailing address of the Incorporator is Mark A. Morton, One Rodney Square, P.O. Box 551, Wilmington, Delaware 19899. ARTICLE VI The powers of the Incorporator shall terminate upon the filing of this Certificate of Incorporation. The name and mailing address of the person who is to serve as the sole director of the Corporation until the first annual meeting of the stockholders of the Corporation, or until his successor is elected and qualified, is Rajeev Tandon, 19820 Northridge Road, Chatsworth, CA 91311. ARTICLE VII Unless and except to the extent that the By-Laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. ARTICLE VIII In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized and empowered to make, alter and repeal the By-Laws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any by-law made by the Board of Directors. -2- 17 ARTICLE IX A director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. ARTICLE X The Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this article. -3- 18 IN WITNESS WHEREOF, I, the undersigned, being the Incorporator hereinabove named, do hereby further certify that the facts hereinabove stated are truly set forth, and accordingly I have hereunto set my hand this 3rd day of February, 1994. /s/ Mark Morton -------------------------------- Mark A. Morton -4- 19 EXHIBIT 2 BY-LAWS OF ARTICLE I Stockholders Section 1.1. Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 1.2. Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors, or by a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority, as expressly provided in a resolution of the Board of Directors, include the power to call such meetings, but such special meetings may not be called by any other person or persons. Section 1.3. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given that shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the certificate of incorporation or these by-laws, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 1.4. Adjournments. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or it after the adjournment a new record date is fixed for the adjourned meeting, notice of 20 the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.5. Quorum. Except as otherwise provided by law, the certificate of incorporation or these by-laws, at each meeting of stockholders the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum. In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 1.4 of these by-laws until a quorum shall attend. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the corporation or any subsidiary of the corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.6. Organization. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in his absence by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of the meeting shall announce at the meeting of stockholders the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote. Section 1.7. Voting; Proxies. Except as otherwise provided by the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the corporation. Voting at meetings of stockholders need not be by written ballot. At all meetings of stockholders for the election of directors a plurality of the votes cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided by law, the certificate of incorporation or -2- 21 these by-laws, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock which are present in person or by proxy and entitled to vote thereon. Section 1.8. Fixing Date for Determination of Stockholders of Record. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty nor less than ten days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than ten days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where -3- 22 the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Upon the willful neglect or refusal of the directors to produce such a list at any meeting for the election of directors, they shall be ineligible for election to any office at such meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. Section 1.10. Action By Consent of Stockholders. Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered (by hand or by certified or registered mail, return receipt requested) to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of minutes of stockholders are recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 1.11. Inspectors of Election. The corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital stock of the corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting 23 of proxies and ballots cast at any meeting of stockholders of the corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. Section 1.12. Conduct of Meetings. The Board of Directors of the corporation may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. 24 ARTICLE II Board of Directors Section 2.1. Number; Qualifications. The Board of Directors shall consist of one or more members, the number thereof to be determined from time to time by resolution of the Board of Directors. Directors need not be stockholders. Section 2.2. Election; Resignation; Removal; Vacancies. The Board of Directors shall initially consist of the persons named as directors in the certificate of incorporation, and each director so elected shall hold office until the first annual meeting of stockholders or until his successor is elected and qualified. At the first annual meeting of stockholders or until his successor is elected and qualified. At the first annual meeting of stockholders and at each annual meeting thereafter, the stockholders shall elect directors each of whom shall hold office for a term of one year or until his successor is elected and qualified. Any director may resign at any time upon written notice to the corporation. Any newly created directorship or any vacancy occurring in the Board of Directors for any cause may be filled by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum, or by a plurality of the votes cast at a meeting of stockholders, and each director so elected shall hold office until the expiration of the term of office of the director whom he has replaced or until his successor is elected and qualified. Section 2.3. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine, and if so determined notices thereof need not be given. Section 2.4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the President, any Vice President, the Secretary, or by any member of the Board of Directors. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting at least twenty-four hours before the special meeting. Section 2.5. Telephonic Meetings Permitted. Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting. Section 2.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the whole Board of Directors shall constitute a quorum for the transaction of business. Except in cases in which the certificates of -6- 25 incorporation, these by-laws or applicable law otherwise provides, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. Informal Action by Directors. Unless otherwise restricted by the certificates of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee. -7- 26 ARTICLE III Committees Section 3.1 Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Section 3.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these by-laws. -8- 27 ARTICLE IV Officers Section 4.1. Executive Officers; Election; Qualifications; Term of Office; Resignation; Removal; Vacancies. The Board of Directors shall elect a President and Secretary, and it may, if it so determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its members. The Board of Directors may also choose one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding his election, and until his successor is elected and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the corporation. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the corporation. Any number of offices may be held by the same person. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. Section 4.2. Powers and Duties of Executive Officers. The officers of the corporation shall have such powers and duties in the management of the corporation as may be prescribed in a resolution by the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Board of Directors may require any officer, agent or employee to give security for the faithful performance of his duties. -9- 28 ARTICLE V Stock Section 5.1. Certificates. Every holder of stock shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the corporation certifying the number of shares owned by him in the corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. 29 ARTICLE VI Indemnification Section 6.1. Right to Indemnification. The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partner- ship, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans (an "indemnitee"), against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such indemnitee. The corporation shall be required to indemnify an indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if the initiation of such proceeding (or part thereof) by the indemnitee was authorized by the Board of Directors of the corporation. Section 6.2. Prepayment of Expenses. The corporation shall pay the expenses (including attorney's fees) incurred by an indemnitee in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this Article or otherwise. Section 6.3. Claims. If a claim for indemnification or payment of expenses under this Article is not paid in full within sixty days after a written claim therefor by the indemnitee has been received by the corporation, the indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the indemnitee was not entitled to the requested indemnification or payment of expenses under applicable law. Section 6.4. Nonexclusivity of Rights. The rights conferred on any person by this Article VI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.5. Other Indemnification. The corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or -11- 30 nonprofit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. Section 6.6. Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE VII Miscellaneous Section 7.1. Fiscal Year. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. Section 7.2. Seal. The corporate seal shall have the name of the corporation inscribed thereon and shall be such form as may be approved from time to time, by the Board of Directors. Section 7.3. Waiver of Notice of Meetings of Stockholders, Directors and Committee. Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. Section 7.4. Interested Directors; Quorum. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and -12- 31 the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 7.5. Form of Records. Any records maintained by the corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. Section 7.6. Amendment of By-Laws. these by-laws may be altered or repealed, and new by-laws made, by the Board of Directors, but the stockholders may make additional by-laws and may alter and repeal any by-laws whether adopted by them or otherwise. -13- 32 and (c) are entitled to recover from any party, breaching the terms hereof, the profits earned by such breaching party as a portion of the money damages sought in any suit. TEAC Corporation DZU AD By: [sig] By: [sig] ----------------------------- ---------------------------- Its Duly Authorized Signatory Its Duly Authorized Signatory JT Storage, Inc. DZU Corporation By: By: [sig] ----------------------------- ---------------------------- Its Duly Authorized Signatory Its Duly Authorized Signatory EX-10.24 44 LICENSE AGREE TEAC & JT STORAGE 2/24/94 1 EXHIBIT 10.24 LICENSE AGREEMENT LICENSE AGREEMENT (the "Agreement") made as of the 4th day of February, 1994, by and among JT STORAGE, INC., a Delaware corporation having its principal place of business at 2125 Madera Road, Simi Valley, California 93065 (the "Corporation") and TEAC CORPORATION, a corporation organized and existing under the laws of Japan, having its principal place of business at 3-7-3 Naka-cho, Musashino, Tokyo, Japan ("TEAC"). PRELIMINARY RECITALS A. Pursuant to an Agreed Order Compromising Controversies (the "Order"), entered as of the date hereof by the Bankruptcy Court presiding over the Bankruptcy Case No. 93-54027 MM of Kalok Corporation, a California corporation ("Kalok"), pending in the Northern District of California, and certain related documents referenced in and approved by the Order (the "Related Documents"), TEAC has acquired certain of the technology and other intellectual property and certain other assets of Kalok, subject only to the terms and conditions of the Order and the Related Documents. B. Pursuant to that certain Master Agreement (the "Master Agreement") of even date by and among TEAC and the Corporation, such parties have agreed to exploit through the Corporation certain technology for the purpose of designing, manufacturing, marketing and selling magnetic rotating hard disk drive storage devices ("HDDs") and related accessories. C. TEAC has certain technology that the Corporation desires to utilize and further develop and TEAC desires to have the Corporation make such developments and to utilize such developments in its own business, all on the terms and conditions set forth herein. D. TEAC and the Corporation each desire to License certain future additional developments of each company to the other, as hereinafter set forth. E. The Master Agreement, the representations and covenants of each party thereunder being substantial consideration for this Agreement, provides, among other things, that Tandon contribute to the Corporation certain funds, and that TEAC contribute to the Corporation certain assets. In addition, TEAC is to provide this license of the technology and other intellectual property of Kalok acquired by TEAC pursuant to the Order. NOW, THEREFORE, in consideration of the premises and the mutual covenants and undertakings hereinafter set forth, the parties hereto hereby agree as follows: 1 2 AGREEMENTS 1. Certain Definitions. "Accessories" means any products that are not HDDs but are sold in conjunction with or for uses incidental to an HDD, which is a Licensed Product, such as carrying cases, docking modules, interface cards and installation software and other items incidental to installation in a computer or other value added subsystem; provided, Accessories shall not include any system incorporating an HDD. "Additional Developments" as applied to any Person means any improvements in, modifications on, derivative works of, variations of, new designs of, discoveries related to, or developments utilizing any of the Licensed Technology or any other additional development (including preproduction tooling and drawings and product design and processes and Accessories), whether separately developed, licensed or otherwise obtained by or on behalf of such Person or jointly developed, licensed or otherwise obtained by or on behalf of such Person during the term of this Agreement now existing or hereafter developed, including patents and patent applications and licenses therefor (obtained under Section 3.11D or otherwise) in each case, solely in connection with the development, manufacture or sale of HDD's; provided that if Additional Developments are obtained by a party hereto from an unaffiliated third party then the obligations of the party hereto to license such Additional Development to the other parties hereto shall be conditioned upon obtaining the consent of such Unaffiliated third party to such license, which consent the party hereto shall undertake its best efforts to obtain. "Affiliate" as applied to any Person means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For purposes of this definition and Section 5.3 below, the term "control" (including, with correlative meanings, the terms controlling, controlled by and under common control with), as applied to any Person, means the possession, directly or indirectly, of the power to vote 50% or more of the Voting Stock (or in the case of a Person which is not a corporation, 50% or more of the ownership interest, beneficial or otherwise) of such Person or otherwise to direct or cause the direction of the management and policies of that Person, whether through the ownership of Voting Stock or other ownership interest, by contract or otherwise. All executive officers, 50% or greater shareholders and directors of any Person shall be deemed to be Affiliates of such Person for purposes of this Agreement. "Unaffiliated" shall refer to a person or entity which is not an Affiliate. "Future Generation Products" means any HDD product, other than the Point5 Series or the Nordic II Series, that utilizes the Licensed Technology or Additional Developments, and was developed or in development prior to January 31, 1999. "Licensed Products" means the Point5 Series, the Nordic II Series and the Future Generation Products. 2 3 "Licensed Technology" all technical information and intellectual property of Kalok acquired by TEAC pursuant to the Order and the Related Documents, including without limitation, patents, patent applications and copyrights (and all extensions, continuations, continuations in part, divisions, reexaminations and reissues thereof), trade secrets, inventions, source codes, object codes, flow charts, processes, techniques, specifications, drawings, parts layouts, parts lists, all technical information and other intellectual property pertaining to Parts, circuitries, tooling and testing requirements, know-how, manuals and other technical data and support documentation, whether or not patentable or copyrightable and whether or not actually patented or copyrighted. "Licensed Trademarks" means all trademarks, trade names, trademark registrations, and applications for registration of trademarks for the names "Point5", "Kalok", "Nordic II Series" and variations thereof (including all renewals and extensions thereof) and any other trademark rights or goodwill associated therewith. "Corporation Manufacturing Territory" means world-wide, except for the following: Japan, Poland, the Czech Republic, Slovakia, Hungary, Romania, the countries that constituted the former Yugoslavia and the countries that constituted the former Soviet Union, and any new nation created by the merger or separation of any of the above countries and all territories in the region controlled by any of the above countries. "Nordic II Series" means any HDD with a width of between 3.25 and 3.75 inches and a height of less than .40 (four-tenths) inches, and all Licensed Technology pertaining principally thereto. "Person" means a natural person, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof. "Point5 Series" means the Kalok Point5 Series products consisting of models P-3125, P-3250, P-3360 and P-3540, each having those specifications attached hereto as Exhibit A, and each Accessory obtained by TEAC from Kalok pursuant to the Order that is fully-developed and in commercial sale as of the date hereof. "Corporation Sales Territory" means world-wide, except for the following: Japan, Poland, the Czech Republic, Slovakia, Hungary, Romania and the countries that constituted the former Yugoslavia, and any new nation created by the merger or separation of any of the above countries and all territories in the region controlled by any of the above countries. "Subsidiary" means any corporation, association or other business entity of which securities or other ownership interests representing more than fifty percent (50%) of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the Corporation or one or more Subsidiaries of the Corporation or by the Corporation and one or more Subsidiaries of the Corporation. 3 4 "Tandon" means Mr. Jugi Tandon. "TEAC Manufacturing Territory" means world-wide, except for the following: India, North and South Korea, Poland, the Czech Republic, Slovakia, Hungary, Romania, the countries that constituted the former Yugoslavia and the countries that constituted the former Soviet Union, and any new nation created by the merger or separation of any of the above countries and all territories in the region controlled by any of the above countries. "TEAC Sales Territory" means world-wide, except for the following: India, Poland, the Czech Republic, Slovakia, Hungary, Romania and the countries that constituted the former Yugoslavia, and any new nation created by the merger or separation of any of the above countries and all territories in the region controlled by any of the above countries. "Voting Stock" of any Person means securities of any class or classes of such Person the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the directors of such Person. 2. Transfer of Licensed Technology. 2.1 Delivery by TEAC. A. Licensed Technology and Additional Developments. As of the date of this Agreement, TEAC will deliver to the Corporation copies or originals of all of the Licensed Technology in its possession. From time to time during the term of this Agreement in a reasonably prompt manner as, TEAC shall, at its sole expense, deliver to the Corporation in written form, and such other useful format and media as may be reasonably required for the manufacture and support of the Licensed Products, all Licensed Technology and Additional Developments that come into the possession of TEAC or any of its Affiliates not previously so delivered. B. Disclosure of Additional Developments. Without limiting the foregoing, with respect to Additional Developments, TEAC shall at the time this Agreement is executed and delivered and from time to time thereafter, but in no event less frequently than quarterly, disclose to the Corporation and confer with it as to all Additional Developments under consideration or in development by or on behalf of TEAC or any of its Affiliates. 2.2 Delivery by the Corporation. A. Additional Developments. From time to time during the term of this Agreement in a reasonably prompt manner as, the Corporation shall, at its sole expense, deliver to TEAC in written form, and such other useful format and media as may be reasonably required for the manufacture and support of the Licensed Products, all Additional Developments that come into the possession of the Corporation or any of its Affiliates. 4 5 B. Disclosure of Additional Developments. Without limiting the foregoing, with respect to Additional Developments, the Corporation shall at the time this Agreement is executed and delivered and from time to time thereafter, but in no event less frequently than quarterly, disclose to TEAC and confer with it as to all Additional Developments under consideration or in development by or on behalf of the Corporation or any of its Affiliates. 2.3 Restricted Ancillary Technology. On February __, 1994, TEAC and the Corporation entered into an escrow agreement (the "Escrow Agreement") with ___________________ (the "Escrow Agent"). In accordance with the terms of the Escrow Agreement, TEAC deposited with the Escrow Agent all of the source codes and object codes related to the Licensed Technology (the "Restricted Ancillary Technology"). In addition, under the Escrow Agreement TEAC and the Corporation agreed to deposit with the Escrow Agent from time to time all source codes and object codes in their possession or in the possession of one of their Affiliates related to Additional Developments. 2.4 Confidentiality. A. TEAC and the Corporation each agree to undertake all reasonable efforts to treat, and to cause each of its Affiliates, licensees and sublicensees to treat, as confidential all proprietary information with respect to the Licensed Technology and Additional Developments. Each of the parties hereto acknowledge that another party hereto may find it necessary to disclose general descriptions of proprietary information during the conduct of its business to banks and other financial institutions contemplating the provision of project financing to such party. In addition, each of the parties hereto acknowledge that another party hereto may find it necessary to disclose proprietary information in connection with the proper grant of sublicenses to parties other than a party hereto. Under such circumstances, TEAC or the Corporation, as the case may be, may make such information available to third parties to the limited extent necessary for such third party to fulfill its supply or other permitted purposes, provided that such party shall first obtain from the recipients, a fully-executed confidentiality agreement which is at least as restrictive as the confidentiality agreement contained herein; provided, however, that the foregoing shall not restrict the Corporation's or TEAC's right to provide technical information (other than the Restricted Ancillary Technology) and test data that is reasonably requested by customers in the ordinary course of business. B. With respect to information not subject to Section 2.4.A above, each of TEAC and the Corporation agree to undertake all reasonable efforts to treat, and to cause each of its Affiliates to treat, as confidential all other proprietary information of any party hereto obtained through its relationship with another party hereto established hereunder or otherwise, and will not disclose any such information to a third party or, subject to the provisions of Section 3.7 below, otherwise use such information for its own purposes. C. Neither TEAC nor the Corporation shall be bound by the provisions of this Section 2.4 with respect to information which (a) was previously known to the recipient at the time of disclosure; (b) is in the public domain at the time of disclosure; (c) becomes a part of the public domain after the time of disclosure, other than through disclosure by the 5 6 recipient or some other third party who is under an agreement of confidentiality with respect to the subject information or obtained the information from the recipient; (d) is required to be disclosed by law or (e) is disclosed by a third party not bound by any agreement of confidentiality with respect to such information which third party did not obtain the information from the recipient. D. Each of TEAC and the Corporation shall take such action as another party hereto may reasonably request from time to time to safeguard the confidentiality of any information subject to the terms of this Section 2.4. E. To the extent that United States Export Control Regulations, or similar laws of any jurisdiction, are applicable, neither of TEAC nor the Corporation shall, without having first fully complied with such regulations, (i) knowingly transfer, directly or indirectly, any unpublished technical data obtained or to be obtained from the other party hereto to a destination outside the United States, or such other relevant jurisdiction, or (ii) knowingly ship, directly or indirectly, any product produced using such unpublished technical data to any destination outside the United States, or such other relevant jurisdiction. F. The obligations of TEAC and the Corporation under this Section 2.4 shall survive the expiration or earlier termination of all or any part of this Agreement. 2.5 Support of Licensed Technology. From time to time under this Agreement, each of the parties hereto shall provide the other parties hereto with any support materials that they shall have on hand and which shall be reasonably requested for the manufacture, of the Licensed Products as provided for herein, including, without limitation, any manuals, reports, specifications or drawings required by customers to use the Licensed Products in the manufacture of their products. Each of the Corporation and TEAC shall also allow the other access to each of their engineering staffs and will allow each others engineers to visit each of their manufacturing, or research facilities, for the purpose of providing or receiving support of the technology licensed by each of them hereunder. 3. Licensing Matters. 3.1 Grant of License by TEAC. Subject to the terms of this Agreement, TEAC hereby grants to the Corporation: A. Exclusive Rights to Manufacture. The sole and exclusive right and license to make the Licensed Products within India, North and South Korea and the entire Asian Continent, subject only to TEAC's right to manufacture the Licensed Products within the entire Asian Continent (as set forth in the dictionary definition attached as Exhibit B hereto, but excluding the countries that constitute the former Soviet Union), and to use the Licensed Technology and any Additional Developments made by TEAC and/or its Affiliates in connection therewith. B. Nonexclusive Rights to Manufacture. The nonexclusive right and license to manufacture the Licensed Products within the Corporation Manufacturing Territory, and to 6 7 use the Licensed Technology and any Additional Developments made by TEAC and/or its Affiliates in connection therewith. C. Exclusive Rights to Sell. The sole and exclusive right and license to sell the Licensed Products within India, and to use the Licensed Trademarks, the Licensed Technology and any Additional Developments made by TEAC and/or its Affiliates in connection therewith. D. Nonexclusive Rights to Sell. The nonexclusive right and license to sell the Licensed Products within the Corporation Sales Territory and, to use the Licensed Trademarks, the Licensed Technology and any Additional Developments made by TEAC and/or its Affiliates in connection therewith. E. Nonexclusive Rights to Use. The nonexclusive right to use the Licensed Technology and Additional Developments made by TEAC and/or any of its Affiliates within the Corporation Manufacturing Territory for the purpose of making Additional Developments. 3.2 Grant of License to TEAC. Subject to the terms of this Agreement the Corporation hereby grants to TEAC: A. Exclusive Right to Manufacture. The sole and exclusive right and license to use Additional Developments made by the Corporation and/or its Affiliates for the purpose of manufacturing Licensed Products within Japan and the entire Asian Continent (as set forth in the dictionary definition attached as Exhibit B hereto, but excluding the countries that constitute the former Soviet Union), subject only to the Corporation's right to manufacture the Licensed Products within the entire Asian Continent (excluding the countries that constitute the former Soviet Union). B. Nonexclusive Rights to Manufacture. The nonexclusive right and license to use Additional Developments made by the Corporation and/or its Affiliates for the purpose of Licensed Products within the TEAC Manufacturing Territory. C. Exclusive Rights to Sell. The sole and exclusive right and license to use Additional Developments made by the Corporation and/or its Affiliates for the purpose of selling the Licensed Products within Japan. D. Nonexclusive Rights to Sell. The nonexclusive right and license to use Additional Developments made by the Corporation and/or its Affiliates for the purpose of selling the Licensed Products within the TEAC Sales Territory. E. Nonexclusive Rights to Use. The nonexclusive right to use Additional Developments made by the Corporation and/or any of its Affiliates within the TEAC Manufacturing Territory for the purpose of making Additional Developments. 7 8 3.3 Sublicensing. The licenses granted in Sections 3.1 and 3.2 above shall not include the right to sublicense to a third party, except (i) that either party may sublicense such licenses in connection with the manufacturing of Parts and Accessories for use in the manufacture or assembly of finished goods by the primary licensee or the person described in Section 3.3(ii) hereunder, (ii) that either party may sublicense their rights to manufacture or assemble to a third party making products to such party's specifications and for sale by such primary licensee and under the tradenames or trademarks of the primary licensee hereunder, and (iii) the parties may sublicense selling rights in their respective exclusive selling territories. Further, the parties shall from time to time consider in good faith the granting of additional sublicenses to other manufacturers for the purpose of providing multiple sourcing requested by substantial customers of both of the parties hereto. 3.4 The Corporation's Royalty Obligations to TEAC. A. The Point5 Series and the Nordic II Series. All of the licenses granted by TEAC to the Corporation in Section 3.1 above shall be [*] with respect to the Point5 Series, the Nordic II Series and all Accessories (with respect to Accessories, only those in existence on the date hereof). B. Other Licensed Products. Subject to Section 3.4D below, the Corporation shall pay TEAC royalties on all Future Generation Products as follows: (i) all such licenses are now [*] with respect to all Future Generation Products sold within the [*] period, immediately following the first commercial sale by the Corporation of each such Future Generation Product (excepting Future Generation Products with a different form factor than either the Point5 Series or the Nordic II Series (or Accessories therefor) ("Other Form Factor Drives and Accessories") which shall be [*] for only [*] after the first commercial sale by the Corporation of each such Future Generation Product); (ii) after such [*] period or such [*] period, as applicable, if the Future Generation Product was developed by TEAC, then the royalty shall be [*] of the sales price of such Future Generation Product; (iii) after such [*] period or such [*] period, as applicable, if the Future Generation Product was developed by TEAC, but TEAC has not developed in a commercially timely manner production tooling or processes utilized in the development or production of such Future Generation Product, then the royalty shall be [*] of the sales price of such Future Generation Product; and (iv) after such [*] period or such [*] period, as applicable, if the Future Generation Product is a Joint Development, then the royalty shall be [*] for each such Future Generation Product sold by the Corporation. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 9 3.5 TEAC's Royalty Obligations to the Corporation. A. The Nordic II Series. All of the licenses granted by the Corporation in Section 3.2 above shall be [*] with respect Additional Developments on the Nordic II Series. B. Other Licensed Products. TEAC shall pay the Corporation royalties on all Future Generation Products as follows: (i) all such licenses shall be [*] with respect to all Future Generation Products sold within the [*] period, immediately following the first commercial sale by TEAC of such Future Generation Product (except for Other Form Factor Drives and Accessories, which shall be [*] for [*] period following the first commercial sale of each such Future Generation Product); (ii) after such [*] period or such [*] period, as applicable, if the Future Generation Product was developed solely by the Corporation, then the royalty shall be [*] of the sales price of such Future Generation Product; (iii) after such [*] period or such [*] period, as applicable, if the Future Generation Product was developed by the Corporation, but the Corporation has not developed in a commercially timely manner production tooling or processes utilized in the development or production of such Future Generation Product, then the royalty shall be [*] of the sales price of such Future Generation Product; and (iv) after such [*] period or such [*] period, as applicable, if the Future Generation Product is a Joint Development, then the royalty shall be [*] for each such Future Generation Product sold by the Corporation. 3.6 Calculation of Royalties. Each of TEAC and the Corporation shall be responsible for only one royalty on each Future Generation Product sold or otherwise provided to customers irrespective of the number of patents, patent claims, copyrights, trademarks, trade names or other types of Licensed Technology and Additional Developments that may pertain to such Future Generation Product. In addition, royalties paid on Future Generation Products not accepted by the customer and returned to the seller thereof will be deducted from future royalties; provided, that if such returned Future Generation Products are resold, then royalties will be paid thereon. Notwithstanding anything in this Agreement to the contrary, royalties will not be payable on Future Generation Products manufactured by TEAC and sold by it to the Corporation or manufactured by the Corporation and sold by it to TEAC. Future Generation Products internally used by TEAC or the Corporation and/or their respective Affiliates for their own purpose shall be excluded from royalty payment obligations hereunder. The "sales price" of a Future Generation Product shall be FOB seller, net of discounts and allowances, and, with respect to sales to Affiliates, shall be deemed to equal the lowest "sales price" that would have been paid by an independent third party on an arms-length basis for such a Future Generation Product. All royalties payable in full, regardless of applicable withholding taxes. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 10 3.7 Payment of Royalties. Royalties shall be based on sales made in any given calendar quarter as reflected in TEAC's or the Corporation's invoices to its customers, as the case may be, in such calendar quarter. All royalty payments for each calendar quarter shall be made within thirty (30) days subsequent to the end of such quarter, and shall be subject to any applicable withholding tax requirements. Each of TEAC and the Corporation agrees to maintain accurate and complete records showing all Future Generation Products sold by it and to keep such records for a period of three years after the date of sale. Such records will include all information necessary to verify the total amount and computation of royalties due, and will be open to inspection by TEAC or the Corporation, as the case may be, or their respective representatives during reasonable business hours, at their sole expense. 3.8 Proprietary Rights. Subject to the provisions of this Agreement and any other written agreement between the parties hereto entered into after the date hereof: A. TEAC's Rights to the Licensed Technology. Subject to the other express terms of this Agreement, including Section 3.8.D below, TEAC shall retain all title and other rights (including copyrights, patent rights, trade secret rights and other proprietary rights) to the Licensed Technology and the Licensed Trademarks. B. Rights to TEAC Additional Developments. Subject to Section 3.8.D below, TEAC shall retain all title and other rights (including copyrights, patent rights, trade secret rights and other proprietary rights) to: (i) the information, design and technology of property (including the Licensed Products and Additional Developments) and all manufacturing processes with respect thereto developed by TEAC independently from the Corporation, and all modifications, improvements and derivative works of the foregoing made by TEAC; and (ii) all service marks, trademarks, tradenames, and any other designations with respect to TEAC products. C. Rights to the Corporation's Additional Developments. Subject to Section 3.8.D below, the Corporation shall retain all title and other rights (including copyrights, patent rights, trade secret rights and other proprietary rights) to: (i) the information, design and technology of property (including the Licensed Products and Additional Developments) and all manufacturing processes with respect thereto developed by the Corporation independently from TEAC, and all modifications, improvements and derivative works of the foregoing made by each of the Corporation; and (ii) all service marks, trademarks, tradenames, and any other designations with respect to the Corporation's products. 10 11 D. Joint Developments. From time to time during the term of this Agreement the parties may agree in writing to develop products through a joint project between each other using the technology owned and/or engineers employed by each of them (a "Joint Development") to develop Future Generation Products. Any technology or other intellectual property developed under a Joint Development shall be owned jointly by the parties, and the parties mutually shall agree in writing upon the method(s) for commercial exploitation of such technology. Royalties on Joint Developments shall be as set forth in Sections 3.4(iv) or 3.5(iv), as the case may be. In addition, any patents or copyrights resulting from any such Joint Development shall be applied for and owned jointly by the parties. The individual expenses incurred by either party in connection with any Joint Development (e.g. engineering, development, prototypes, testing, travel, lodging, allowances and other expenses incurred in connection with the project) shall be borne by the party incurring the expense. Notwithstanding anything to the contrary contained herein, neither party shall transfer or license any of its rights in or to any technology or other intellectual property developed under a Joint Development without the written consent of the other party, except pursuant to sublicenses permitted under Section 3.3. E. Markings. All Licensed Products shall bear such markings with respect to patents (or patents pending) and/or trademarks, as shall be reasonably requested by the licensing party to comply with applicable law or otherwise required to protect its proprietary rights. 3.9 Defense of Infringement Claims. A. Notification. If and as soon as any party hereto becomes aware of any claim of infringement by any third party against any party hereto concerning or affecting any rights or properties licensed under this Agreement within the scope of the licenses granted in Sections 3.1 and 3.2 above, it shall inform the other in writing of all the details thereof. B. Control of and Co-operation in Defense. If any claim or action described in Section 3.9.A above results in the filing by a third party of a formal complaint, answer or other request for judicial or administrative relief or action (a "Suit"), then each party hereto shall assist the other parties hereto in diligently defending such suit. The control of the defense of a Suit relating to the Licensed Technology shall rest, at TEAC's option, with TEAC and all costs incurred in such a Suit by either party shall be borne by the party incurring such cost. The defense of all other Suits shall be controlled by the party licensing the subject technology, which party shall defend such suit on its own behalf and on behalf of the licensee and, except as set forth in Section 3.9.C below, shall bear the costs of such defense. C. Representation in Defense. Each party hereto shall have the right, in any Suit defended by another party hereto, to be represented at its own expense by counsel of its own selection to the extent of having full access to all information and the opportunity to be heard. 11 12 3.10 Prosecution of Infringement Claims. A. Notification. If any party hereto becomes aware of an infringement or potential infringement of any of the Licensed Technology, Additional Developments or Licensed Trademarks by third parties then each shall inform the other in writing of all details available (an "Infringement Notice"). B. Right to Prosecute. Upon receipt of an Infringement Notice or otherwise learning of an infringement or potential infringement of the Licensed Technology, Additional Developments or Licensed Trademarks, the party that owns the technology or other intellectual property rights that are the subject of such infringement shall promptly either (a) obtain a discontinuance of said infringement; or (b) bring suit against the third party. Before any party hereto commences any such infringement action, it shall give careful consideration to the views of the other parties hereto and to any potential effects of the litigation on such other parties or itself. The costs and expenses of such suit and all recoveries therefrom shall be the responsibility of, and for the party bringing the suit. C. Participation in Prosecution. Whenever any suit for infringement is contemplated or brought against any third party by a party hereto as provided in Section 3.10.B above, such party hereto shall immediately notify the other parties hereto of any intention of any such suit, and shall provide such other parties with copies of all pleadings, formal papers, and related documents and materials prior to filing of such suit. At any time, such other party may notify the prosecuting party that it elects to participate in such suit. Regardless of a party's participation in the prosecution of such infringement, the prosecuting party shall not settle such suit in any manner which would impair any of the rights hereunder of any other party hereto without such party's prior written consent. D. Representation in Prosecution. Any party hereto shall have the right, in any suit brought by another party hereto pursuant to Section 3.10.B above, to be represented at its own expense by counsel of its own selection to the extent of having full access to all information and the opportunity to be heard. E. Assumption of Prosecution. If at any time hereafter a party (the "Delivering Party") shall deliver an Infringement Notice to another party (the "Other Party") who fails or is unable to bring suit against such infringing third party or obtain a discontinuance of such infringing operations as provided in Section 3.10.B above within six (6) months of delivery of the Infringement Notice, then the Delivering Party may, at its election, bring suit in its own name against such infringer or, if required by the law of the forum, in the name of the Other Party or joining such Other Party as a party plaintiff. Should the Delivering Party bring suit in its own name, the Delivering Party is hereby irrevocably granted the power to execute such legal papers necessary and take such other action required for the prosecution of such suit pursuant to the power of attorney granted by each party hereto to the other party hereto and executed and delivered contemporaneously herewith. The Other Party further agrees to execute such legal papers necessary and take such other action as may be reasonably required for the prosecution of such suit as may be requested by the 12 13 Delivering Party. Such other party shall also have all rights described in Sections 3.10.C and 3.10.D above. 3.11 Prosecution of Applications. A. Licensed Technology and Licensed Trademarks. As between the parties hereto, TEAC agrees to take responsibility, including financial responsibility, for the preparation, filing and prosecution of any and all United States and foreign patent, trademark and copyright applications covering the Licensed Technology or the Licensed Trademarks and shall furnish to the Corporation copies of all communications and correspondence between TEAC and any patent, trademark or copyright office in which such a patent copyright application has been filed. B. Additional Developments. As between the parties hereto, each party agrees to take responsibility, including financial responsibility, for the preparation, filing and prosecution of any and all United States and foreign patent, trademark and copyright applications covering the Additional Developments made by such party or its Affiliates and shall furnish to the Corporation copies of all communications and correspondence between any party and any patent, trademark or copyright office in which such a patent copyright application has been filed. C. Failure to Prosecute Claim. If any party hereto decides to abandon or not to initiate any United States or foreign patent, trademark or copyright application covering the Licensed Technology, the Licensed Trademarks or Additional Developments in the countries listed on Exhibit C before exhausting all permissible applications or petitions for rehearing or review, or appeals by a superior tribunal, then such party shall inform the other party of such decision no less than thirty (30) days prior to the expiration of the time permitted for such applications for petitions for rehearing or review, or appeals. D. Power to Prosecute. If (a) a party hereto decides to abandon any United States or foreign patent, trademark or copyright application covering the Licensed Technology, the Licensed Trademarks or the Additional Developments as described in Sections 3.11.A or Section 3.11.B above or otherwise fails or is unable to prosecute such patent, trademark or copyright application or acts as described in Section 3.11.A or Section 3.11.B above or (b) if such party fails to prepare, file or prosecute any patent, trademark or copyright application in any jurisdiction, then the other party shall have the right, at its own option and expense, to initiate or continue the prosecution, including the right to file applications or continuation, continuation-in-part, and/or divisional applications, of such applications, which such party has decided to abandon or has otherwise failed or been unable to prosecute. Each party hereto is hereby irrevocably granted the power to prosecute such patent, trademark or copyright applications and to prepare and file such legal papers necessary and take such other action required for the prosecution of such applications pursuant to the patent power of attorney granted to by each party hereto and executed and delivered to each other as of the date hereof. Each party hereto further agrees to give the other party its full cooperation and assistance in preparing, filing and prosecuting such applications. 13 14 4. LIMITATION OF LIABILITY. NOTWITHSTANDING ANY OTHER TERM OF THIS AGREEMENT, NEITHER PARTY HEREUNDER NOR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES, OR AGENTS SHALL BE LIABLE TO THE OTHER PARTY HEREUNDER OR TO ANY THIRD PARTY FOR ANY LOSS OF USE, LOSS OF GOODWILL, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST REVENUES OR PROFITS) OR SIMILAR DAMAGES, WHETHER BASED ON TORT (INCLUDING WITHOUT LIMITATION, NEGLIGENCE OR STRICT LIABILITY), CONTRACT, OR OTHER LEGAL OR EQUITABLE GROUNDS, EVEN IF SUCH PARTY HAS BEEN ADVISED OR HAD REASON TO KNOW OF THE POSSIBILITY OF SUCH DAMAGES. 5. TERM AND TERMINATION. 5.1 LICENSE PERPETUAL. Except as otherwise provided in Section 5.2 below, the term of this Agreement and the licenses hereunder shall be perpetual. 5.2 TERMINATION OF RIGHTS. If any party hereto shall commit a material breach of any of the terms of the Order, any of the Related Documents to which all parties hereto are also parties thereto or this Agreement, and such breach (to the extent it can be cured) continues for seventy-five (75) days after receipt of written notice specifying such breach in reasonable detail, then any non-breaching party shall have the right to terminate all of the breaching party's rights hereunder by delivery of written notice of such termination. Notwithstanding the foregoing, (i) any such termination shall have no effect on the breaching party's duties and obligations hereunder, which shall continue past such termination in full force and effect, (ii) if any party initiates arbitration under Section 24 within thirty (30) days of its notice of the breach hereunder, this license shall not terminate to such person unless the arbitrator determines that such breach did in fact occur and was material (regardless of any cure after such seventy-five (75) day period) and (iii) an inadvertent breach or one caused by a third party outside the control or not an Affiliate of a party hereto shall not be a material breach unless (a) it is remediable by money damages and the party hereto fails to do so after court order or arbitration hereunder, or (b) such breach may be cured by the party hereto and it fails to do so within the time provided therefor herein. 5.3 BANKRUPTCY, ETC. A party's rights (but not its obligations) under this Agreement shall terminate automatically if (a) any party attempts to assign this Agreement, except under circumstances permitted hereunder, or hereto suspends business, or files a voluntary petition pursuant to or purporting to be pursuant to any reorganization or insolvency law of any jurisdiction, or an involuntary petition pursuant to or purporting to be pursuant to any reorganization or insolvency law of any jurisdiction is filed and is not dismissed within sixty (60) days, or any party makes an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee of a substantial part of its property or a receiver or trustee of a substantial part of its property is otherwise appointed and is not removed within sixty (60) days or (b) "control" of such party shall be obtained by an entity or person engaged (or whose affiliate is engaged), in the 14 15 manufacture by itself or its affiliates of hard disk drives (excluding affiliates of the parties hereto on the date hereof) other than following a public offering under the Securities Act of 1933 of not less than 30% of the Corporation's common stock (an "IPO"). 6. Force Majeure and Damage Exclusions. Notwithstanding any other provision of this Agreement: A. Force Majeure. Either party shall be excused from any failure or delay in performance resulting directly or indirectly from inability to obtain parts or other necessary materials from usual sources of supply, transit failure or delay, labor disputes, governmental orders or restrictions, fire, flood or other acts of nature, accident, war, civil disturbance, or any other causes beyond such party's reasonable control. A party affected by a force majeure shall resume performance promptly upon cessation of same. B. Damage Exclusions. Neither party shall be liable to the other party for any incidental, indirect, consequential or special damages in connection with any matters relating directly or indirectly to this Agreement, or otherwise relating to the business relationship of the parties, even if such party has been advised of the possibility of such damages by the other party and even if such damages have been asserted against a party hereto by a third party. 7. Warranties and Representations: Release. A. Of TEAC. TEAC represents and warrants that (i) TEAC is a corporation validly existing, and in good standing under the laws of Japan and has full power and authority to carry on its business as it is now being conducted and to own or lease the properties and assets it now owns or leases, and is duly qualified to do business, and is in good standing as a foreign corporation in each state in the United States in which TEAC's activities require such qualification, (ii) TEAC has all necessary right, power and authority to enter into this Agreement (iii) neither the execution and delivery of this Agreement by TEAC nor its performance hereunder will conflict with or result in the breach of any of the terms or conditions of or constitute a default under the charter documents of TEAC or of any contract, agreement, commitment, indenture, mortgage, note, bond, license or other instrument or obligation to which it is a party or by which it or any of its property or assets may be bound, (iv) this Agreement has been duly and validly executed by TEAC and constitutes the valid and binding obligation of TEAC enforceable in accordance with its terms and (v) except as set forth on Exhibit D attached hereto, no consent, approval or authorization of, or declaration, filing or registration with, any foreign, federal, state or local governmental or regulatory authority, or any other party, is required to be made by TEAC in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SPECIFICALLY PROVIDED IN THIS AGREEMENT ALL OF THE TECHNOLOGY IS PROVIDED TO THE CORPORATION BY TEAC HEREUNDER "AS IS" AND TEAC EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES, INCLUDING ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 15 16 B. Of The Corporation. The Corporation represents and warrants that (i) the Corporation is a corporation validly existing, and in good standing under the laws of the State of California and has full power and authority to carry on its business as it is now being conducted and to own or lease the properties and assets it now owns or leases, and is duly qualified to do business, and is in good standing as a foreign corporation in each state in the United States in which the Corporation's activities require such qualification, (ii) the Corporation has all necessary right, power and authority to enter into this Agreement (iii) neither the execution and delivery of this Agreement by the Corporation nor its performance hereunder will conflict with or result in the breach of any of the terms or conditions of or constitute a default under the charter documents of the Corporation or of any contract, agreement, commitment, indenture, mortgage, note, bond, license or other instrument or obligation to which it is a party or by which it or any of its property or assets may be bound, (iv) this Agreement has been duly and validly executed by the Corporation and constitutes the valid and binding obligation of the Corporation enforceable in accordance with its terms and (e) except as set forth on Exhibit E attached hereto, no consent, approval or authorization of, or declaration, filing or registration with, any foreign, federal, state or local governmental or regulatory authority, or any other party, is required to be made by the Corporation in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SPECIFICALLY PROVIDED IN THE AGREEMENT ALL OF THE ADDITIONAL DEVELOPMENTS IS PROVIDED TO TEAC BY THE CORPORATION HEREUNDER "AS IS" AND THE CORPORATION EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES, INCLUDING ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. C. The Corporation, on behalf of itself, Tandon and all of their now or hereafter existing Affiliates (the "First Releasing Parties") grants to TEAC and any of its licensees or product purchasers ("TEAC Users") immunity from any infringement action by the First Releasing Parties with respect to the use by TEAC or the TEAC Users of the Licensed Technology or Licensed Products and hereby covenants, on behalf of itself and the other First Releasing Parties, not to sue TEAC or the TEAC Users with respect thereto. D. TEAC, on behalf of itself and its now or hereafter existing Affiliates (the "Second Releasing Parties") grants to TEAC and any of its licensees or purchasers ("Corporation Users") immunity from any infringement action by those and Releasing Party with regard to the use by the Corporation or the Corporation Users of the Licensed Technology or Licensed Products and hereby covenants on behalf of itself and the other Second Releasing Parties, not to sue the Corporation or the Corporation Users with respect thereto. 8. Waiver. The waiver by either party of any of its rights or any breaches of the other party under this Agreement in a particular instance shall not serve as a waiver of the same or different rights or breaches in subsequent instances. All remedies, rights, undertakings and obligations hereunder shall be cumulative, and none shall operate as a limitation of any other. 16 17 9. Section Headings and Language Interpretations: Business Days. As used herein, "business day" shall mean each day other than Saturday, Sunday and any day on which banks are nationally required to be closed in the United States of America or Japan, or any other business holiday for either party of which it has advised the other party in writing not less than 45 days in advance. The descriptive headings in this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter genders shall include all genders, the singular shall include the plural and vice versa and shall refer solely to the parties signatory thereto unless otherwise specifically provided. The use of the word "including" in this Agreement shall be by way of example rather than by limitation. 10. Notices. All notices, demands, consents, requests, approvals, and other communications required or permitted hereunder shall be in writing and shall be deemed effective only upon delivery (whether receipt is accepted or refused) at the addresses set forth below (or at such other addresses within the United States of America as shall be given in writing by any party to the others in accordance with this Section 10. Notices may be delivered by hand, United States registered or certified mail, return receipt requested, bonded private courier service or by telecopier (followed immediately in writing by bonded private courier service). To the Corporation: JT Storage, Inc. 2125 Madera Road Simi Valley, California 93065 Attention: Board of Directors Telecopy Number: (805) 582-3227 with a copy to: Riordan & McKenzie 5743 Corsa Avenue, Suite 116 West Lake Village, California 91362 Attention: Lawrence Weeks Telecopy Number: (818) 706-2956 To TEAC: TEAC Corporation 3-7-3 Nakacho, Musashino Tokyo, Japan Attention: General Manager, Disk Drive Products Division Telecopy Number: 0422-52-3771 with copies to: Katten Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago, Illinois 60661 Attention: Mark D. Gerstein Telecopy Number: (312) 902-1061 17 18 and TEAC America, Inc. 7733 Montebello Road Montebello, California 90640 Attention: Executive Vice President Telecopy Number: (213) 727-7688 11. Assignment. Except as specifically provided herein, no party hereto may assign any of its rights or delegate any of its obligations hereunder without the prior written consent of the other parties, which consent shall not be withheld unreasonably; provided that TEAC may assign its rights and obligations hereunder to any party purchasing all of the Licensed Technology, without the consent of the Corporation, other than as prohibited by the Order and provided further the Corporation's rights hereunder will succeed to a successor by merger or acquisition to the Corporation following an IPO. 12. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 13. Governing Law. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of California, without giving effect to provisions thereof regarding conflict of laws. 14. Controlling Terms/Entire Agreement/Amendment. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. No provisions in the purchase orders, acknowledgements or other business forms of either party which are different from or in addition to the applicable terms set forth in this Agreement shall be of any force or effect whatsoever unless it is acknowledged to in writing by the other party expressly stating that each document supersedes this Agreement as follows: "Notwithstanding any term of the License Agreement by and between TEAC Corporation and ___________________ dated February ____, 1994". Any provision of this Agreement may be amended only with the prior written consent of all of the parties hereto. 15. Multiple Counterparts. This Agreement may be executed on separate counterparts transmitted by telecopy, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 18 19 16. Relationship of the Parties. It is not the intent of the parties to create a partnership or joint venture or to assume partnership liability or responsibility by entering into this Agreement. Each party hereto shall be deemed an independent contractor with respect to the other party and neither party hereto shall have any right or authority to assume or create any obligations on behalf of the other party hereto or to make any representations on such other party's behalf. Accordingly, the obligations of the parties with respect to the matters addressed herein shall be limited to those specifically set forth in this Agreement or other written agreements between the parties. 17. Public Disclosure. Neither party hereto shall make any public release of information regarding the terms of this Agreement relating to the royalties due hereunder unless (i) such party has obtained the written consent of the other party regarding the form, content and timing of such disclosure or (ii) such disclosure is required by applicable law; provided that in the event of any disclosure mandated by law, each party shall consult with the other as to the content of such disclosure. 18. Right of Set-off. If in the good faith belief of one of the parties hereto (the "Injured Party"), it is entitled to indemnification, reimbursement or payment hereunder, in addition to any other remedies which it may have available to it, the Injured Party shall have the right to set off the entire amount thereof against any amounts which the Injured Party shall owe to the other party from time to time thereafter for any reason, including any royalties due or which become due hereunder. 19. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. 20. Remedies. Each of the parties confirms that damages at law may be an inadequate remedy for a breach or threatened breach of this Agreement and agrees that, in the event of a breach or threatened breach of any provisions hereof, the respective rights and obligations hereunder shall be enforceable by specific performance, injunction or other equitable remedy, but nothing herein contained is intended to, nor shall it limit or affect, any rights at law or by statute or otherwise of any party aggrieved as against any other party for breach or threatened breach of any provision hereof, it being the intention by this section to make clear the agreement of the parties that the respective rights and obligations of the parties shall be enforceable in equity as well as at law or otherwise. 21. Preamble; Preliminary Recitals. The Preliminary Recitals set forth in the Preamble hereto are hereby incorporated and made part of this Agreement. 22. Consent to Jurisdiction and Service of Process. Each of the Corporation and TEAC hereby consent to the jurisdiction of any state or federal court located within the County of Los Angeles, State of California and irrevocably agree that all actions or proceedings arising out of or relating to this Agreement shall be litigated in such courts. Each of the parties hereto accept for itself, himself or herself, as the case may be, and in connection with its, his or her properties, generally and unconditionally, the nonexclusive jurisdiction of the 19 20 aforesaid courts and waives any defense of forum non conveniens, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each of the parties hereto designate and appoint CT Corporation System and such other persons as may hereinafter be selected by them who irrevocably agree in writing to so serve as agent to receive on their behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by each such party to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to each such party hereto as provided herein, except that unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of process. If any agent appointed by a party hereto refuses to accept service, such party hereby agrees that service upon it, him or her, as the case may be, by mail shall constitute sufficient notice. Nothing herein shall affect the right of any party hereto to serve process in any other manner permitted by law. 23. WAIVER OF JURY TRIAL. EACH OF THE CORPORATION AND TEAC HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREBY. EACH OF THE CORPORATION AND TEAC ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF ANY OTHER PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH OF THE CORPORATION AND TEAC ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF THE CORPORATION AND TEAC FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS, HIS OR HER, AS THE CASE MAY BE, LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS, HIS OR HER, AS THE CASE MAY BE, JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTION CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 20 21 24. Arbitration. (i) If any controversy or claim between the parties hereto arises out of this Agreement or any document, instrument or agreement executed and delivered pursuant hereto, such disagreement or dispute may, at the election of either party prior to the filing by either party an action in a court of proper jurisdiction pertaining to such claim, be submitted to binding arbitration in Los Angeles, California, under the Commercial Arbitration Rules of the American Arbitration Association; provided that any matter provided for in this Agreement to be mutually agreed to, negotiated or otherwise discussed between the parties shall be subject to arbitration hereunder only if specifically provided in this Agreement. (ii) One arbitrator shall be appointed under the Commercial Arbitration Rules of the American Arbitration Association, who shall be a business person with at least five years experience in the disk drive industry; provided, however, that if any disagreement arises concerning specialized matters such as intellectual property rights, product design or computer engineering, market conditions or importing/exporting regulations, then the arbitrator shall also have an expertise in such matters. As soon as the panel has been convened, a hearing date shall be set within 45 days thereafter. Written submittals shall be presented and exchanged by both parties 15 days before the hearing date, including reports prepared by experts upon whom either party intends to rely. At such time the parties shall exchange copies of all documentary evidence upon which they will rely at the arbitration hearing and a list of the witnesses whom they intend to call to testify at the hearing. Each party shall also make its respective experts available for deposition by the other party prior to the hearing date. The arbitrator shall make its award as promptly as practicable after conclusion of the hearing. (iii) The arbitrator shall not be bound by the rules of evidence or civil procedure, but rather may consider such writings and oral presentations as reasonable businessmen would use in the conduct of their day-to-day affairs, and may require the parties to submit some or all of their presentations orally or in written form as the arbitrators may deem appropriate. It is in the intention of the parties to limit live testimony and cross-examination to the extent necessary to insure a fair hearing to the parties on the matters submitted to arbitration, and to provide neither party more than ten business days to present its position. The parties have included the foregoing provisions limiting the scope and extent of the arbitration with the intention of providing for prompt, economic and fair resolution of any dispute submitted to arbitration. (iv) The arbitrator shall have the discretion to award the costs of arbitration, arbitrators' fees and the respective attorneys' fees of each party between the parties as they see fit. Judgment upon the award entered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall make its award in accordance with applicable law and based on the evidence presented by the parties, and at the request of either party at the state of the arbitration shall include in its award findings of fact and conclusions of law both in law and equity which would be available in a court having 21 22 jurisdiction over the parties and over the subject matter of the dispute. Such powers shall include, but not be limited to, the power to require specific performance. (v) The arbitration agreement set forth herein shall not limit a court from granting a temporary restraining order or preliminary injunction in order to preserve the status quo of the parties pending arbitration. Further, the arbitrator shall have power to enter such orders by way of interim award, and they shall be enforceable in court. 22 23 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. THE CORPORATION: JT STORAGE, INC. By: /s/ ----------------------------- A duly authorized signatory TEAC: TEAC CORPORATION By: ---------------------------- A duly authorized signatory 23 24 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. THE CORPORATION: JT STORAGE, INC. By: ----------------------------- A duly authorized signatory TEAC: TEAC CORPORATION By: /s/ ---------------------------- A duly authorized signatory 24 25 AMENDMENT AND CONSENT This Amendment and Consent (the "Amendment") is made and entered into as of this 3rd day of February, 1995, by and between TEAC Corporation, a corporation organized and existing under the laws of Japan, having its principal place of business at 3-7-3 Naka-cho, Musashino, Tokyo, Japan ("TEAC"), and JT Storage, Inc., a corporation organized and existing under the laws of the State of Delaware, U.S.A., having its principal place of business at 2125 Madera Road, Simi Valley, California 93065 (the "Corporation"). WHEREAS, on February 4, 1994 an Agreed Order Compromising Controversies (the "Order") was entered into in the United States Bankruptcy Court For the Northern District of California with respect to case No. 93-54027MM pursuant to which TEAC obtained certain technology and other intellectual property and certain other assets of Kalok Corporation, and licensed certain of said technology and intellectual property to the Corporation pursuant to a License Agreement attached to the Order as Exhibit A (the "License Agreement"); and WHEREAS, Section F of the Order prohibits the sublicensing or transfer of the IP Assets to certain parties, including Western Digital Corporation ("WDC"). WHEREAS, TEAC and the Corporation deem that it is in their mutual best interest to amend the License Agreement, and to consent to certain transactions related thereto, upon the terms and conditions set forth in this Amendment. WHEREAS, all capitalized terms not otherwise defined herein shall have the meaning given such term in the License Agreement. NOW, THEREFORE, in consideration of the mutual promises contained herein and in the Order and the License Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. AMENDMENT OF LICENSE AGREEMENT. The License Agreement is hereby amended as follows: 1.1 Section 1, the definition of "Nordic II Series", is amended to delete the number and words ".40 (four-tenths)" appearing between the words "than" and "inches" and to insert the number and words ".50 (five tenths)" between the words "than" and "inches". 1.1A A new Section 2.1C will be added and will read in its entirety as follows: "C. Certain WDC Additional Developments. Notwithstanding the foregoing, TEAC shall not disclose to the Corporation any Additional Developments which may be delivered by WDC to TEAC after [*] , under the WDC License Agreement (as defined hereunder)." 1.2 Section 3.1A is amended to add the phrase "India, North and South Korea and" between the words "within" and "the" at the end of the third line of said section. Section 3.1B * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 26 is amended to add the phrase "Japan and" between the words "within" and "the" in the second line of said Section. Section 3.1C is amended to add the phrase ",subject only to TEAC's right to sell Licensed Products in India after January 1, 1995" after the word "India" in the second line of said section. Section 3.1D is amended to add the phrase "and, after January 1, 1995, in Japan" after the word "Territory" in the second line of said section. 1.3 Section 3.2A is amended to add the phrase "Japan and" between the words "within" and "the" in the sixth line of said section. Section 3.2C is amended to add the phrase ",subject only to the Corporation's right to sell Licensed Products in Japan after January 1, 1995" after the word "Japan" in the last line of said section. Section 3.2D is amended to add the phrase "and, after January 1, 1995, in India" after the word "Territory" in the last line of said section. 1.4 The first paragraph of Section 3.3 of the Agreement is amended to delete the text ",and (iii) the parties may sublicense selling rights in the respective exclusive selling territories", and to insert before the text "(ii)", the word "and" in the fifth line of said paragraph. The second paragraph of Section 3.3 is amended to add the following phrase at the end of such paragraph: ", but only for sale of products under the trade names or trademarks of the primary licensee hereunder." 1.5 Section 3.4A is amended to add the phrase "Subject to Sections 3.4C and 3.4D below, all" in substitution of the first word of said section. Section 3.4B is amended to add the phrase "Subject to Section 3.4D below, the" in substitution of the first word of said section. 1.6 Section 3.4B(iii) is amended to delete the phrase "pre-" in the third line of said section. 1.7 A new Section 3.4C will be added and will read in its entirety as follows: "C. TEAC Exit of HDD Industry. If TEAC shall cease (i) all sales of Licensed Products, (ii) all production or subcontracting production of Licensed Products and (iii) the purchase of Licensed Products from the Corporation and WDC, then during the [*] period following the last of such events, the Corporation shall pay TEAC a royalty of [*] per Nordic II Series HDD sold by the Corporation outside of Japan. Notwithstanding anything to the contrary contained herein, this royalty shall cease at such time, if any, as the fair market value of TEAC's investment in the Corporation shall equal or exceed [*] (subject to pro rata adjustment to the extent TEAC disposes of such investment) for a period of twelve consecutive months." 1.8 A new Section 3.4D will be added and will read in its entirety as follows: "D" Sales in Japan. Notwithstanding anything to the contrary contained herein, the Corporation shall pay TEAC a royalty as follows: From the date of [*] , up until the earlier of an [*] [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -2- 27 [*] or [*] (the "Initial Term") the Corporation shall pay TEAC the greater of (i) [*] each three months during the Initial Term (provided that this clause "(i)" shall only be applicable for periods after [*] , or (ii) the product of [*] times the number of HDD or each HDD in an accessory utilizing the Licensed Technology ("Licensed HDD's") sold by the Corporation in Japan each [*] during the Initial Term. Subsequent to the Initial Term and up through [*] , the Corporation shall pay TEAC the greater of (i) [*] each [*] or (ii) the product of [*] times the number of HDD or Licensed HDD's sold during each three-month period. In the event that an IPO occurs prior to [*] the Corporation shall pay TEAC, with respect to the [*] period during which the IPO occurs, the greater of (i) an amount equal to [*] in such [*] times [*] , or (ii) the number of HDD or Licensed HDD's sold during the period of time within such [*] period prior to the [*] times [*] . All amounts owed by the Corporation to TEAC under this Section 3.4(D) shall be paid no later than thirty (30) days after the three-month period in which such payment is due." 1.8 Section 3.5B(iii) is amended to delete the word "pre-" in the third line of said section. Section 3.5B(iv) is amended to delete the words "the Corporation" and substitute therefor the word "TEAC". 1.9 All references to "Future Generation Products" in Sections 3.6 and 3.7 shall be changed to reference "Licensed HDD's". 1.10 Section 3.7 is amended to delete the phrase ", and shall be subject to any applicable withholding tax requirements" in lines 4 and 5 of said section. 1.11 Section 11 is amended to clarify the original intent of the parties to add the following language: "As used in this Agreement, the phrase 'assign' or 'assignments' shall include, without limitation, any pledge, hypothecation or other encumbering of rights hereunder, and any transfer by operation of law, involving merger or consolidation. 2. OTHER AGREEMENTS. As additional consideration for the agreements and covenants of TEAC contained herein, the parties hereby further agree as follows: 2.1 The Corporation shall provide TEAC with the opportunity to purchase Licensed HDDs from the Corporation at a price equal to the lower of [*] If TEAC purchases Licensed HDDs at the * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -3- 28 price provided in (i) of the previous sentence, then TEAC's purchases shall be limited to [*] . Allocations of the indirect costs provided for in the previous sentence shall be made in a reasonable manner, consistent with allocations made by the Corporation for other cost/analysis purposes. Delivery (subject only to the available manufacturing capacity of the Corporation) and warranty terms for such purchases shall be equal to the most favorable terms provided to any of the Corporation's other customers for comparable products without regard to volume purchased by such customers or to be purchased by TEAC. 2.2 If TEAC or one of its subcontracted manufacturers of Licensed Products needs to purchase parts from a vendor that also does business with the Corporation, then the Corporation shall authorize such vendor to calculate the price of such parts based on the combined purchase volumes of such parts of TEAC, any such subcontractor and the Corporation. TEAC agrees to bear its pro rata share of any tooling costs, which proportion shall be agreed to by TEAC and the Corporation at the time of the purchase. 3. BALANCE OF AGREEMENT. Except as amended by the terms of this Amendment, each and every other term, condition and covenant of the License Agreement (and the exhibits and schedules thereto) and all other documents, instruments or agreements heretofore executed and delivered by the parties shall remain in full force and effect. 4. LICENSE WITH WDC. The Corporation and TEAC hereby acknowledge that TEAC is entering into a certain licensing agreement with WDC dated as of February 3, 1995 (the "WDC License Agreement") by which TEAC will license certain technologies to WDC and WDC will license certain technologies to TEAC and the Corporation hereby consents to the WDC License Agreement. The Corporation and TEAC hereby acknowledge that the Corporation is entering into a certain licensing agreement with WDC, the Technology Transfer and License Agreement dated as of February ___, 1995 (hereinafter the "Corporation License Agreement") by which the Corporation will license certain technologies to WDC and WDC will license certain technologies to the Corporation and TEAC hereby consents to the Corporation License Agreement. 5. LICENSE WITH COMPAQ. The Corporation and TEAC hereby acknowledge that the Corporation has entered into a certain licensing agreement with Compaq Computer Corporation, dated as of June 16, 1994, as amended (the "Development Agreement"), by which the Corporation has licensed certain technologies to Compaq and TEAC hereby consents to the Development Agreement. 6. CERTAIN CONDITIONS. The agreements of the parties contained herein are conditioned upon, and shall become immediately effective only upon the completion of, the following: 6.1 TEAC shall have received the counter-signature page of Mr. Tandon to the Stockholders Agreement (as defined in the Master Agreement) and a revised Exhibit H to the Order, executed by the Corporation. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -4- EX-10.25 45 DEVELOPMENT AGREE COMPAQ & JT STORAGE 6/16/94 1 EXHIBIT 10.25 DEVELOPMENT AGREEMENT DEVELOPMENT AGREEMENT (the "Agreement") made as of the 16th of June 1994, by and between COMPAQ COMPUTER CORPORATION, a Delaware corporation having its principal place of business at 20555 S.H. 249, Houston, Texas 77070 [hereafter "Compaq"] and JT STORAGE, INC., a Delaware corporation having its principal place of business at 1289 Anvilwood Avenue, Sunnyvale, California 94089 [hereafter "JTS"]. PRELIMINARY RECITALS WHEREAS, Compaq (i) is in the business of designing, manufacturing and marketing Computer Products, including hard disk drives ("HDD"), computer options/accessories, and software for such HDDs, and (ii) possesses expertise and owns proprietary rights related to its products, including, but not limited to, copyrights, know-how, inventions, trade secrets, patents, patent applications and the like; and WHEREAS JTS desires to promote its HDDs to the personal computer industry; and WHEREAS JTS desires to have Compaq endorse and adopt JTS's proposed design for HDDs as an industry standard; and WHEREAS Compaq's endorsement of JTS's proposed design for HDDs as an industry standard will aid in the adoption by the industry at large; and WHEREAS Compaq has agreed to assist JTS's efforts to promote and develop an industry standard for certain HDD technology in exchange for the covenants, licenses, and consideration recited herein; and WHEREAS, the parties desire to develop hardware and software products which will incorporate existing technology of JTS, and additional new technology to be developed by JTS; and WHEREAS, Compaq is a manufacturer of personal computer products sold and distributed on a world-wide basis; and WHEREAS, JTS has demonstrated some small form factor HDD technology and product concepts which appear to be of particular use to Compaq for its personal computer products; and WHEREAS, JTS has certain technology that Compaq desires to utilize in its personal computer products and JTS desires to complete development on 2 such technology and make products using such technology available for use by Compaq on the terms and conditions set forth herein; and WHEREAS, JTS desires to License certain future additional developments to Compaq, as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants and undertakings hereinafter set forth, the parties hereto hereby agree as follows: AGREEMENTS ---------- 1.0 Certain Definitions - ----------------------- 1.1 Acceptance and Accepted means strict compliance with the provisions of the applicable technical specification unless compliance is waived or modified in writing by Compaq and shall be satisfied by JTS's submittal of the software (firmware) and/or hardware (as specified by the Development Plan) with a statement that such software and/or hardware [hereafter collectively referred to as "Product"] complies with the applicable technical specification, provided, however, that Compaq, in its sole discretion shall determine whether such Product is in compliance with the applicable specification. After submittal by JTS, Compaq shall test such Product, in randomly selected commercially reasonable quantities, to verify compliance and to determine whether JTS can reasonably produce the Product in commercial quantities. Compaq's tests shall be performed as soon as commercially practical. In the event that the Product does not comply with the applicable specifications (including but not limited to the engineering specifications attached hereto, shock and vibration specification and other specifications provided by Compaq), Compaq shall provide detailed information of such non-compliance to JTS. In the event that Compaq does not provide JTS with a written notice that the Product submitted by JTS is in compliance with the applicable specifications within ten business (10) days [the "First Period"] then in such event the Product submitted by JTS shall be deemed to be in non-compliance. Thereafter, JTS shall have ten business (10) days [the "Section Period"] to correct such non-compliance and resubmit the Product for Acceptance. Compaq shall again have ten (10) business days [the "Third Period"] to retest the Product and provide JTS with details, if any, of non-compliant operation. In the event that Compaq does not provide JTS with a written notice that the Product submitted by JTS is in compliance with the applicable specifications during such Third Period then in that event the Product submitted by JTS shall be deemed to be in non-compliance. In the event that Compaq does not respond in writing within the aforesaid First Period and/or Third Period with a written acceptance of the Product submitted, such submitted Product shall be deemed to be in non-compliance and shall not be Accepted. The submittal by JTS of a non-compliant Product shall not toll a Project Milestone or satisfy a Project Milestone. In the event that JTS submits a non- 3 compliant Product, Compaq may serve a notice of material breach and the Cure Period shall run concurrently with any attempts by JTS to correct a non-compliant Product and such Cure Period shall run concurrently with Compaq's testing and verification program. Notwithstanding the foregoing, Acceptance of a Product by Compaq shall not relieve JTS from its obligation to resolve any hardware and/or software bugs which are discovered after Acceptance. 1.2 "Additional Developments" as applied to JTS, means any improvements in, modifications on, derivative works of, variations of, new designs of, discoveries related to, or developments utilizing any of the Licensed Technology or any other additional development (including reproduction tooling and drawings and product design and processes and Accessories), whether separately developed, licensed or otherwise obtained by or on behalf of such Person or jointly developed, licensed or otherwise obtained by or on behalf of such Person during the term of this Agreement now existing or hereafter developed, including patents and patent applications and licenses therefore in each case, solely in connection with the development, manufacture or sale of HDDs; provided that if Additional Developments are obtained by a party hereto from an unaffiliated third party then the obligations of the party hereto to license such Additional Development to the other parties hereto shall be conditioned upon obtaining the consent of such Unaffiliated third party to such license, which consent the party hereto shall undertake its best efforts to obtain. 1.3 "Affiliate" as applied to any Person means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For purposes of this definition, the term "control" (including, with correlative meanings, the terms controlling, controlled by and under common control with), as applied to any Person, means the possession, directly or indirectly, of the power to vote 50% or more of the Voting Stock (or in the case of a Person which is not a corporation, 50% or more of the ownership interest, beneficial or otherwise) of such Person or otherwise to direct or cause the direction of the management and policies of that Person, whether through the ownership of Voting Stock or other ownership interest, by contract or otherwise. All executive officers, 50% or greater shareholders and directors of any Person shall be deemed to be Affiliates of such Person for the purposes of this Agreement. "Unaffiliated" shall refer to a person or entity which is not an Affiliate. 1.4 "Change in Corporate Control" means any circumstance in which (i) any person, entity or group (other than pursuant to a venture capital financing) acquires direct or indirect beneficial ownership [as defined in Rule 13d-3 under the Exchange Act of 1934 as Amended] in the aggregate securities of a party representing more than thirty percent (30%) of the total combined voting power of such party's then issued and outstanding voting securities, (ii) the sale of all or substantially all of the assets of a party occurs to any person or entity which is not a wholly-owned subsidiary of such party, (iii) a party is liquidated, or (iv) a 4 party experiences a change in the composition of a majority of its Board of Directors as a result of an election contest. 1.5 "Derived Program" means, individually or collectively, any and all derivations or Source made by compiling and/or processing of Source, or modified, enhanced or extended versions thereof, to create a machine-readable object code (binary), intermediate code or interpreted form, and all copies or portions thereof. Derived Programs also include Documentation. For purposes of this Agreement, Derived Programs shall be construed to be "derivative works" and "compilations," within the meaning of such terms in the Copyright Act (17 U.S.C. Section 101 et seq.). 1.6 "Development Plan" means the product development and design plan which is set out in Exhibit A. 1.7 "Documentation" means all written materials furnished hereunder by either party, including, but not limited to, user and maintenance manuals, and materials useful for designing, developing, testing, marketing and maintaining products, and providing training related thereto. 1.8 "Effective Date" shall mean the date last affixed on the signature line of this Agreement. 1.9 "Filing" means any documentation, application, filing, registration or the like required to perfect the parties' interest in the developed Technology under statutory intellectual property rights protection mechanisms. 1.10 "Future Generation Products" means any HDD product, other than the Nordic Series, that utilizes the Licensed Technology or Additional Developments, and was developed or in development prior to end of the Term of this Agreement. 1.11 "HDD" shall mean hard disk drive in any form factor or size. 1.12 "Licensed Products" means the Nordic Series and the Future Generation Products. 1.13 "Licensed Technology" all technical information and intellectual property of JTS, including without limitation, patents, patent applications and copyrights (and all extensions, continuations, continuations in part, divisions, reexaminations and reissues thereof), trade secrets, inventions, source codes, object codes, flow charts, processes, techniques, specifications, drawings, parts layouts, parts lists, all technical information and other intellectual property pertaining to Parts, circuitry, tooling and testing requirements, know-how, manuals and other technical data and support documentation, whether or not patentable or copyrightable and whether or not actually patented or copyrighted. 5 1.14 "Nordic Series" means any HDD with a width of between 3.25 and 3.75 inches and a height of less than .40 (four-tenths) inches, and all Licensed Technology pertaining principally thereto. 1.15 "JTS Patents" means all domestic and foreign patents and utility models which issue from any applications filed by or for JTS and/or its Subsidiaries during the Term of this Agreement but does not include design, ornamental, industrial design patents, or design registrations. 1.16 "Person" means a natural person, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof. 1.17 "Project Milestones" means that set of milestones which is set forth in Exhibit B. 1.18 [*] 1.19 "Source" means software (firmware) source code provided or developed under this Agreement, and any portion thereof. Source is provided in human-readable form and contains specific algorithms, instructions, plans, routines and the like, for controlling the operation of a central processing unit (including microprocessors, controllers, etc.), or otherwise used by a central processing unit to do a particular job or solve a particular problem. Machine-readable form (a "Derived Program") is derived upon compilation of such Source. Source may be provided as printed listings of code or on magnetic media, and includes any Documentation and information related to Source. Source includes corrections, modifications, and enhancements thereto by JTS during the Term. 1.20 "Subsidiary" means any entity of which fifty percent (50%) or more of the voting rights are owned or controlled, directly or indirectly, by a party hereto, provided, however, that such entity shall be deemed to be a Subsidiary only for so long as such ownership or control exists. 1.21 "Technology" means, Background Technology, developed Technology or Residuals, and includes, but is not limited to, technical information, data and processes, whether tangible or intangible, including, without limitation, any and all techniques, discoveries, inventions, copyrights, mask works, VHSIC hardware description language ("VHDL") descriptions, net * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6 lists, know-how, patents (including any extension, reissue or renewal patents), patent, mask work or copyright applications, inventor certificates, trade secrets, designs, drawings, specifications, schematics, software programs (including Source and object codes), microcode, operating and instructional manuals, magnetic tapes, methods of production and any other proprietary information. 1.22 "Term" shall mean the period commencing with the execution of this Agreement and ending on the fifth anniversary of this agreement. This Agreement shall automatically renew for an additional five (5) year period, if Compaq is purchasing HDDs from JTS in commercially reasonable quantities during the fifth year. 1.23 "Use" or "Used" means the application, exploitation, commercialization and sublicensing of Technology, including (i) modifying Technology to form derivative works, (ii) incorporating portions of original or modified Technology into products, (iii) research, design, experimentation, development, or marketing of products, and (iv) making, having made, leasing, selling or otherwise transferring hardware Background Technology in products. 2.0 Development of Nordic HDD A. JTS agrees to develop the Nordic HDDs in conformance with the Development Plan attached hereto as Exhibit A and in conformance with the Project Milestones as set forth in the attached Exhibit B. JTS agrees that the Project Milestones shall not have been satisfied until the Nordic design is Accepted by Compaq. Failure to meet a Project Milestone, produce an HDD in conformance with the Development Plan, and/or failure to design an HDD in conformance with the Nordic Technical Specifications shall be deemed to be a material default of this Agreement. B. JTS further agrees that the Nordic HDDs shall be in strict conformance with the Nordic Technical Specifications attached hereto as Exhibit C. The parties agree that to the extent that Exhibit C contains "TBDs" (To Be Determined) such information shall be inserted into the specification at a later date and that such information shall be negotiated in good faith by the parties prior to July 30, 1994 unless otherwise agreed to in writing by both parties. JTS agrees that the information designated as "TBD" is not material and will not result in any changes to the Milestone Dates, Schedule, and/or result in additional cost. To the extent that JTS later finds that the information designated as "TBD" will impact the Milestone Dates, Schedule, and/or result in additional cost, JTS will notify Compaq in writing within five (5) business days of the time that Compaq provides JTS with the information designated as "TBD" which has resulted in a change to the Milestone Date, Schedule, and/or resulting in additional cost. In the event that JTS does not notify Compaq within five (5) business days, then in 7 such event the information furnished as a "TBD" will be deemed to have no impact on the Milestone Dates, Schedule, and/or cost of the project. C. In consideration for JTS' agreement to design the Nordic HDD in conformance with the Development Plan and the Project Milestones and in conformance with the Nordic Technical Specifications, Compaq shall pay [*] as non-recurring engineering charges (NRE) to JTS for the development of two Nordic HDDs, [*] (hereafter collectively referred to as "Nordic HDDs"). The NRE charges referred to above shall be payable as follows: [*] D. In the event of a material default by JTS, JTS agrees to refund any NRE moneys advanced by Compaq. JTS further agrees that in the event of a material default by JTS, Compaq at its sole option, may apply the NRE previously paid by Compaq, as an offset against its purchases of other HDD (e.g. Palladium or Sterling) from JTS. The offset may be applied at any time and in any increments which Compaq may in its sole judgment effect. E. In consideration of the covenants and obligations set forth in this Agreement, JTS agrees that it shall not undertake any other development projects for any third party and that it will focus the appropriate resources to the development of the Nordic HDDs. A breach of this provision shall be deemed to be a material breach of this Agreement. F. JTS agrees that Compaq shall have no obligations to provide any technology, licenses, firmware, development resources, engineering resources or any contribution, other than the NRE listed above, to the Nordic development efforts. G. In consideration of the covenants and obligations set forth in this Agreement, Compaq will have a first right of refusal on all of Nordic production for a period of [*] commencing with volume production of Nordic HDDs. Additionally, JTS agrees that during the Term of this Agreement, Compaq shall [*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 have a right of first refusal to license and/or otherwise acquire any newly developed JTS product and/or technology on a right of first refusal and on pricing and royalties which are [*] . H. Except for any of its pre-existing obligations to TEAC, JTS agrees not to license the Nordic design to a third party manufacturer. I. In consideration of the convenants and obligations set forth in this Agreement, JTS agrees that Compaq will have price preferences which shall result in Compaq's price being at least [*] lower than any price paid by any other party for JTS' HDDs, such price preferences commencing with volume production of Nordic HDDs and shall extend for the initial Term of this Agreement. In the event this Agreement is extended beyond the initial Term, then in such event Compaq will have a price preference which shall result in Compaq's price being at least [*] lower than any price paid by any other party for JTS' HDDs. J. In consideration of the covenants and obligations set forth in this Agreement, JTS agrees not to market the Nordic HDDs to any third party before the Nordic HDDs are Accepted by Compaq and JTS further agrees that it will not sell any Nordic HDDs to any third party for the [*] . JTS shall be free to market Nordic HDDs to third parties during the [*] provided however, that marketing efforts shall not include the sale of Nordic HDDs to such third parties in contravention of the [*] . Additionally, JTS agrees that it will not sample in quantities exceeding two (2) Nordic HDDs to any third party during the [*] . K. Following Acceptance by Compaq of the Nordic HDDs and - provided further that JTS is able to supply Compaq with quantities of Nordic HDDs as set out in the applicable purchasing documents within the schedule provided in such purchasing documents, if Compaq fails to fulfill its minimum purchase obligations of Nordic HDDs (as such obligation is set forth in the accompanying purchasing documents), then in that event JTS shall notify Compaq of its default. In the event that Compaq fails to cure such default within thirty (30) days of such notice, then in such event JTS shall be relieved of any further obligations with respect to the [*] . Notwithstanding the foregoing, Compaq and JTS agree that Compaq will not be declared to be in default of its purchasing obligations if JTS is not able to deliver HDDs on the schedule agreed to in writing by the parties. JTS further acknowledges that in the event Compaq is required to place orders for HDDs with an alternate supplier because of reasonable uncertainty of JTS' delivery, such decision may result in Compaq's inability to purchase HDDs from JTS. JTS agrees that such inability shall not be considered as a default condition. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 L. Upon expiration of the [*] , and in consideration of the covenants and obligations set forth in this Agreement, Compaq will receive a royalty of [*] HDD for each Nordic HDD sold to a third party, such royalty payable for the initial Term of this Agreement. In the event that this Agreement is extended beyond the initial Term, then in such event, Compaq will receive a royalty of [*] HDD for each Nordic HDD sold to a third party. The foregoing royalties shall be payable quarterly in accordance with the provisions of this Agreement and subject to the audit provision of this Agreement. M. In consideration of the covenants and obligations set forth in this Agreement, Compaq will be licensed to use the Nordic designs [hereafter "Licensed Technology"] to make and have made any HDDs, for use in Compaq's products; such license shall permit Compaq to use the Nordic design on a royalty-free basis in the event that JTS is unable to meet Compaq's volume or shipment schedule and such schedule is set forth in a mutually agreed Corporate Purchase Agreement, or in the event of a material default on the Nordic development program. Compaq's right to use the Nordic design shall be of sufficient scope to permit Compaq to improve/modify the JTS design. N. Provided that JTS is not in default and in the event that Compaq in its sole discretion chooses to have Nordic HDDs manufactured by a third party after Acceptance of the Nordic design, then in that event Compaq shall pay JTS a royalty at the rate of [*] HDD during the initial Term of this Agreement; such HDDs shall bear JTS' trademarks. In the event that this Agreement is extended beyond the initial Term of this Agreement. Compaq's royalty obligation shall be reduced from [*] HDD to a royalty of [*] HDD Compaq's right to use the Licensed Technology and the Nordic design shall be of sufficient scope to permit Compaq to improve/modify the JTS design. O. In consideration of the foregoing covenants and obligations set forth above by JTS, Compaq agrees that it will design the Nordic HDD products into at least one of its computer products and further agrees to place purchase orders for the Nordic HDDs as set forth in the Corporate Purchase Agreement. 3.0 Compaq's Purchasing Obligations Upon Compaq's Acceptance of the Nordic HDDs, qualification of JTS' manufacturing operations and compliance with other terms and conditions as set forth in Compaq's purchasing documents, (including but not limited to Corporate Purchase Agreement (CPA)); Compaq will place purchase orders towards the purchase of a minimum quantity of [*] HDDs over a two (2) year period. Compaq's obligations to purchase HDDs shall be as more specifically set forth in the accompanying CPA and purchasing documents. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10 4.0 Transfer of Licensed Technology 4.1 Delivery by JTS A. Licensed Technology and Additional Developments. As of the date of this Agreement, JTS will deliver to Compaq copies or originals of all of the Nordic Licensed Technology in its possession. From time to time during the term of this Agreement in a reasonably prompt manner as, JTS shall, at its sole expense, deliver to Compaq in written form, and such other useful format and media as may be reasonably required for the manufacture and support of the Licensed Products, all Licensed Technology and Additional Developments that come into the possession of JTS or any of its Affiliates not previously so delivered. B. Disclosure of Additional Developments. Without limiting the foregoing, with respect to Additional Developments, JTS shall at the time this Agreement is executed and delivered and from time to time thereafter; but in no event less frequently than quarterly, disclose to Compaq in writing and confer with it as to all Additional Developments under consideration or in development by or on behalf of JTS or any of its Affiliates. 4.2 Confidentiality. A. JTS and Compaq each agree to undertake all reasonable efforts to treat, and to cause each of its Affiliates, licensees and sublicensees to treat, as confidential all proprietary information with respect to the Licensed Technology and Additional Developments. Each of the parties hereto acknowledge that another party hereto may find it necessary to disclose general descriptions of proprietary information during the conduct of its business to banks and other financial institutions contemplating the provision of project financing to such party. In addition, each of the parties hereto acknowledge that another party hereto may find it necessary to disclose proprietary information in connection with the proper grant of sublicenses to parties other than a party hereto. Under such circumstances, JTS or Compaq, as the case may be, may make such information available to third parties to the limited extent necessary for such third party to fulfill its supply or other permitted purposes, provided that such party shall first obtain from the recipients, a fully-executed confidentiality agreement which is at least as restrictive as the confidentiality agreement contained herein; provided, however, that the foregoing shall not restrict Compaq's or JTS's right to provide technical information (other than the Restricted Ancillary Technology) and test data that is reasonably requested by customers in the ordinary course of business. B. With respect to information not subject to Section 4.2(A) above, each of JTS and Compaq agree to undertake all reasonable efforts to treat, and to cause each of its Affiliates to treat, as confidential all other proprietary information of any party hereto obtained through its relationship with another 11 party hereto established hereunder or otherwise, and will not disclose any such information to a third party except as necessary to comply with its obligations to TEAC but in no event shall JTS disclose any Compaq Confidential Information, or otherwise use such information for its own purposes. C. Neither JTS nor Compaq shall be bound by the provisions of this Section 4.2 with respect to information which (a) was previously known to the recipient at the time of disclosure; (b) is in the public domain at the time of disclosure; (c) becomes a part of the public domain after the time of disclosure, other than through disclosure by the recipient or some other third party who is under an agreement of confidentiality with respect to the subject information or obtained the information from the recipient; (d) is required to be disclosed by law or (e) is disclosed by a third party not bound by any agreement of confidentiality with respect to such information which third party did not obtain from the recipient. D. Each of JTS and Compaq shall take action as another party hereto may reasonably request from time to time to safeguard the confidentiality of any information subject to the terms of this Section 4.2. E. To the extent that United States Export Control Regulations, or similar laws of any jurisdiction, are applicable, neither of JTS nor Compaq shall, without having first fully complied with such regulations, (i) knowingly transfer, directly or indirectly, any unpublished technical data obtained or to be obtained from the other party hereto to a destination outside the United States, or such other relevant jurisdiction, or (ii) knowingly ship, directly or indirectly, any product produced using such unpublished technical data to any destination outside the United States, or such other relevant jurisdiction. F. The obligations of JTS and Compaq under this Section 4.2 shall survive the expiration or earlier termination of all or any part of this Agreement. 4.3 Support of Licensed Technology. From time to time under this Agreement, each of the parties hereto shall provide the other parties hereto with any support materials that they shall have on hand and which shall be reasonably requested for the manufacture, of the Licensed Products as provided for herein, including, without limitation, any manuals, reports, specifications or drawings required by customers to use the Licensed Products in the manufacture of their products. Each of Compaq and JTS shall also allow the other access to each of their engineering staffs and will allow each others engineers to visit each of their manufacturing, or research facilities, for the purpose of providing or receiving support of the technology licensed by each of them hereunder. 5. Licensing Matters 5.1 Grant of License by JTS. Subject to the terms of this Agreement, JTS hereby grants to Compaq: 12 A. Nonexclusive Rights to Manufacture. The nonexclusive right and license to manufacture the Licensed Products, and to use the Licensed Technology and any Additional Developments made by JTS and/or its Affiliates in connection therewith. B. Nonexclusive Rights to Sell. The nonexclusive right and license to sell the Licensed Products, in Compaq Products or as options for use in Compaq Products, and to use the Licensed Trademarks, the Licensed Technology and any Additional Developments made by JTS and/or its Affiliates in connection therewith. C. Nonexclusive Rights to Use. The nonexclusive right to use the Licensed Technology and Additional Developments made by JTS and/or any of its Affiliates for the purpose of making Additional Developments. 5.2 Sublicensing. The licenses granted in Section 5.1 above shall not include the right to sublicense to a third party, except (i) that either party may sublicense such licenses in connection with the manufacturing of Nordic HDDs and/or parts and accessories therefore, for use in the manufacture or assembly of finished goods to fulfill orders placed by Compaq, and, (ii) that either party may sublicense their rights to manufacture or assemble to a third party making products to Nordic specifications as necessary to fill Compaq orders for Nordic HDDs and under the tradenames or trademarks of JTS. Further, the parties shall from time to time consider in good faith the granting of additional sublicenses to other manufacturers for the purpose of providing multiple sourcing requested by Compaq. 6.0 Royalty Payments 6.1 Calculation of Royalties Payable by Compaq. Compaq shall be responsible for only one royalty on each Nordic HDD manufactured by Compaq pursuant to its royalty-bearing license irrespective of the number of patents, patent claims, copyrights, trademarks, trade names or other types of Licensed Technology and Additional Developments that may pertain to such Future Generation Product. Royalties paid shall be net of any returns. 6.2 Calculation of Royalties Payable by JTS. JTS shall be responsible for only one royalty on each Nordic HDD sold to a third party [hereafter sometimes referred to as a "Market Development Royalty"] pursuant to the royalty provisions of this agreement. Royalties paid shall be net of any returns. 6.3 Payment of Royalties. Royalties shall be based on sales made in any given calendar quarter as reflected in Compaq's or JTS invoices (as the case may be) to its customers, as the case may be, in such calendar quarter. All 13 royalty payments for each calendar quarter shall be made within sixty (60) days subsequent to the end of such quarter, and shall be subject to any applicable withholding tax requirements. Each of JTS and Compaq agrees to maintain accurate and complete records showing Nordic HDDs sold by it and to comply with such further requirements as set forth in the Record Keeping and Audit provisions of this Agreement. 6.4 Proprietary Rights. Subject to the provisions of this Agreement and any other written agreement between the parties hereto entered into after the date hereof the parties agree that the following provisions shall govern the parties intellectual property rights: A. JTS's Rights to the Licensed Technology. Subject to the other express terms of this Agreement, JTS shall retain all title and other rights (including copyrights, patent rights, trade secret rights and other proprietary rights) to the Licensed Technology. B. Rights to JTS Additional Developments. JTS shall retain all title and other rights (including copyrights, patent rights, trade secret rights and other proprietary rights) to: (i) the information, design and technology of property (including the Licensed Products and Additional Developments) and all manufacturing processes with respect thereto developed by JTS independently from Compaq, and all modifications and derivative works of the foregoing made by JTS; and (ii) all service marks, trademarks, tradenames, and any other designations with respect to JTS products. C. Rights to Compaq's Additional Developments. Compaq shall retain all title and other rights (including copyrights, patent rights, trade secret rights and other proprietary rights) to: (i) the information, design and technology of property (including the Licensed Products and Additional Developments) and all manufacturing processes with respect thereto developed by Compaq independently from JTS, and all modifications, improvements and derivative works of the foregoing made by each of Compaq; and (ii) all service marks, trademarks, tradenames, and any other designations with respect to Compaq's products. D. Joint Developments. From time to time during the term of this Agreement the parties may agree in writing to develop products through a joint project between each other using the technology owned and/or engineers employed by each of them (a "Joint Development") to develop Future Generation Products. Any technology or other intellectual property developed under a Joint 14 Development shall be owned jointly by the parties, and the parties mutually shall agree in writing upon the method(s) for commercial exploitation of such technology. Royalties on Joint Developments shall be negotiated in the future. In addition, any patents or copyrights resulting from any such Joint Development shall be applied for and owned jointly by the parties. The individual expenses incurred by either party in connection with any Joint Development (e.g. engineering, development, prototypes, testing, travel, lodging, allowances and any other expenses incurred in connection with the project) shall be borne by the party incurring the expense. Notwithstanding anything to the contrary contained herein, neither party shall transfer or license any of its rights in or to any technology or other intellectual property developed under a Joint Development without the written consent of the other party, except pursuant to sublicenses permitted in this Agreement. To the extent that Compaq and JTS engage in joint development in the course of developing the Nordic HDDs, each party shall retain ownership in its own development and there shall be no obligation to license or otherwise provide such development to the other party, except as necessary to manufacture Nordic HDDs for Compaq. E. Markings. All Licensed Products shall bear such markings with respect to patents (or patents pending) and/or trademarks, as shall be reasonably requested by the licensing party to comply with applicable law or otherwise required to protect its proprietary rights. 7.0 Limitation Of Liability. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY HEREUNDER NOR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES, OR AGENTS SHALL BE LIABLE TO THE OTHER PARTY HEREUNDER OR TO ANY THIRD PARTY FOR ANY LOSS OF USE, LOSS OF GOODWILL, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST REVENUES OR PROFITS) OR SIMILAR DAMAGES, WHETHER BASED ON TORT (INCLUDING WITHOUT LIMITATION, NEGLIGENCE OR STRICT LIABILITY), CONTRACT, OR OTHER LEGAL OR EQUITABLE GROUNDS, EVEN IF SUCH PARTY HAS BEEN ADVISED OR HAD REASON TO KNOW OF THE POSSIBILITY OF SUCH DAMAGES. 8.0 Term And Termination 8.1 License Perpetual. Except as otherwise provided in Section 8.2 below, the term of this agreement and the licenses and immunities from suit hereunder shall be perpetual. 8.2 Termination of Rights. If any party hereto shall commit a material breach of any of the terms of this Agreement, or any of the related purchasing documents, and such breach continues for thirty (30) days after receipt of written notice specifying such breach in reasonable detail, then any non-breaching party 15 shall have the right to terminate all of the breaching party's rights hereunder by delivery of written notice of such termination. Notwithstanding the foregoing any such termination shall have no effect on the breaching party's duties and obligations hereunder, which shall continue past such termination in full force and effect. Compaq's rights to use JTS' technology and designs shall not be reduced or diminished in the event of a Termination for default by JTS. 8.3 Bankruptcy, Etc. A party's rights (but not its obligations) under this Agreement shall terminate automatically if any party attempts to assign this Agreement, except under circumstances permitted hereunder, or hereto suspends business, or files a voluntary petition pursuant to or purporting to be pursuant to any reorganization of insolvency law of any jurisdiction, or an involuntary petition pursuant to or purporting to be pursuant to any reorganization or insolvency law of any jurisdiction or an involuntary petition pursuant to or purporting to be pursuant to any reorganization of insolvency law of any jurisdiction is filed and is not dismissed within sixty (60) days, or any party makes an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee of a substantial part of its property or a receiver or trustee of a substantial part of its property is otherwise appointed and is not removed within sixty (60) days. 9.0 Force Majeure And Damage Exclusions. Notwithstanding any other provision of this Agreement: A. Force Majeure. Either party shall be excused from any failure or delay in performance resulting directly or indirectly from inability to obtain parts or other necessary materials from usual sources of supply, transit failure or delay, labor disputes, governmental orders or restrictions, fire, flood or other acts of nature, accident, war, civil disturbance, or any other causes beyond such party's reasonable control. A party affected by a force majeure shall resume performance promptly upon cessation of same. 10.0 Warranties And Representations: Release A. Of JTS. JTS represents and warrants that (i) JTS validly existing and in good standing under the laws of the State of Delaware and having full power and authority to carry on its business as it is now being conducted and to own or lease the properties and assets it now owns or leases, and being duly qualified to do business, and being in good standing, (ii) JTS has all necessary right, power and authority to enter into this Agreement (iii) neither the execution and delivery of this Agreement by JTS nor its performance hereunder will conflict with or result in the breach of any of the terms or conditions of or constitute a default under the charter documents of JTS or of any contract, agreement, commitment, indenture, mortgage, note, bond, license or other instrument or obligation to which it is a party or by which it or any of its property or assets may be bound, (iv) this Agreement has been duly and validly executed by JTS and 16 constitutes the valid and binding obligation of JTS enforceable in accordance with its terms (c) no consent, approval or authorization of, or declaration, filing or registration with, an foreign, federal, state, or local governmental or regulatory authority, or any other party, is required to be made by JTS in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SPECIFICALLY PROVIDED IN THIS AGREEMENT ALL OF THE ADDITIONAL DEVELOPMENTS PROVIDED BY JTS HEREUNDER ARE PROVIDED "AS IS" AND JTS EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES, INCLUDING ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. B. Of Compaq. Compaq represents and warrants that it has received a copy of the TEAC agreement with JTS. 11.0 Record Keeping And Audit Rights A. Reports. Each party hereto shall keep and maintain full and accurate records relating to sale and manufacture of Nordic HDDs. To the extent that a party is obligated to pay royalties, such party shall prepare and submit quarterly reports to the other party no later than sixty (60) days following the last business day of all calendar quarters, certified by an officer of such party, specifying, at a minimum, the quantity of each royalty-bearing products sold during the previous quarter and the royalty due for such royalty-bearing products. The information contained in such reports will be retained in confidence and access to such information shall be restricted to the finance and legal groups. The obligations to provide royalty reports shall only apply to royalty-bearing products. Each party shall retain such business records as necessary to support the royalty reports for a period of three (3) years following the end of a reporting period. B. Audit. Each party agrees to allow mutually acceptable independent auditors to audit and analyze appropriate accounting records to ensure compliance with all terms of this Agreement. Any such audit shall be permitted by the party to be audited within fifteen (15) days of receipt of a written request by the party requesting such audit, during normal business hours, at a time mutually agreed upon by the party to be audited. The cost of such an audit will be borne by the party requesting the audit unless a material discrepancy is found (underpayment of royalties for the quarter) or records are not maintained and available in accordance with this section, in which case the audited party agrees to pay the requesting party for the costs associated with the audit, but in no event shall such costs exceed twenty thousand dollars ($20,000) for such audit. C. Interest. In the event that there is an underpayment of royalties, the underpaid royalties shall be promptly remitted with interest, such interest accruing from the date such royalties should have been paid. The applicable 17 interest rate shall be equal to the higher of twelve percent (12%) per annum or at two percent (2%) over prime. The interest rate shall be compounded monthly. 12.0 Immunity From Suit A JTS hereby grants to Compaq, its Subsidiaries and to its and their customers, mediate and immediate, a personal, non-transferable immunity from suit under any JTS Patents for the formation, combination, and use of any JTS Nordic HDD with other hardware or software products. The foregoing immunity from suit shall extend to an apparatus, method, or process used in the manufacture of a Nordic HDD. 13.0 Additional Licenses A JDD Firmware License. Subject to the provisions of this Agreement, JTS hereby grants to Compaq a nonexclusive, transferable, worldwide, non-royalty bearing, irrevocable license to: (1) use and prepare derivative works of source code for JTS's firmware, on equipment located within Compaq's control, such source code to be used for internal purposes only; (2) reproduce, perform, display, sublicense and distribute, in any HDD, such firmware (in object code form) to third parties; each third party shall have the right correspondingly to sublicense other third parties along the chain of distribution to end users; (3) reproduce, perform, display, sublicense and distribute, in any HDD, Compaq prepared derivatives of the firmware (in object code form) to third parties; each third party shall have the right correspondingly to sublicense other third parties along the chain of distribution to end users; and (4) reproduce, perform, display, sublicense and distribute Compaq derivations of the JTS firmware under a source code license agreement. B License under JTS Patents (1) JTS hereby grants to Compaq a nonexclusive, transferable, worldwide license under JTS Patents to use, make, have made, lease, sell and otherwise transfer any HDD with Compaq products, either alone or connected to or in conjunction with other computer hardware or software. All licenses granted under this Agreement 18 shall be of sufficient scope to permit Compaq to exercise all rights granted in this Agreement and shall include the right to grant sublicenses of equivalent scope to Compaq's Subsidiaries, which Subsidiaries may correspondingly sublicense other Subsidiaries. Licenses to Subsidiaries shall be valid and subsisting for as long as the parent has a valid and subsisting license and only for as long as the parent has corporate control of the Subsidiary receiving a license hereunder. (2) JTS hereby grants to Compaq, its Subsidiaries and its and their customers, mediate and immediate, a personal, non-transferable immunity from suit under JTS Patents for the formation and use of any Compaq product with other hardware or software products. The foregoing immunity from suit extends to any apparatus, method, or process per se if such apparatus, method, or process infringes a JTS Patent when used for its intended purpose or is combined with a Compaq product. C. JTS hereby grants Compaq a royalty-free, irrevocable, worldwide license to use, publish, have published, copy, have copied, distribute, have distributed, prepare derivative works and have such derivative works prepared of any Documentation produced by JTS for any Nordic HDD. D. In furtherance of Compaq's licenses granted in above, JTS agrees to provide Compaq with magnetic copies of modifications, enhancements, versions, version releases, updates, and bug fixes which JTS makes to its firmware. JTS agrees to use its best efforts to inform Compaq of its plans to release major modifications and version releases and of the anticipated release date to permit Compaq to formulate corresponding release dates and to permit Compaq to phase out its production of obsolete versions and updates. Magnetic copies of major modifications and version releases shall be provided to Compaq at least 30 days prior to commercial release by JTS to other JTS customers or 30 days prior to commercial release by JTS's licensees (whichever comes first). Magnetic copies of minor bug fixes, updates, modifications, etc. shall be provided to Compaq as soon as reasonably possible but in every event prior to the expiration of sixty (60) days from commercial release by JTS or commercial release by JTS's licensees. 14.0 Miscellaneous Provisions A. EXPORT. Notwithstanding any rights, license or privileges specified in this Agreement, each party agrees that it will not export any technology or product provided by the other party hereunder or jointly developed hereunder, or any part thereof, either directly or indirectly, without first obtaining any required licenses to so export from the United States Government, and 19 further agrees that it will comply with all laws, rules and regulations applicable to the export or re-export of such technology or product. B. INFRINGEMENT CLAIMS. Compaq and JTS shall notify each other of any potential or actual infringement or misappropriation by any third party of any patent, copyright or other proprietary right that forms part of the HDD technology and shall provide each other with any available evidence of such infringement or misappropriation. If the parties determine that they will cooperate in an action relating to the foregoing, the parties shall jointly take all reasonable steps necessary to enjoin and prevent such infringement or misappropriation, including the institution and maintenance of legal or equitable proceedings, and shall promptly execute all papers and perform such other acts as may be reasonably required to join in any such suit, action or proceeding, provided, however, that a party may, at its option, be represented by counsel of its choice. Upon any such joinder, each party shall pay the fees of its own separate counsel (if any) and shall bear fifty percent (50%) of all other reasonable costs incurred in connection with such suit, action or proceeding. If a party, in its reasonable business judgment, concludes that the steps necessary to enjoin such infringement or misappropriation are not economically justifiable under the circumstances, it may decline to join in any action proposed or taken by the other party, provided, however, that if the other party determines that it shall proceed in such action, the declining party shall provide all reasonable assistance and information, at its sole cost and expense, to the other party in support of such action. Any amount recovered in any such suit, action or proceeding brought by the parties jointly (whether recovered through judgment or settlement) shall be allocated to Compaq and JTS, pro-rata, for reimbursement of the reasonable expenses incurred by the parties in connection with such proceedings in accordance with their cost-sharing arrangement set forth in this section, and to the extent to which amounts recovered are in addition to the amount of such expenses, such additional amounts shall be shared equally by the parties. Any amount recovered by a party individually pursuing any such suit, action or proceeding shall inure solely to the benefit of such party. C. Third-Party Claims of Infringement to Technology. Each party agrees to promptly notify the other party upon becoming aware of any suit or proceeding brought against it by any third party which is based on a claim that the HDD technology infringes any patent, copyright or other proprietary right. The parties may, upon mutual agreement, cooperate in the defense against such suit or proceeding, and in such case shall promptly execute all papers and perform such other acts as may be reasonably required to join in such defense. In such circumstance where the parties cooperate in a defense, each party shall pay the fees of its own separate counsel (if any) in such defense, and shall bear fifty percent (50%) of all other reasonable costs incurred in connection with such suit, action or proceeding. In any event, each party shall provide all reasonable assistance and information to the other party in support thereof. 20 D. Injunctive Relief. Each party acknowledges and agrees that in the event of an unauthorized use, reproduction, distribution or disclosure of any confidential information or data contained in either party's technology, an adequate remedy at law would not be available; and, therefore, injunctive or other equitable relief would be appropriate to restrain such use, reproduction, distribution or disclosure, threatened or actual. Such relief shall be in addition to any other remedies provided herein. E. Breach of Exclusivity. JTS acknowledges and agrees that in the event a license is granted to a third party in breach of the [*] , an adequate remedy at law would not be available; and, therefore, injunctive or other equitable relief would be appropriate to restrain any use, reproduction, distribution or disclosure, threatened or actual in contravention of the [*] . Such relief shall be in addition to any other remedies provided herein. F. Other Remedies. In the event of a material breach of this Agreement, the other party shall have such remedies for direct damages (including out-of-pocket expenses and funds paid to JTS) to which it is entitled by law. G. Assignment. This Agreement and the licenses granted hereunder are to a specific entity or legal person, which does not include corporate subsidiaries, affiliates or parent company of either party, and except as set forth herein, all rights hereunder are not assignable nor are the obligations imposed delegable by either party without the prior written consent of the other party. Notwithstanding anything to the contrary, neither party may assign its patent license or immunity to another party unless the acquiring party agrees to provide a patent license, to the other party to this Agreement, of the same scope and on the same terms as set forth in this Agreement. H. Execution of Assignments and Non-Disclosure Agreements by Contract Employees. JTS agrees to have each of its contract employees (including contractors, independent agents, temporary employees, etc.) execute an assignment of all intellectual property rights, including an assignment of copyrights, inventions, and patents and a waiver of moral rights prior to employment or retention by JTS. Additionally, such Contractor employees shall execute appropriate non-disclosure agreements which obligate them to retain the confidential information of JTS and its customers and licensees in strictest confidence. I. Execution of Assignments, Non-Disclosure Agreements, and Non-Solicitation Agreements by Employees. JTS agrees to have each of its employees execute an assignment of all intellectual property rights, including an assignment of copyrights, inventions, and patents and a waiver of moral rights prior to employment or retention by JTS. Additionally, such employees shall execute appropriate non-disclosure agreements which obligate them to retain the * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 21 confidential information of JTS and its customers and licensees in strictest confidence. Such employees shall also execute an appropriate non-solicitation agreement which prohibits the solicitation of JTS's employees by a former employee. J. Execution of Assignments, Non-Disclosure Agreements, Non-Solicitation Agreements and Covenants Not to Compete by Officers and Key Employees. JTS agrees to have each of its officers and key employees execute an assignment of all intellectual property rights, including an assignment of copyrights, inventions, and patents and a waiver of moral rights prior to employment or retention by JTS. Additionally, such officer and key employees shall execute appropriate non-disclosure agreements which obligate them to retain the confidential information of JTS and its customers and licensees in strictest confidence. Such officer and key employees shall also execute an appropriate non-solicitation agreement which prohibits the solicitation of JTS' employees by a former officer or key employee. In consideration for Compaq's participation and as material inducement for Compaq participation in this venture, JTS agrees to obtain, to the extent such agreements are enforceable in the state or country where such employees reside, from its current and future officers and key employees an agreement not to compete with JTS' business interests for a period of fifteen (15) months following the Effective Date of this Agreement. 15.0 Waiver. The waiver by either party of any of its rights or any breaches of the other party under this Agreement in a particular instance shall not serve as a waiver of the same or different rights or breaches in subsequent instances. All remedies, rights, undertakings and obligations hereunder shall be cumulative, and none shall operate as a limitation of any other. 16.0 Section Heading and Language Interpretations: Business Days. As used herein, "business day" shall mean each day other than Saturday, Sunday and any day on which banks are nationally required to be closed in the United States of America or Japan, or any other business holiday for either party of which it has advised the other party in writing not less than 45 days in advance. The descriptive headings in this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter genders shall include all genders, the singular shall include the plural and vice versa and shall refer solely to the parties signatory thereto unless otherwise specifically provided. The use of the word "including" in this Agreement shall be by way of example rather than by limitation. 17.0 Notices. All notices, demands, consents, requests, approvals, and other communications required or permitted hereunder shall be in writing and shall be deemed effective only upon delivery (whether receipt is accepted or refused) at the addresses set forth below (or at such other addresses within the United 22 States of America as shall be given in writing by any party to the others in accordance with this Section 10. Notices may be delivered by hand, United States registered or certified mail, return receipt requested, bonded private courier service or by telecopier (followed immediately in writing by bonded private courier service). To Compaq: Compaq Computer Corporation 20555 S.H. 249 Houston, Texas 77070 Attn: Purchasing Department with copy to: P.C. Storage Development Compaq Computer Corporation 20555 S.H. 249 Houston, Texas 77070 and copy to: Managing Attorney - Licensing and Technology Compaq Computer Corporation 20555 S.H. 249 Houston, Texas 77070 To JTS: JT Storage, Inc. 1289 Anvilwood Avenue Sunnyvale, California 94089 Attention: President Telecopy Number: (408) 747-0849 18.0 Assignment A. Except as specifically provided herein, no party hereto may assign any of its rights (in whole or in part), or delegate any of its obligations (in whole or in part), hereunder without the prior written consent of the other parties, which consent shall not be unreasonably withheld. In the event of an IPO, Compaq's rights hereunder will succeed to a successor by merger or acquisition to Compaq following an IPO. B. In the event of an assignment by JTS of any its rights or delegation of its obligations, or in the event of a Change in Control of JTS and its 23 operations, Compaq may at its sole option choose to terminate JTS' rights (but not its obligations) under this Agreement. 19.0 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 20.0 Governing Law. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of Texas, without giving effect to provisions thereof regarding conflict of laws. 21.0 Controlling Terms/Entire Agreement/Amendment. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. No provisions in the purchase orders, acknowledgments or other business forms of either party which are different from or in addition to the applicable terms set forth in this Agreement shall be of any force or effect whatsoever unless it is acknowledged to in writing by the other party expressly stating that each document supersedes this Agreement as follows: "Notwithstanding any term of the Development Agreement by and between JTS and dated June 16th, 1994." Any provision of this Agreement may be amended only with the prior written consent of all of the parties hereto. 22.0 Multiple Counterparts. This Agreement may be executed on separate counterparts transmitted by telecopy, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 23.0 Relationship of the Parties. It is not the intent of the parties to create partnership or joint venture or to assume partnership liability or responsibility by entering into this Agreement. Each party hereto shall be deemed an independent contractor with respect to the other party and neither party hereto shall have any right or authority to assume or create any obligations on behalf of the other party hereto or to make any representations on such other party's behalf. Accordingly, the obligations of the parties with respect to the matters addressed herein shall be limited to those specifically set forth in this Agreement or other written agreements between the parties. 24 24.0 Public Disclosure. Neither party hereto shall make any public release of information regarding the terms of this Agreement relating to the royalties due hereunder unless (i) such party has obtained the written consent of the other party regarding the form, content and timing of such disclosure or (ii) such disclosure is required by applicable law; provided that in the event of any disclosure mandated by law, each party shall consult with the other as to the content of such disclosure. 25.0 Right of Set-Off. If in the good faith belief of one of the parties hereto (the "Insured Party"), it is entitled to indemnification, reimbursement or payment hereunder, in addition to any other remedies which it may have available to it, the Insured Party shall have the right to set off the entire amount thereof against any amounts which the Injured Party shall owe to the other party from time to time thereafter for any reason, including any royalties due or which become due hereunder. 26.0 No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. 27.0 Remedies. Each of the parties confirms that damages at law may be an inadequate remedy for a breach or threatened breach of this Agreement and agrees that, in the event of a breach or threatened breach of any provisions hereof, the respective rights and obligations hereunder shall be enforceable by specific performance, injunction or other equitable remedy, but nothing herein contained is intended to, nor shall it limit or affect, any rights at law or by statute or otherwise of any party aggrieved as against any other party for breach or threatened breach of any provision hereof, it being the intention by this section to make clear the agreement of the parties that the respective rights and obligations of the parties shall be enforceable in equity as well as at law or otherwise. 25 28.0 Preamble; Preliminary Recitals and Exhibits. The Preliminary Recitals set forth in the Preamble hereto are hereby incorporated and made part of this Agreement. Additionally, Exhibits A, B, and C are incorporated herein by reference. JT Storage COMPAQ COMPUTER CORP. By: /s/ David B. Pearce By: /s/ Hugh Barnes ---------------------------- --------------------------- David B. Pearce Hugh Barnes President Sr. Vice President and General Manager Portable P.C. Division Date: June 16, 1994 Date: 6/20/94 -------------------------- ------------------------- 26 AMENDMENT TO DEVELOPMENT AGREEMENT This Amendment is made effective as of the Effective Date between COMPAQ COMPUTER CORPORATION, A Delaware corporation having a principal place of business at 20555 S.H. 249, Houston, Texas 77070 (hereinafter "Compaq") and JT STORAGE, INC., a Delaware corporation having a principal a place of business at 1289 Anvilwood Avenue, Sunnyvale, California 94089 (hereinafter "JTS") and amends the Development Agreement between the parties of effective date of June 16, 1994 (hereinafter referred to as "Agreement"). PRELIMINARY RECITALS WHEREAS, Compaq has paid to JTS consideration of Five Hundred Thousand U.S. Dollars (U.S. $500,000.00) under the Agreement; and WHEREAS, JTS has been negotiating with Western Digital Corporation ("WDC") about entering into a Technology Transfer and License Agreement pursuant to which, among other things, JTS will grant to WDC certain license and sublicense rights with respect to JTS technology, including the Nordic Series design and other technology referred to in the Agreement between JTS and Compaq; and WHEREAS, JTS desires that Compaq release JTS from certain obligations in the Agreement in order that JTS may finalize the Technology Transfer and License Agreement; and WHEREAS, Compaq desires to release JTS from such obligations if WDC will provide equity funding to JTS and thereby make JTS a more viable entity and further to enable WDC to become an alternate source of Nordic Series HDDs for Compaq; and WHEREAS, JTS has represented to Compaq that WDC will provide equity funding to JTS and JTS agrees that it will not stand in the way of WDC being an alternate source of Nordic Series HDDs to Compaq; and WHEREAS, the parties are desirous of modifying the obligations of each other that are in the Agreement, as described in this Amendment; and NOW THEREFORE, in consideration of the premises and the mutual covenants and undertakings hereinafter set forth, the parties hereto hereby agree as follows: 1.0 Definitions 1.1 Capitalized terms in this Amendment shall have the same meaning as given them in the Agreement. 1.2 Delete Section 1.14 in its entirety and replace with the following: "Nordic-Series" means any HDD with a width of between 3.25 and 3.75 inches and a height of 0.50 (five-tenths) inches or less, and all Licensed Technology pertaining principally thereto. 1.3 Delete Section 1.18 in its entirety and replace with the following: [*] means that period of exclusivity commencing on the date of a publicly-announced delivery by Compaq of a revenue-bearing product incorporating a Nordic Series HDD and extending for a period of [*] thereafter, provided however, that such [*] shall not begin unless and until the * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 27 Nordic Series HDD that will be incorporated into the Compaq product has been Accepted by Compaq. 1.4 The term [*] in the Agreement shall be replaced with the term [*] . 1.5 The term "Nordic" in the Agreement shall be replaced with the term "Nordic Series." 1.6 The "Effective Date" of this Amendment shall be February 3, 1995. The amendments to Sections 2.1.e. and 2.1.f. of this Amendment shall, solely with respect to JTS's obligations to TEAC, be retroactively effective as of June 16, 1994. 2.0 Development of Nordic Series HDDs 2.1 The parties agree to modify the Agreement as follows: a. Delete Exhibits A, B, and C in their entirety and replace within thirty (30) days of the effective date of this Amendment with new Exhibits A, B, and C. b. Delete Section 2.0.B of the Agreement in its entirety and replace with the following: JTS further agrees that the Nordic Series HDDs shall be in strict conformance with the Nordic Technical Specifications attached hereto as Exhibit C. To the extent that JTS finds that any information in Exhibit C will impact the Milestone Dates, Schedule, and/or result in additional cost. JTS will notify Compaq in writing within five (5) business days of the time that Compaq provides JTS with the information which has resulted in a change to the Milestone Dates, Schedule, and/or additional cost. In the event that JTS does not notify Compaq within five (5) days, then in such event, the information furnished will be deemed to have no impact on the Milestone Dates, Schedule, and/or cost of the project. c. Delete Section 2.0.C in its entirety and replace with the following: In consideration for JTS's agreement to design the Nordic Series HDDs in conformance with the Development Plan and the Project Milestones and in conformance with the Nordic Technical Specifications; Compaq shall pay five hundred thousand dollars (U.S. $500,000.00) as non-recurring engineering charges ("NRE") to JTS for the development of two (2) Nordic Series HDDs: [*] . The NRE charges referred to above shall be payable as follows: One Hundred percent (100%) of NRE already paid by Compaq by JTS. d. In Section 2.0.E, second line down from the top, after the word "that", insert the following: , except for JTS's obligations under the Technology Transfer and License Agreement with WDC. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 28 e. In Section 2.0.G, four lines down from the top, after the word "Agreement," the phrase "except for any pre-existing obligation to TEAC and JTS's obligations to WDC under the Technology Transfer and License Agreement." f. Delete Section 2.0.H of the Agreement in its entirety and replace instead with the following: Except for any of JTS's pre-existing obligations to TEAC and for the above-referenced Technology Transfer and License Agreement with WDC, JTS agrees not to license the Nordic Series design to a third party manufacturer. JTS represents and warrants that the Technology Transfer and License Agreement with WDC contains a prohibition against WDC sublicensing the Licensed Technology to any third party other than a WDC Subsidiary, as defined herein. "WDC Subsidiary" is defined as an entity in which WDC holds at least a fifty-one percent (51%) ownership, or, for WDC manufacturing entities that are located in foreign jurisdictions that require that the foreign entity own a controlling interest, is controlled for all intent and purposes by WDC and in which WDC holds at least a forty-nine percent (49%) ownership, but only for so long as the foregoing conditions are met. g. Delete Section 2.0.J of the Agreement in its entirety and replace with the following: In consideration of the covenants and obligations set forth in this Agreement, JTS agrees not to market any particular Nordic Series HDD to any third party before such Nordic Series HDD is Accepted by Compaq, and JTS further agrees that it will not sell any Nordic Series HDDs [except the Nordic three inch (3"), single disk, seven millimeter (7mm) high, 270MByte HDD, the three inch (3"), dual disk, ten and a half millimeter (10.5mm) high HDD with a capacity of less than 700MBytes, and the three inch (3"), single disk, ten and a half millimeter (10.5mm) high HDD with a capacity of less than 350MBytes] to any third party for the [*] . JTS shall be free to market Nordic Series HDDs to third parties during the [*] provided however, that marketing efforts shall not include the sale of Nordic Series HDDs to such third parties in contravention of the [*] . Additionally, JTS agrees that it will not sample in quantities exceeding two (2) Nordic Series HDDs to any third party during the [*] h. In Section 2.0.K of the Agreement, delete all references to [*] and replace with [*] Five lines down from the top, delete the phrase "Nordic HDDs" and insert instead "HDDs." i. Delete Section 2.0.L of the Agreement in its entirety and replace with the following: Upon expiration of the [*] and in consideration of the covenants and obligations set forth in this Agreement, Compaq will receive a royalty of [*] HDD for each Nordic Series HDD sold to a third party, such royalty payable for the initial Term of this Agreement. In the event that this Agreement is extended beyond the initial Term, then in such event, Compaq will receive a royalty of [*] HDD for each Nordic Series HDD sold to a third party. Compaq agrees that in the event that any third party, who is not licensed by JTS, begins volume shipment of any Nordic Series equivalent form factor and capacity HDDs, Company will renegotiate the royalties of Section 2.0.L. in good faith. The foregoing royalties shall be payable quarterly in accordance with the provisions of this Agreement and subject to the audit provision of * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 29 this Agreement. JTS agrees that WDC is obligated under the above-referenced Technology Transfer and License Agreement to pay to JTS the royalties described in the following paragraph and further agrees that all such royalties paid by WDC to JTS (hereinafter "WDC Royalties") will be promptly paid by JTS to Compaq as additional royalty under this Agreement. JTS hereby grants to Compaq a perfected security interest in such WDC Royalties and agrees to execute and file in California and in Texas a Form UCC-1 with respect thereto and all other documents and instruments as Compaq may request to confirm or perfect such security interest. The royalty payable to WDC to JTS is as follows: For so long as JTS is obligated to pay royalties to Compaq for the sale of Nordic Series drives under this Agreement, WDC shall pay to JTS, on a quarterly basis, a royalty at a rate equivalent to the rate quoted in the Development Agreement, not to exceed [*] per drive on all sales of "Licensed Nordic Products" by WDC to any third party other than Compaq (hereinafter referred to as "Royalty Obligation"); provided, however, that at such time as a third party competitor begins volume shipment of any "3-Inch Disk Drive," such Royalty Obligation will be reduced to a level to be negotiated in good faith among WDC, JTS, and Compaq. Nothing in the WDC/JTS Technology Transfer and License Agreement or in this letter is intended to reduce or otherwise affect JTS's obligation to Compaq to pay royalties to Compaq on sales by JTS of Licensed Nordic Products. For purposes of this letter and the WDC/JTS Technology Transfer and License Agreement, "3-Inch Disk Drives" means every magnetic-media storage system that includes control and interfacing circuitry and hard disk assembly that includes at least one magnetic rigid disk the diameter of which is less than three and one-half inches (3 1/2") and greater than two and three-quarters inches (2 3/4"); and "Licensed Nordic Products" means 3-Inch Disk Drives that include the proprietary single-chip controller currently embodied in JTS's Nordic Series design and any derivative controller. j. In Section 2.0.O of the Agreement, last line, delete "Nordic HDDs" and insert instead "HDDs." 3.0 General 3.1 Other than as modified by this Amendment, all other terms and conditions of the Agreement remain the same. 3.2 Whenever possible, each provision of this Amendment will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 3.3 Governing Law. This Amendment shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Amendment shall be governed by, the laws of the State of Texas, without giving effect to provisions thereof regarding conflict of laws. 3.4 This Amendment, together with the Agreement and those documents expressly referred to therein, and the Corporate Purchase Agreement of June 21, 1994 between the parties herewith, embody the complete agreement * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 30 and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. No provisions in the purchase orders, acknowledgements or other business forms of either party that are different from or in addition to the applicable terms set forth in this Amendment shall be of any force or effect whatsoever unless it is acknowledged to in writing by the other party expressly stating that such document supersedes this Amendment as follows: "Notwithstanding any term of the Development Agreement dated June 16, 1994 between the parties, as amended." Any provision of this Amendment may be amended only with the prior written consent of all of the parties hereto. IN WITNESS WHEREOF, the persons signing below warrant that they are duly authorized to sign for, an on behalf of, the respective parties. This Amendment has been executed in duplicate originals. JT STORAGE COMPAQ COMPUTER CORPORATION By: /s/ David B. Pearce By: /s/ Hugh Barnes -------------------------- ---------------------------- David E. Pearce Hugh Barnes President Senior Vice President General Manager Portable PC Division Date: February 3, 1995 Date: 2/8/95 -------------------------- ---------------------------- 5 31 [COMPAQ LETTERHEAD] December 5, 1995 Mr. Lee Peterson Vice President Sales & Marketing JTS Corporation 166 Baypointe Parkway San Jose, CA 95134 Subject: Nordic Series Exclusivity Issue; Proposed Amendment 2 to our Development Agreement of June 16, 1994, ("Agreement") as amended by the Amendment dated February 3, 1995 ("Amendment 1") Dear Lee: Thank you for your letter of November 28, 1995. We seem to be close to agreement on the issues. While Compaq remains willing to provide JTS relief from the current [*] on Nordic Series products, we would like to ensure (1) that Compaq's prices for Nordic Series products are not permitted to increase as a result of increased royalties required of third parties, and (2) that the proposed terms also apply to Western Digital Corporation ("WDC"). Compaq proposes, therefore, to modify our Agreement, as amended by Amendment 1 (collectively "Amended Agreement") substantially as outlined in your letter of November 28, 1995, with additional provision to address provided these concerns. Accordingly, we propose the following as Amendment 2 to our Amended Agreement: * Sections 2.0.G and 2.0.I of the Amended Agreement will remain in effect. In addition, Compaq's prices for Nordic Series products will be the lesser of the amounts permitted under these Sections or Compaq's current prices. * For clarification, the phrase [*] , wherever it appears in the Amended Agreement, shall be replaced by [*] . The [*] will commence upon the date of delivery by JTS of a revenue-bearing product and extend for a period of [*] thereafter. Section 2.0.J of the Amended Agreement is simply entirely deleted to reflect the elimination of the [*] restriction placed on JTS. * The first sentence the first paragraph of Section 2.0.L of the Amended Agreement is replaced with the following sentence: "Compaq will receive a royalty of (a) [*] /HDD for each Nordic Series HDD sold to a third party during the [*] , and (b) [*] /HDD for each Nordic Series HDD sold to a third party after the [*] , such royalty payable for the initial Term of this Agreement." * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 32 Mr. Lee Peterson -2- December 5, 1995 * The first sentence of the last paragraph of Section 2.0.L of the Amended Agreement is replaced with the following sentence: "For so long as JTS is obligated to pay royalties to Compaq for the sale of Nordic Series drives under this Agreement, WDC will pay JTS, on a quarterly basis, a royalty at a rate of (a) [*] /HDD for each Nordic Series HDD sold to a third party other than Compaq during the [*] , and (b) [*] /HDD for each Nordic Series HDD sold to a third party other than Compaq after the [*] (collectively "Royalty Obligation"): provided, however, that at such time as a third party competitor begins volume shipment of any "3-Inch Disk Drive," such Royalty Obligation will be reduced to a level to be negotiated in good faith among WDC, JTS and Compaq. * Capitalized terms in this letter shall have the same meaning given them in the Amended Agreement. Other than as modified by this Amendment 2, all other terms and conditions of the Amended Agreement remain the same. Because we understand the importance of timing to JTS at this stage, JTS may confirm its acceptance of the above by signing below and returning a counter signed copy of this letter to me at the above address. This Amendment 2 shall become effective upon JTS' acceptance and return of a countersigned copy of this letter. Very truly yours, COMPAQ COMPUTER CORPORATION /s/ James W. Hartzog - ----------------------------- James W. Hertzog Vice President AGREED TO: Portable PC Division JTS Corporation By: /s/ D. T. Mitchell --------------------------- Name: David T. Mitchell Date: Dec. 15, 1995 * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.26 46 PURCHASE AGREE/JTS & COMPAQ 6/16/94 1 EXHIBIT 10.26 COMPAQ COMPUTER CORPORATION PURCHASE AGREEMENT This Purchase Agreement ("Agreement") is made by Compaq Computer Corporation ("Buyer") and J.T. Storage Inc., ("Seller"), (JTS). The terms and conditions contained in this Agreement shall govern the purchase and sale of Product listed in Exhibit A ("Products and Pricing"), conforming to Compaq specifications listed in Exhibit "B". 1. INTENT A. Buyer intends to enter into a long term relationship with Seller. As such, Seller is willing to cooperate with Buyer to further mutual long term goals by sharing Product road map and technology directions. Seller agrees to cooperate to achieve Buyer's long term program goals such as shortening Product lead-times, increasing volume flexibility, achieving Just-in-Time delivery, achieving ongoing cost reductions and specific quality goals, and continuous quality improvement. B. This Agreement is not a requirements contract and does not obligate Buyer to purchase any minimum quantity of Product but only establishes the terms and conditions for such purchase if and when they occur, except as provided in Exhibit "A". 2. PURCHASE ORDERS A. Buyer will purchase Products only by issuing purchase orders ("Order or Orders") to Seller. Orders shall contain such things as quantity, price, delivery date, part number, and revision level. Buyer shall make commercially reasonable efforts to send written confirmation (except by mutual agreement) of Orders within one (1) week after issuance. If Seller fails to return the acknowledgment, Seller will be deemed to have accepted any Order which conforms with the terms of this Agreement. No additional or different provisions proposed by Seller shall apply unless expressly agreed to in writing by Buyer. Buyer hereby gives notice of its objection to any additional or different terms. B. Seller agrees that all Buyer sites, subsidiaries, affiliated companies and subcontractors, wherever located, shall be entitled to make purchases under this Agreement. 3. TERM OF AGREEMENT A. The term of this Agreement shall be sixty (60) months, commencing on the date Buyer executes this Agreement ("Effective Date"). This Agreement will be automatically renewed at the conclusion of the initial sixty (60) month period for successive twelve (12) month periods unless one of the parties indicates by written notice to the other party not less than thirty (30) days prior to the end of any such twelve (12) month period that it does not intend to renew the Agreement. Notwithstanding the foregoing, the Agreement shall remain in full force and effect and shall be applicable to any Order(s) issued by Buyer to Seller during the term of this Agreement until any and all obligations of the parties under such Order(s) have been fulfilled. page 1 2 4. PRICING A. The prices for the Products shall be set forth in Exhibit A and shall be for the period set forth therein (the "Pricing Period"). B. Prices shall include all charges such as packaging, packing, crating, storage, forwarding agent or brokerage fees, document fees, duties, and any and all sales, use, excise and similar taxes. C. Seller represents that the prices charged for any 3 1/2" product, qualified by Compaq, will be [*] than prices charged to any other customer, regardless of volume. Seller represents that prices charged for any 3" form factor product, qualified by Compaq, will be [*] than prices charged to any other customer, regardless of volume. In the event Seller provides prices and/or terms for Products more favorable to another of its customers. Buyer shall be entitled to a reduction retroactive to the date the prices and/or terms were made available to other customers. D. Seller shall maintain a vigorous cost reduction program to ensure that pricing is competitive at all times. In the event that Buyer does not consider Seller's pricing aggressive relative to the market during any Pricing Period, Buyer shall have the right to request an immediate meeting with Seller to renegotiate pricing. E. Seller agrees to allow mutually acceptable independent auditors to inspect the books and records of Seller from time to time as reasonably necessary to confirm the representations contained in, and compliance with the terms of, this Section 4, at Buyer's expense. 5. DELIVERY A. Time shall be of the essence in meeting Buyer's requirements. Delivery performance shall be measured by on-dock date at Buyer's specified ship-to location (+/- 2 Days). B. Unless otherwise set forth in the Order, title and risk of loss shall pass to Buyer at Buyer's specified ship-to location. C. If Seller delivers Product in advance of the specified delivery date, Buyer may either return such Product at Seller's risk and expense for subsequent delivery on the specified delivery date or retain such material and make payment when it would have been due based on the specified delivery date. D. Changes to delivery dates may only be made by Buyer's authorized purchasing representatives. Buyer may, without cost or liability, issue change requests for Product quantities and schedule dates in accordance with the Flexibility Agreement attached as Exhibit D ("Flexibility Agreement"). Written confirmation will be sent by Seller to Buyer within two (2) work days of receiving a change request, and Buyer shall provide a confirming Order change within ten (10) working days of receiving Seller's confirmation. E. Seller shall notify Buyer in writing immediately if Seller has knowledge of any event which could result in any change to the agreed delivery plan. F. In the event that Product scheduled for delivery is more than two (2) business days late, Buyer may request such Product to be shipped and delivered via a different mode of transportation at sellers expense. Alternatively, Buyer may purchase substitute Product elsewhere without affecting other remedies Buyer may have and charge Seller any additional cost incurred as a result. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. page 2 3 6. PACKING, MARKING, AND SHIPPING INSTRUCTIONS A. All Product shall be prepared and packed in a commercially reasonably manner so as to secure the lowest transportation rates and meet carrier's requirements or those set forth in the Product specification attached as Exhibit B ("Specification"). B. Each shipping container shall be marked to show Buyer's Order number, part number, revision level, lot number, and quantity contained therein. A packing list showing the Order number shall be included in each container. C. Seller agrees to standardize the count multiples used in shipments. 7. QUALITY A. Seller shall establish and/or maintain a quality improvement plan acceptable to Buyer. Seller's Quality Improvement Plan is attached to this Agreement as Exhibit C ("Quality Plan"). B. At Buyer's request, Seller will facilitate one-site visits and inspections by Buyer during normal business hours. Buyer's inspections shall in no way relieve Seller of its obligation to deliver conforming Product or waive Buyer's right of inspection and acceptance at the time the Products are delivered. C. Seller agrees to provide relevant outgoing inspection, quality, and reliability data upon Buyer's request. D. Seller agrees to conform to the revision level stated on Buyer's Order. E. Seller agrees to advise Buyer of any changes to process, materials, or sources of supply and ensure that such changes do not compromise specifications, quality, or reliability of Products ordered by Buyer. 8. INSPECTION AND ACCEPTANCE A. Products purchased pursuant to this Agreement shall be subject to inspection and test by Buyer at all times and places, including the period of manufacture or development. Unless otherwise specified in the Order, final inspection and acceptance of Product by Buyer shall be at Buyer's facilities. Buyer reserves the right to reject Product which does not conform to the specifications, drawings, samples or other descriptions specified by Buyer. Buyer may, at its option, either return defective or non-conforming Product for full credit of the purchase price plus any transportation charges paid by Buyer, or require prompt correction or replacement of defective or non-conforming Product, which rights shall be in addition to such other rights as Buyer may have in law or in equity. Product required to be corrected or replaced shall be subject to the same inspection and warranty provisions of this Agreement as Product originally delivered under any Order. Buyer may charge Seller for costs of any above normal level of inspection. page 3 4 B. In the event Buyer returns Product back to Seller for correction or replacement, Seller shall repair or replace all defective Product within five (5) days of receipt of such Product. Seller will issue a "Return Material Authorization" within twenty-four (24) hours of receipt. Seller shall bear all risk and costs such as labor, material, inspection, and shipping to and from Buyer's facilities. If Buyer incurs any such costs, it may either recover them directly from Seller or set-off via a credit note any amounts due to Seller. Seller agrees to provide failure analysis of rejected material within five (5) days after receipt of rejected materials. Seller will also provide a written corrective action report addressing the steps that will be taken to eliminate the cause of the problem. 9. WARRANTY A. Seller warrants that title to all Products delivered to Buyer under this Agreement shall be free and clear of all liens, encumbrances, security interests or other claims and that for a period of three (3) years from date of acceptance of material by Buyer, that all Product shall be free from defects in material, workmanship, and design. Seller further warrants that all Product shall conform to applicable specifications, drawings, samples, and descriptions referred to in this Agreement. The warranty for replaced or repaired Product will be the same as the original Product. B. Defective material discovered during Buyer's manufacturing or assembly processes are not considered to be a warranty repair and shall be corrected in accordance with paragraph 8.B. C. Seller agrees that in case of epidemic failure (greater than 2% failure for the same cause in any six (6) month period), Seller shall provide correction or replacement in accordance with Paragraph 8.B. D. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 9, NO WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, ARE MADE WITH RESPECT TO THE PRODUCT DELIVERED BY SELLER TO BUYER UNDER THIS AGREEMENT. 10. OUT OF WARRANTY REPAIRS and SPARE PARTS AVAILABILITY A. Seller agrees to refurbish to a "like new" condition any out of warranty Product at the refurbishment prices listed in Exhibit E ("Service, Repair, and Refurbishment"). In addition, Seller agrees to make available for purchase by Buyer replacement and repair parts for Products ("Spares") in accordance with Exhibit E. 11. PAYMENT AND SET-OFF A. Terms of payment shall be net 15 from the date of Seller's invoice provided that Product has been received by Buyer for the period of six (6) months from date of initial production shipment. After this period, terms of payment shall be net 45 from the date of Seller's invoice provided that Product has been received by Buyer. Payment of invoices shall not constitute final acceptance of the Product. B. Buyer retains the right to setoff rejections of Product or discrepancies on paid invoices against future invoices. C. Unless otherwise specified in Exhibit A or agreed to in writing by the parties, payment shall be in U.S. dollars. page 4 5 12. CHANGES A. Buyer may from time to time change the specifications for the Products and Seller agrees to make best efforts to comply. If changes result in a change in Seller's costs or in the time for performance, an adjustment will be made. Any adjustment must be in writing and must be requested within ten (10) days of receipt by Seller of the notice of change. B. No changes shall be made by Seller in the form, fit, or function of Products purchased hereunder without Buyer's prior written approval. 13. TERMINATION FOR CAUSE A. Seller may terminate this Agreement and/or any Order issued hereunder at any time by written notice in the event Buyer: 1. Fails to comply with any material provision of this Agreement or any Order issued hereunder, and in the case of a breach which is capable of remedy, fails to remedy same within thirty (30) days of notification of said breach, or 2. Becomes insolvent or makes an assignment for the benefit of creditors, or a receiver or similar officer is appointed to take charge of all or a part of the Buyer's assets and such condition is not cured within thirty (30) days, or B. Buyer may terminate this Agreement and/or any Order issued hereunder at any time by written notice in the event Seller: 1. Fails to comply with any material provision of this Agreement or any Order issued hereunder, and in the case of a breach which is capable of remedy, fails to remedy same within thirty (30) days of notification of said breach, or 2. Becomes insolvent or makes an assignment for the benefit of creditors, or a receiver or similar officer is appointed to take charge of all or a part of Seller's assets and such condition is not cured within thirty (30) days, or 3. Assigns or attempts to assign, or subcontracts or attempts to subcontract, any or all of its rights or obligations under this Agreement or any Orders issued hereunder to a third party without Buyer's prior written approval, or 4. Failure to agree on pricing for any Pricing Period. C. Upon termination by Seller of the Agreement and/or any Order issued under 13A above, Buyer's entire liability shall be to purchase all finished goods, work in progress, and Buyer unique materials that have been purchased within lead time by Seller to fulfill Buyer's Order(s). D. Upon termination by Buyer of the Agreement and/or any Order issued under 13B above: 1. Buyer shall have the option to purchase any materials or work in progress which Seller may have purchased or processed for the fulfillment of any Order at Seller's cost plus a reasonable amount for any value already added by Seller. 2. Buyer shall have no liability beyond payment for any balance due for Products delivered by Seller before notice of termination. page 5 6 14. TERMINATION FOR CONVENIENCE A. Buyer may terminate this Agreement and/or any Order issued hereunder at any time for any reason upon giving written notice of termination to the Seller. Upon receipt of such notice, Seller shall immediately cease to incur expenses pursuant to this Agreement and/or the Order that has been terminated unless otherwise directed in the termination notice. Seller shall also take all reasonable steps to mitigate the cost to Buyer for terminating this Agreement and/or any Order. Within sixty (60) days from the date of notice, Seller shall notify Buyer of costs incurred up to the date of termination. In no event shall such cost exceed the unpaid balance: 1. Due for conforming material delivered prior to receipt of Buyer's termination notice; and 2. Due on purchase orders previously issued in conformance with this Agreement. B. In addition to the foregoing, in the event that this Agreement is terminated pursuant to this Paragraph, Buyer's entire liability shall be to purchase all finished goods, work in progress, and Buyer unique materials that have been purchased within lead time by Seller to fulfill Buyer's Order(s). 15. LIMITATION OF LIABILITY A. EXCEPT FOR A BREACH OF SECTION 19, 25 OR 26 OF THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE FOR ANY CONSEQUENTIAL (INCLUDING, WITHOUT LIMITATION, LOST PROFITS, UNLIQUIDATED INVENTORY, ETC.), INCIDENTAL, INDIRECT, SPECIAL, ECONOMIC, OR PUNITIVE DAMAGES EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 16. FORCE MAJEURE A. Neither party shall be liable for its failure to perform any of its obligations hereunder during any period in which performance is delayed by fire, flood, war, embargo, riot or the intervention of any government authority ("Force Majeure"), provided that the party suffering such delay immediately notifies the other party of the delay. If, however, Seller's performance is delayed for reasons set forth above for a cumulative period of fourteen (14) calendar days or more, the Buyer, notwithstanding any other provision of this Agreement to the contrary, may terminate this Agreement and/or any Order issued hereunder by notice to Seller. In the event of such termination, Buyer's sole liability, hereunder will be for the payment to Seller of any balance due and owing for conforming Product delivered by Seller prior to Seller's notification of delay to Buyer. In the event the parties do not terminate this Agreement and/or Order due to a Force Majeure, the time for performance or cure will be extended for a period equal to the duration of the Force Majeure. page 6 7 17. PRODUCT NOTICES A. Any notice given under this Agreement shall be in writing and will be effective when delivered personally or deposited in the mail, postage prepaid and addressed to the parties at their respective addresses set forth below, or at any new address subsequently designated in writing by either party to the other: If to Seller: If to Buyer: JTS CORPORATION COMPAQ COMPUTER CORPORATION 1289 Anvilwood Avenue P.O. BOX 692000 Sunnyvale, CA 94089 20555 S.H. 249 HOUSTON, TEXAS 77269-2000 ATTN.: David B. Pearce ATTN.: with a copy to: COMPAQ COMPUTER CORPORATION P.O. BOX 692000 20555 S.H. 249 HOUSTON, TX 77269-2000 ATTN.: Division Counsel - Operations 18. COMPLIANCE WITH LAWS A. All Product supplied and work performed under this Agreement shall comply with all applicable laws and regulations in effect. In particular, Seller agrees that its performance under this Agreement shall comply with all laws governing its relationship with its employees, agents or subcontractors and with the chlorofluorocarbon labeling requirements of the U.S. Clean Air Act of 1990. Upon request, Seller agrees to certify compliance with such applicable laws and regulations. 19. PATENT, COPYRIGHT AND TRADEMARK INDEMNITY A. Seller shall defend, at its expense, any claim against Buyer alleging that Products furnished under this Agreement infringe any patent, copyright or trademark and shall pay all costs and damages awarded, provided Seller is notified in writing of such claim and permitted to defend and compromise such claim. If a final injunction against Buyer's use of the Products results from such a claim (or, if Buyer reasonably believes such a claim is likely) Seller shall, at its expense, and at Buyer's request, use commercially reasonable efforts to obtain for Buyer the right to continue using the Product. In the event that Seller cannot obtain such right for Buyer, Seller shall repurchase all such Product from Buyer at the purchase price. B. Seller warrants that there are no claims of infringement with respect to the Product. C. Seller is authorized to use Compaq logo and trademark only to the extent necessary to meet the required specification for the Product(s). No other rights with respect to Buyer's trademarks, trade names or brand names are conferred, either expressly or by implication, upon Seller. page 7 8 20. CAPACITY PLANNING A. Seller agrees to review forecasts provided by Buyer and advise Buyer if Seller anticipates that he will be unable to achieve the requested volumes. Buyer volume forecasts will be provided to Seller in accordance with Exhibit A. Seller may from time to time request Buyer to review Buyer's forecast and advise of any changes. 21. GRATUITIES A. Each party represents that it has not offered nor given and will not offer nor give any employee, agent, or representative of the other party any gratuity with a view toward securing any business from the other party or influencing such person with respect to the business between the parties. 22. INSURANCE AND STATUTORY OBLIGATIONS A. If Seller's work under this Agreement requires access by Seller to any of Buyer's premises or the premises of Buyer's customers or locations where Buyer conducts business, or with material or equipment furnished by Buyer, Seller shall take all necessary precautions to prevent the occurrence of any injury to persons or property during the progress of such work and, except to the extent that such injury is due solely and directly to Buyer's acts or negligence, Seller shall indemnify Buyer against all loss which may result in any way from any act or negligence of Seller, its employees, servants, agents or subcontractors, and Seller shall maintain such insurance as shall protect Buyer from such risks and from any statutory liabilities arising therefrom and shall provide evidence of such insurance to Buyer upon request. 23. INDEMNIFICATION Seller agrees to protect, defend, indemnify and save Buyer harmless from all sums, costs and expense which Buyer may incur or be obliged to pay as a result of any and all loss, expense, damage, liability, claims, demands, either at law or in equity, of every nature whatsoever in favor of any person, including both Seller's and Buyer's employees, resulting from any personal injury or death resulting from the use of any product sold to Buyer by Seller hereunder, irrespective of whether Compaq or any other party is found to have been negligent or strictly liable in connection with such personal injury or death. page 8 9 24. CONFIDENTIAL INFORMATION A. Each party recognizes that it may have previously entered or will in the future enter into various agreements with the other party which obligates it to maintain as confidential certain information disclosed to it by the other party. To the extent that such information or any further confidential information, which might include but is not limited to business plans, forecasts, capacity, pricing, inventory levels, etc. (collectively referred to hereinafter as "Information") is disclosed in furtherance of this Agreement or any Order issued hereunder, such information shall be so disclosed pursuant to the minimum terms and conditions listed below; provided, however, the minimum terms and conditions listed below shall in no way relieve the parties from any obligation or modify such obligations previously agreed to in other agreements. Both parties agree that this Agreement and any other agreements regarding confidential information shall hereafter be considered as coterminous, and shall expire no earlier than the date of expiration or termination of this Agreement. B. Both parties agree that the party receiving information will maintain such information in confidence for a period of three (3) years from the date of disclosure of such information, except when such disclosure is required by law. C. Each party shall protect the other party's information to the same extent that it protects its own confidential and proprietary information and shall take all reasonable precautions to prevent unauthorized disclosure to third parties, except when such disclosure is required by law. D. The parties acknowledge that the unauthorized disclosure of such information will cause irreparable harm. Accordingly, the parties agree that the injured party shall have the right to seek immediate injunctive relief enjoining such unauthorized disclosure. E. This provision shall not apply to information (1) known to the receiving party at the time of receipt from the other party, (2) generally known or available to the public through no act or failure to act by the receiving party, (3) furnished to third parties by the disclosing party without restriction on disclosure, or (4) furnished to the receiving party by a third party as a matter of right and without restriction on disclosure. F. Immediately upon termination of this Agreement or at the request of the other party, each of the parties shall promptly return all materials in its possession containing information of the other party. 25. COUNTRY OF ORIGIN A. For each Product purchased under this Agreement, Seller shall furnish Buyer with country of origin (manufacture), by quantity and part number (Buyer's and Seller's) if necessary. B. Seller agrees to provide necessary export documents and to facilitate export of Product. Seller further agrees to assist Buyer's import of Product as reasonably requested by Buyer. page 9 10 26. PROPERTY FURNISHED BY BUYER A. Any tools, drawings, specifications, or other materials furnished by Buyer for use by Seller in its performance under this Agreement or any Order issued hereunder shall be identified and shall remain the property of Buyer and shall be used by Seller only in its performance hereunder. Such property shall be delivered, upon request, to destination specified by Buyer in good condition, except for normal wear and tear. 27. GENERAL A. Any obligations and duties which by their nature extend beyond the expiration or earlier termination of this Agreement shall survive any such expiration or termination and remain in effect. B. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, such provision shall be enforced to the fullest extent permitted by applicable law and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. C. No action, except those regarding claims by third parties, or claims with respect to patents, copyrights, trademarks or trade names or the unauthorized disclosure of Confidential Information, regardless of form, arising out of this Agreement may be brought by either party more than two (2) years after the cause of action has arisen, or, in the case of non-payment, more than two (2) years from the date the payment was due. D. Any waiver of any kind by a party of a breach of this Agreement must be in writing, shall be effective only to the extent set forth in such writing and shall not operate or be construed as a waiver of any subsequent breach. Any delay or omission in exercising any right, power or remedy pursuant to a breach or default by a party shall not impair any right, power or remedy which either party may have with respect to a future breach or default. E. Seller hereby gives assurance to Buyer that it shall not export, re-export or otherwise disclose, directly or indirectly, technical data received from Buyer or the direct product of such technical data to any person or destination when such export, re-export or disclosure is prohibited by the laws of the United States or regulations of a Department of the United States. F. This Agreement is considered to be Compaq Confidential. G. The entire Agreement between the parties is incorporated in this Agreement and Appendices attached hereto, and it supersedes all prior discussions and agreements between the parties relating to the subject matter hereof. This Agreement can be modified only by a written amendment duly signed by persons authorized to sign agreements on behalf of both parties, and shall not be supplemented or modified by any course of dealing or trade usage. Variance from or addition to the terms and conditions of this Agreement in any Order, or other written notification from Seller will be of no effect. H. THE CONSTRUCTION, VALIDITY, AND PERFORMANCE OF THIS AGREEMENT AND ANY ORDER ISSUED UNDER IT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, U.S.A. page 10 11 28. [*] IN WITNESS, THE AUTHORIZED REPRESENTATIVES OF THE PARTIES HAVE EXECUTED THIS AGREEMENT. For the Buyer For the Seller /s/ JACK BAIKIC 6/21/94 /s/ DAVID B. PEARCE 6/21/94 ________________________________ _______________________________ Signature (date) Signature (date) JACK BAIKIC DAVID B. PEARCE ________________________________ _______________________________ Name Name Director, Mass Storage Corporate Procurement President ________________________________ _______________________________ Title Title * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. page 11 EX-10.27 47 TECHNOLOGY TRANSFER AGREE WESTERN DIGITAL 2/3/95 1 EXHIBIT 10.27 TECHNOLOGY TRANSFER AND LICENSE AGREEMENT THIS TECHNOLOGY TRANSFER AND LICENSE AGREEMENT (this "Agreement") is made this 3rd day of February, 1995, by and between WESTERN DIGITAL CORPORATION, a Delaware corporation, having its principal place of business at 8105 Irvine Center Drive, Irvine, California 92718 ("WDC"), and JT STORAGE, INC., a Delaware corporation, having its principal place of business at 1289 Anvilwood Avenue, Sunnyvale, California 94089 ("JTS"), with reference to the following facts: WHEREAS, JTS has designed and developed new hard disk drive products in a new form factor generally referred to as a 3-inch disk drive form factor, at least one of which is currently ready for production and for which JTS currently has a customer; WHEREAS, WDC desires to acquire from JTS the information and rights necessary to enable WDC to manufacture such new JTS disk drive products, as well as certain related rights, all as set forth herein; and WHEREAS, JTS is willing to transfer such information and rights to WDC in consideration of the payment and other obligations of WDC hereunder. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 "3-Inch Disk Drive" means every magnetic-media storage system that includes control and interfacing circuitry, and a head-disk assembly that includes at least one magnetic rigid disk the diameter of which is less than three and one-half inches (3.50") and greater than two and three quarters inches (2.75"). 1.2 "Accessories" means any products that are not 3-Inch Disk Drives but are sold in conjunction with or for uses incidental to a 3-Inch Disk Drive that is a Licensed Product, such as carrying cases, docking modules, interface cards and installation software and other items incidental to installation in a computer or other value added subsystem; provided, however, 2 Accessories shall not include any system incorporating a 3-Inch Disk Drive. 1.3 "Additional Developments" of a party hereto means any improvements in, modifications on, or variations of any Licensed Nordic Product; provided, however, that any such improvements, modifications and variations that do not result in a change to any of the following specifications of the affected Licensed Nordic Product shall be excluded from the scope of the term Additional Developments: capacity per disk, data transfer rate, mechanical form factor, and interface specifications. 1.4 "Captured Patents" of a party hereto means all Patents, issued or issuing, on applications entitled to an effective filing date prior to December 31, 1999, under which Patents or the applications therefor such party or any of its Subsidiaries now has, or hereafter obtains, the right to grant licenses of or within the scope granted herein. The Captured Patents of JTS include, but are not limited to, the Patents and Patent applications listed on Exhibit B attached hereto. 1.5 "Change in Control" means any circumstance in which (a) any person, entity or group (as group is used in Section 13(d)(3) of the Exchange Act of 1934, as amended) (other than pursuant to a venture capital financing) acquires direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Exchange Act of 1934, as amended) in the aggregate of securities of JTS representing more than thirty percent (30%) of the total combined voting power of JTS's then issued and outstanding voting securities; (b) the sale of all or substantially all of the assets of JTS occurs to any person or entity that is not a wholly-owned-subsidiary of JTS; (c) a part is liquidated; or (d) an entity identified in Section 11.3 of this Agreement holds or otherwise controls, directly or indirectly, a majority of the seats on the Board of Directors of JTS as a result of an election contest. 1.6 "The Customer Sponsor" means the company identified in a letter from JTS to WDC dated of even date herewith. 1.7 "Designated Product" means the first double disk Licensed Nordic Product and its single disk version that results from the Technology Transfer Program. 1.8 "Effective Date" means the effective date of this Agreement as set forth in Section 10.1 below. 1.9 "Future Generation Licensed Nordic Products" means all Licensed Nordic Products other than the Designated Product. 1.10 "JTS Chip" means the proprietary single-chip controller identified by JTS as 541J included in the Designated Product, and any derivative of such controller. 2 3 1.11 "Licensed Nordic Products" mean every 3-Inch Disk Drive that includes a JTS Chip or any derivative of a JTS Chip, including, without limitation, the Designated Product. 1.12 "Licensed Products" mean (a) every 3-Inch Disk Drive and all components thereof and (b) all Accessories. 1.13 "Other Licensed Technology" of a party hereto means all technical information and intellectual property (other than Captured Patents and trademarks and trade names), now owned or possessed by such party (or any of its Subsidiaries) or hereafter conceived, developed or acquired by such party (or any of its Subsidiaries), embodied or used, or intended to be embodied or used, in the making or operation of any Licensed Nordic Product, including, without limitation, copyrights, trade secrets, inventions, source codes, object codes, flow charts, processes, techniques, specifications, drawings, parts layouts, parts lists, technical information pertaining to manufacturing, parts, circuitry, tooling and testing requirements, know-how, manuals and other technical data and support documentation, whether or not patentable or copyrightable. 1.14 "Patents" mean any and all patents of all countries of the world, including utility patents, design patents, reissue patents, utility models, inventors certificates and registrations, and any and all applications therefor, including divisional, continuation, and reissue applications. 1.15 "Subsidiary" of a party hereto means any corporation, company or other entity (a) in which such party holds at least fifty-one percent (51%) ownership or (b) with respect to such party's manufacturing entities that are located in foreign jurisdictions that require that the foreign entity own a controlling interest, that is controlled for all intents and purposes by such party and in which such party holds at least forty-nine percent (49%) ownership, but only for so long as the foregoing conditions are met. 1.16 "Technology Transfer Program" means the program described in Exhibit A, pursuant to which JTS will deliver to WDC information, rights, documentation and other items relating to the Designated Product. ARTICLE 2 LICENSES 2.1 Grant of Non-Exclusive Patent License by JTS. In consideration of WDC entering into this Agreement, JTS hereby grants WDC the perpetual non-exclusive worldwide right and license under the JTS Captured Patents to make, have made, use, import and sell Licensed Products, and to make, have made and use machines, tools, apparatus and equipment required in such manufacture, and to dispose of such machines, tools, apparatus 3 4 and equipment by sale or otherwise when no longer required in such manufacture; provided, however, that such sale or disposal of such machines, tools, apparatus and equipment shall carry no express or implied rights to make, use or sell any Licensed Product. 2.2 Grant of Non-Exclusive Licensed Technology License by JTS. In consideration of WDC entering into this Agreement, JTS hereby grants WDC the perpetual non-exclusive worldwide right and license under JTS Other Licensed Technology to make, have made, use, import and sell the Licensed Nordic Products, and to make, have made and use machines, tools, apparatus and equipment required in such manufacture, and to dispose of such machines, tools, apparatus and equipment by sale or otherwise when no longer required in such manufacture; provided, however, that such sale or disposal of such machines, tools, apparatus and equipment shall carry no express or implied rights to make, use or sell any Licensed Nordic Product. 2.3 Grant of Non-Exclusive Patent License by WDC. Subject to the terms and conditions of this Agreement, WDC hereby grants JTS the perpetual non-exclusive worldwide right and license under WDC Captured Patents to make, have made, use, import and sell Licensed Products, and to make, have made and use machines, tools, apparatus and equipment required in such manufacture, and to dispose of such machines, tools, apparatus and equipment by sale or otherwise when no longer required in such manufacture; provided, however, that such sale or disposal of such machines, tools, apparatus and equipment shall carry no express or implied rights to make, use or sell any Licensed Product. 2.4 Grant of Non-Exclusive License by WDC. Subject to the terms and conditions of this Agreement, WDC grants JTS the perpetual non-exclusive worldwide right and license under WDC Other Licensed Technology to make, have made, use, import and sell Licensed Nordic Products, and to make, have made and use machines, tools, apparatus and equipment required in such manufacture, and to dispose of such machines, tools, apparatus and equipment by sale or otherwise when no longer required in such manufacture; provided, however, that such sale or disposal of such machines, tools, apparatus and equipment shall carry no express or implied rights to make, use or sell any Licensed Nordic Product. 2.5 Sublicensing. Except as separately agreed between WDC and the Customer Sponsor, the licenses granted in this Article 2 shall not include the right to sublicense to a third party; provided, however, that the licenses granted in this Article 2 shall inure to the benefit of any subsidiary of a party hereto during such period of time that such entity remains a Subsidiary of such party. 4 5 2.6 Additional Disclosure and Transfer Obligations. (a) In addition to the information, documents, rights and other tangible and intangible items required to be transferred and delivered to WDC by JTS in accordance with the Technology Transfer Program, until the earlier of (i) six (6) months after WDC commences volume production of a Licensed Nordic Product or (ii) March 31, 1996, JTS shall, at JTS's sole expense, deliver, transfer and disclose to WDC all other information, documents, rights and other tangible and intangible items that constitute JTS Other Licensed Technology, within a reasonable time before JTS (or any of its Subsidiaries) begins to sell any Licensed Nordic Product containing such JTS Other Licensed Technology. Thereafter, [*] JTS shall disclose to WDC all JTS Additional Developments within a reasonable time before JTS (or any of its Subsidiaries) begins to sell any Licensed Nordic Product containing such JTS Additional Developments, and shall, at JTS's sole expense, deliver to WDC such appropriate documentation in JTS's possession with respect thereto as may be reasonably requested by WDC to enable WDC to incorporate such JTS Additional Developments into WDC's manufacturing processes for 3-Inch Disk Drives. (b) Until [*] WDC shall disclose to JTS all WDC Additional Developments within a reasonable time before WDC (or any of its Subsidiaries) begins to sell any Licensed Nordic Product containing such WDC Additional Developments, and shall, at WDC's sole expense, deliver to JTS such appropriate documentation in WDC's possession with respect thereto as may be reasonably requested by JTS to enable JTS to incorporate such WDC Additional Developments into JTS's manufacturing processes for 3-Inch Disk Drives. ARTICLE 3 TECHNOLOGY TRANSFER PROGRAM 3.1 Transfer of Know-How Required to Manufacture the Licensed Nordic Products. JTS shall deliver to WDC the information, documents, rights and other tangible and intangible items that are necessary to enable WDC to manufacture the Designated Product in accordance with the Technology Transfer Program. Any material deviation from the Technology Transfer Program shall require the mutual agreement of JTS and WDC. JTS shall be solely responsible for the conduct of all phases of the Technology Transfer Program; provided, however, JTS agrees to consult in good faith with WDC regarding all significant aspects of the Technology Transfer Program. JTS shall focus the appropriate resources to the successful and timely completion of the Program Schedule included in Exhibit A attached hereto. Without WDC's prior written consent, which shall not be * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5 6 unreasonably withheld, JTS shall not undertake any development or similar projects for any third party prior to the earlier of (a) the date on which WDC commences volume production of a Licensed Nordic Product or (b) January 1, 1996; provided, however, that JTS may continue to discharge its development and other obligations under the Customer Sponsor Agreement, and nothing contained herein shall limit or restrict JTS in respect of its performance of the Customer Sponsor Agreement. 3.2 Access to Vendors. Without limiting the requirements set forth in the Technology Transfer Program, JTS shall provide WDC with appropriate documentation [*] . Upon reasonable notice and during normal business hours, JTS shall further allow WDC reasonable access to JTS's engineering staff and shall allow WDC's engineers to visit JTS's manufacturing and research facilities for the purpose of receiving reasonable support of the Licensed Nordic Products and all rights granted WDC under this Agreement. 3.3 Disclosures Not Required. Notwithstanding any other provision in this Agreement, JTS shall not be required to disclose to WDC any of the following information with respect to any JTS Chip: varilogic designs, circuit designs and logic designs. ARTICLE 4 PAYMENTS TO JTS 4.1 Technology Transfer Program Payments. In consideration of the rights granted to WDC under this Agreement, WDC shall pay to JTS [*] in accordance with and subject to the conditions set forth in the Payment Schedule included in Exhibit A attached hereto. Whenever the Technology Transfer Program designates a particular achievement or requirement of JTS as a condition to any payment, such condition shall be satisfied only after WDC has verified to its reasonable satisfaction that such achievement or requirement has been accomplished. 4.2 Transfer of Tangible Items. The parties acknowledge and agree that the tangible items to be transferred to WDC incidental to the transfer of technology pursuant to this * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6 7 Agreement have an aggregate value of less than [*] . 4.3 Royalties. For so long as JTS is obligated to pay a royalty to the Customer Sponsor under the Customer Sponsor Agreement, WDC shall pay a royalty to JTS, on a quarterly basis, at a rate equivalent to that set forth in the Customer Sponsor Agreement, not to exceed [*] per covered product, on all sales by WDC to any third party other than the Customer Sponsor of Licensed Nordic Products; provided, however, that at such time as a third party competitor begins volume shipment of any 3-Inch Disk Drive, WDC's royalty obligations to JTS shall be reduced to a level to be negotiated in good faith among WDC, JTS and the Customer Sponsor. Nothing in this Agreement shall reduce or otherwise affect JTS's obligations to the Customer Sponsor to pay royalties to the Customer Sponsor on sales by WDC of Licensed Nordic Products. 4.4 Payments and Reports. WDC shall submit royalty payments due pursuant to Section 4.2 above on a quarterly basis no later than [*] following the last business day of all calendar quarters, together with a quarterly report, certified by an officer of WDC, specifying the quantity of the royalty-bearing Licensed Nordic Product sold during the previous quarter and the royalty due for such royalty-bearing Licensed Nordic Product. JTS shall certify to WDC from time to time the prevailing royalty rates in effect under the Customer Sponsor Agreement. 4.5 Reports Confidential. The information contained in the reports delivered by WDC pursuant to Section 4.3 above shall be retained in confidence and access to such information shall be restricted to the finance and legal groups of JTS. The obligations to provide royalty reports shall only apply to the royalty-bearing Licensed Nordic Products. ARTICLE 5 JTS REPRESENTATIONS, WARRANTIES AND COVENANTS JTS hereby represents, warrants and covenants as follows: 5.1 Corporate Power. JTS has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement has been duly and validly authorized by JTS, and upon the Effective Date, this Agreement will constitute a valid and binding agreement of JTS. 5.2 No Other Licenses. Except to the extent identified on Exhibit C attached hereto, JTS has not granted to any third party any rights or interests to the JTS Captured * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 8 Patents, the Licensed Nordic Products or JTS Other Licensed Technology. Until [*] neither JTS nor any of its Subsidiaries shall grant to any third party any license under the JTS Captured Patents, JTS Other Licensed Technology or any JTS Chip to sell 3-Inch Disk Drives made for or by such third party; provided, however, that JTS and its Subsidiaries shall be entitled to (a) allow other companies to manufacture 3-Inch Disk Drives to be sold by JTS or its Subsidiaries; (b) grant manufacturing and sales licenses with respect to 3-Inch Disk Drives to customers of JTS in connection with sales agreements between JTS and its customers, but only to the extent such licenses are contingent upon the inability or failure of JTS to supply such 3-Inch Disk Drives to its customers; (c) include 3-Inch Disk Drives in the field of use in any patent license included in a cross-license agreement that is reasonably required to resolve third party patent infringement claims; and (d) on or after [*] transfer any of its rights in any JTS Chip (by license or otherwise) to any third party. For the term of this Agreement, neither JTS nor any of its Subsidiaries shall take or fail to take any action that may restrict JTS's legal right to grant to WDC the rights and licenses contemplated under this Agreement. 5.3 No Consents Required. As of the Effective Date, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereunder will require JTS or any of its Subsidiaries to obtain any permits, authorizations or consents under current law from any governmental body or from any other person, firm or corporation under any existing agreement to which JTS or any of its Subsidiaries may be a party. The execution, delivery and consummation of this Agreement will not result in the breach of or give rise to cause for termination of any agreement to which JTS or any of its Subsidiaries may be a party or, to JTS's knowledge, that otherwise relates to the Captured Patents, Licensed Products or any JTS Other Licensed Technology. 5.4 No Additional Obligations. Neither the execution, delivery and performance of this Agreement by WDC nor the use of the licenses and other rights granted WDC hereunder impose or will impose on WDC any royalty obligation or other payment obligation of any kind pursuant to (a) any agreement or understanding to which JTS is a party or (b) to the best of JTS's knowledge, otherwise, except as expressly contemplated herein and in the License Agreement of even date herewith between WDC and TEAC CORPORATION. 5.5 Current Technology. All material technical information and other items deliverable pursuant to the Technology Transfer Program represent what JTS believes in good faith to be the most current and best technology available to JTS relating to 3-Inch Disk Drives. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 9 ARTICLE 6 WDC REPRESENTATIONS AND WARRANTIES WDC hereby represents, warrants and covenants as follows: 6.1 Corporate Power. WDC has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement has been duly and validly authorized by WDC, and upon the Effective Date, this Agreement will constitute a valid and binding agreement of WDC. 6.2 No Consents Required. As of the Effective Date, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereunder will require WDC to obtain any permits, authorizations or consents from any governmental body or from any other person, firm or corporation, and such execution, delivery and consummation will not result in the breach of or give rise to any termination of any agreement or contract to which WDC may be a party. 6.3 Future Generation Licensed Nordic Products. WDC shall offer to sell all Future Generation Licensed Nordic Products to the Customer Sponsor before offering such products to any third party. Provided the Customer Sponsor commits in a reasonably timely manner to purchase such Future Generation Licensed Nordic Products from WDC or JTS, WDC shall refrain from selling such products to any customer other than JTS or the Customer Sponsor for a period of [*] commencing on [*] . ARTICLE 7 IMMUNITY FROM SUIT 7.1 Immunity Granted by JTS. JTS, on behalf of itself and its Subsidiaries, hereby grants to all third-party transferees of the Licensed Products manufactured, leased, sold or otherwise transferred by WDC or its Subsidiaries, an immunity from suit under JTS Captured Patents (a) for the manufacture, use and sale of the Licensed Products; and (b) for the formation, sale and use of any higher-level assembly that includes any Licensed Product, whether or not such higher-level assembly includes other apparatus not furnished by WDC or any of its Subsidiaries; provided, however, that such immunity shall not extend to any apparatus that forms a part of such higher-level assembly that is not furnished by WDC or its Subsidiaries. JTS, on behalf of itself and its Subsidiaries, hereby grants to all third-party transferees of the Licensed Nordic Products manufactured, leased, sold or otherwise transferred by WDC or its Subsidiaries, an immunity from suit under JTS Other Licensed Technology (a) for the manufacture, use and sale of the Licensed * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 10 Nordic Products; and (b) for the formation, sale and use of any higher-level assembly that includes any Licensed Nordic Product, whether or not such higher-level assembly includes other apparatus not furnished by WDC or any of its Subsidiaries; provided, however, that such immunity shall not extend to any apparatus that forms a part of such higher-level assembly that is not furnished by WDC or its Subsidiaries. 7.2 Immunity Granted by WDC. WDC, on behalf of itself and its Subsidiaries, hereby grants to all third-party transferees of the Licensed Products manufactured, leased, sold or otherwise transferred by JTS or its Subsidiaries, an immunity from suit under WDC Captured Patents (a) for the manufacture, use and sale of Licensed Products; and (b) for the formation, sale and use of any higher-level assembly that includes any Licensed Product, whether or not such higher-level assembly includes other apparatus not furnished by JTS or any of its Subsidiaries; provided, however, that such immunity shall not extend to any apparatus that forms a part of such higher-level assembly that is not furnished by JTS or its Subsidiaries. WDC, on behalf of itself and its Subsidiaries, hereby grants to all third-party transferees of the Licensed Nordic Products manufactured, leased, sold or otherwise transferred by JTS or its Subsidiaries, an immunity from suit under WDC Other Licensed Technology (a) for the manufacture, use and sale of the Licensed Nordic Products; and (b) for the formation, sale and use of any higher-level assembly that includes any Licensed Nordic Product, whether or not such higher-level assembly includes other apparatus not furnished by JTS or any of its Subsidiaries; provided, however, that such immunity shall not extend to any apparatus that forms a part of such higher-level assembly that is not furnished by JTS or its Subsidiaries. ARTICLE 8 CONFIDENTIALITY 8.1 Confidential Information. JTS and WDC agree to undertake all reasonable efforts to refrain, and to cause its Subsidiaries to refrain, from disclosing any confidential proprietary information with respect to the technology products governed by this Agreement. Each of the parties hereto acknowledge that another party hereto may find it necessary to disclose proprietary information in connection with the proper grant of sublicenses to parties other than a party hereto to the extent permitted hereby. Under such circumstances, JTS or WDC, as the case may be, may make such information available to third parties to the limited extent necessary for such third party to fulfill its supply or other permitted purposes, provided that such party shall first obtain from the recipients a fully-executed confidentiality agreement that is at least as restrictive as the confidentiality agreement contained herein; provided, however, that the foregoing shall not restrict JTS's or WDC's right to provide technical information and test data that 10 11 is reasonably requested by customers in the ordinary course of business. 8.2 Public Domain. Neither JTS nor WDC shall be bound by the provisions of Section 8.1 above with respect to information that (a) was previously known to the recipient at the time of disclosure; (b) is in the public domain at the time of disclosure; (c) becomes a part of the public domain after the time of disclosure, other than through disclosure by the recipient or some other third party that is under an agreement of confidentiality with respect to the subject information or obtained the information from the recipient; (d) is required to be disclosed by law; or (e) is disclosed by a third party not bound by an agreement of confidentiality with respect to such information that the third party did not obtain from the recipient. ARTICLE 9 RECORDKEEPING AND AUDIT RIGHTS Each party shall keep and maintain full and accurate records relating to the development, manufacture and sales of the Licensed Products. Each party agrees to allow a mutually acceptable independent auditor to audit and analyze appropriate records to ensure compliance with the terms of this Agreement. Any such audit shall be permitted by the party to be audited within fifteen (15) days of receipt of a written request by the party requesting such audit, during normal business hours. The cost of such audit will be borne by the party requesting the audit unless a material discrepancy is found or records are not maintained and available in accordance with this Article, in which case the audited party agrees to pay the requesting party for the costs associated with the audit. ARTICLE 10 TERM AND TERMINATION 10.1 Effective Date. This Agreement shall become effective upon satisfaction of the following conditions, any of which may be waived by WDC in its sole discretion: (a) The execution and delivery of a license or similar agreement, acceptable in form and substance to WDC, from TEAC CORPORATION in favor of WDC with respect to 3-Inch Disk Drives (the "TEAC Agreement"); (b) The execution and delivery of a license or similar agreement, acceptable in form and substance to WDC, from PONT PERIPHERALS (formerly known as DZU CORPORATION) in favor of WDC with respect to 3-Inch Disk Drives; (c) The execution and delivery of an amendment to or other arrangement affecting the Customer Sponsor 11 12 Agreement, acceptable in form and substance to WDC, modifying such agreement to the extent it may otherwise affect WDC's rights hereunder and consenting to this Agreement; and (d) The closing of the JTS equity financing on substantially the terms and conditions identified in the Letter of Intent for Private Placement of Equity Securities dated November 3, 1994 or otherwise on terms and conditions acceptable to WDC. The parties agree that if the Effective Date does not occur on or before February 15, 1995, WDC may terminate this Agreement at any time before the Effective Date occurs. 10.2 Term. Except to the extent provided in Section 10.3 below, the term of this Agreement and the licenses and immunities from suit granted hereunder shall be perpetual. 10.3 Early Termination. If any party hereto commits a material breach of this Agreement, and such breach continues for thirty (30) days after receipt of a written notice specifying such breach in reasonable detail, the non-breaching party shall have the right to terminate all of the breaching party's rights hereunder by delivery of written notice of such termination. Notwithstanding the foregoing, any such termination shall have no effect on the breaching party's duties and obligations hereunder, which shall continue in full force and effect. WDC's rights hereunder shall not be reduced or diminished in the event of a termination by WDC by reason of a material breach of JTS. JTS's rights hereunder shall not be reduced or diminished in the event of a termination by JTS by reason of a material breach by WDC. ARTICLE 11 MISCELLANEOUS 11.1 Notices. Any notice, consent or approval required under this Agreement shall be in writing sent by registered or certified mail, postage prepaid, or by facsimile or cable (confirmed by such registered or certified mail) and addressed as follows: If to WDC: Western Digital Corporation 8105 Irvine Center Drive Irvine, California 92718 Attn: General Counsel Phone: (714) 932-5000 Facsimile: (714) 932-7820 12 13 If to JTS: JT Storage, Inc. 1289 Anvilwood Avenue Sunnyvale, California 94089 Attn: President Phone: (408) 747-1315 Facsimile: (408) 747-0849 All notices shall be deemed to be effective on the earlier of actual receipt or the fifth day after deposit in the U.S. first class mail, postage prepaid, properly addressed to the party to whom such notice is directed. Either party may change its address at which notice is to be received by delivering notice to the other party in accordance with this Section. 11.2 Relationship of the Parties. Notwithstanding any provision hereof, for all purposes of this Agreement each party shall be and act as an independent contractor and not as a partner, joint venturer or agent of the other and shall not bind nor attempt to bind the other to any contract. 11.3 Assignment. Neither party shall have the right or ability to assign, transfer or sublicense any obligations or benefits under this Agreement without the written consent of the other party, which consent shall not be unreasonably withheld. A Change in Control of JTS shall constitute an assignment for purposes of this Agreement, requiring the consent of WDC as set forth in this Section, [*] Further, JTS shall not consent to an assignment, transfer or sublicense of the JTS Captured Patents, the Licensed Nordic Products and/or JTS Other Licensed Technology by [*] 11.4 Waivers; Amendments. The waiver by either party of any of its rights or any breaches of the other party under this Agreement in a particular instance shall not be deemed to be a waiver of the same or different rights or breaches in subsequent instances. Neither this Agreement nor any Exhibit attached hereto may be amended or waived except by an instrument in writing executed by the party against which enforcement is sought. 11.5 Governing Law. This Agreement shall be governed, construed and interpreted in accordance with the laws of the State of California, without regard to the choice of law rules thereof. 11.6 Entire Agreement. This Agreement and the Exhibits attached hereto constitute the entire agreement of the parties * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 13 14 and supersede all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the parties with respect to the subject matter hereof. 11.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which when executed shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 11.8 Severability. If any provision of this Agreement shall be held illegal or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect. 11.9 Attorneys' Fees. Should any party institute any action or proceeding, including without limitation binding arbitration, to enforce this Agreement or any provision hereof, the prevailing party in any such action or proceeding shall be entitled to receive from the other all reasonable costs and expenses, including attorneys' fees, incurred by the prevailing party in connection with such action or proceeding. 11.10 Binding Arbitration. Any controversy or claim arising out of or related to this Agreement, or any breach thereof (a "Dispute"), shall be settled by binding arbitration, conducted by a single mutually agreed-upon arbitrator, with the forum being Orange County, California. The arbitrator of any Dispute shall be either a lawyer selected by the parties or a retired judge selected by two lawyers (one of each such lawyer being designated for such purpose by each party). Promptly after such Dispute arises, the parties shall confer to select a lawyer who practices in or near Orange County, California to serve as the arbitrator. If the parties cannot agree upon the selection of a lawyer as the arbitrator, a retired judge who is a member of JAMS shall be selected as the arbitrator. Such selection shall by made by the lawyers designated by the parties. The arbitrator so selected shall make the determination required on the basis of such procedures as such arbitrator, in his or her sole judgment, deems appropriate and expeditious, taking into account the nature of the issues, the amount in dispute and the positions asserted by the parties. The arbitrator shall not be required to follow any particular rules or procedure, it being the parties' intention to create a flexible, practical, and expeditious method of resolving any Dispute hereunder. Upon the written request of a party, the arbitrator shall issue a written opinion of his or her findings of fact and conclusions of law. Upon receipt by the requesting party of such a written opinion, such party shall have the right within ten (10) days thereof to file with the arbitrator a motion to reconsider. Thereupon, the arbitrator shall reconsider the issues raised by said motion and either confirm or change his or her decision. The decision of such arbitrator shall then be final, conclusive and binding, and shall not be subject to review or challenge of any kind. The parties 14 15 intend that this agreement to arbitrate be valid, enforceable and irrevocable. 11.11 Time of the Essence. Time is of the essence of this Agreement. 15 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. "WDC" WESTERN DIGITAL CORPORATION, a Delaware corporation By: /s/ Marc Nussbaum for Kathryn A. Braun --------------------------------------- Its: -------------------------------------- "JTS" JT STORAGE, INC., a Delaware corporation By: --------------------------------------- Its: -------------------------------------- 16 17 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. "WDC" WESTERN DIGITAL CORPORATION, a Delaware corporation By: --------------------------------------- Its: -------------------------------------- "JTS" JT STORAGE, INC., a Delaware corporation By: /s/ David B. Pearce --------------------------------------- Its: President -------------------------------------- 16 18 LIST OF EXHIBITS TO TECHNOLOGY TRANSFER AND LICENSE AGREEMENT PAGE ---- EXHIBIT A TECHNOLOGY TRANSFER PROGRAM A1 SECTION A-1 DESIGNATED PRODUCT TECHNICAL A2 SPECIFICATIONS SECTION A-2 PROGRAM SCHEDULE (DEVELOPMENT A4 PLAN) SECTION A-3 PAYMENT SCHEDULE A7 SECTION A-4 DELIVERY SCHEDULE A9 SECTION A-5 JTS DELIVERABLES TO WDC QUALITY AND A10 RELIABILITY DEPARTMENT SECTION A-6 JTS DELIVERABLES TO WDC NEW PRODUCT A13 INTRODUCTION AND ADVANCED MANUFACTURING DEPARTMENT SECTION A-7 JTS DELIVERABLES TO WDC DESIGN A14 ENGINEERING DEPARTMENT SECTION A-8 JTS DELIVERABLES TO WDC TEST A18 ENGINEERING DEPARTMENT SECTION A-9 JTS DELIVERABLES TO WDC PURCHASING A20 AND MATERIALS DEPARTMENT EXHIBIT B NON-EXCLUSIVE LIST OF JTS CAPTURED B1 PATENTS EXHIBIT C THIRD PARTY LICENSES AND RIGHTS C1 AFFECTING JTS TECHNOLOGY 19 EXHIBIT A TO TECHNOLOGY TRANSFER AND LICENSE AGREEMENT TECHNOLOGY TRANSFER PROGRAM --------------------------- This Technology Transfer Program sets forth the information, documents, rights and other tangible and intangible items that JTS shall deliver to WDC pursuant to Article 3 of this Agreement; the manner in which JTS shall deliver such items to WDC; and the payments to which JTS shall be entitled in consideration of its performance of this Agreement, including, without limitation, the Technology Transfer Program. Any material deviation from the Technology Transfer Program shall require the mutual written agreement of JTS and WDC. Page A1 20 SECTION A-1: DESIGNATED PRODUCT TECHNICAL SPECIFICATIONS In a timely manner following the execution of this Agreement, the parties shall finalize the Technical Specifications for the Designated Product. Set forth below are preliminary technical specifications for the Designated Product, which may be modified by mutual agreement of the parties in accordance with the above provision and the terms of this Agreement.
- ------------------------------------------------------------------------------- [*] - -------------------------------------------------------------------------------
[*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A2 21 -J541HP 'HIGH PERFORMANCE' ASIC FEATURES (.95u) IDE INTERFACE: [*] DME INTERFACE: [*] SEQUENCER/DISK INTERFACE: [*] SERVO INTERFACE: [*] PROCESSOR INTERFACE: [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. A3 22 [CHART] [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. A4 23 [CHART] [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. A5 24 [CHART] [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. A6 25 SECTION A-3: PAYMENT SCHEDULE In consideration of the rights granted to WDC under this Agreement, WDC shall pay to JTS up to [*] in accordance with and subject to the terms and conditions of the Technology Transfer Program and the Payment Schedule set forth below:
Date Payment Condition to Payment ---- ------- -------------------- Execution of this [*] None Agreement [*] [*] JTS successfully completes Engineering Verification Test ("EVT") and reviews EVT with WDC [*] [*] JTS delivers the Designated Product to WDC* If JTS delivers the Designated Product between [*] and [*] , the payment shall be [*] , unless the Designated Product is an [*] Mbyte 3-Inch Disk Drive, in which case the payment shall be [*] * If JTS delivers the Designated Product after 09/30/95, the payment shall be $500,000* * If a change is made to the Technology Transfer Program at the request of WDC that causes a delay in JTS's delivery of the Designated Product, the time deadlines set forth herein shall be equitably adjusted accordingly. [*] [*] [*] following the date on which the Company accepts from JTS working samples of both an [*] Mbyte Licensed Nordic Product and a [*] Mbyte Licensed Nordic Product
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A7 26 [*] [*] [*] following the date on which the Company commences volume production of both an [*] Mbyte Licensed Nordic Product and a [*] Mbyte Licensed Nordic Product
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A8 27 SECTION A-4: DELIVERY SCHEDULE JTS shall deliver to WDC the following deliverables in accordance with the Delivery Schedule set forth below:
DELIVERY DATE DELIVERABLE -------- ----------- [*]
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A9 28 SECTION A-5: JTS DELIVERABLES TO WDC QUALITY AND RELIABILITY DEPARTMENT Promptly upon execution of this Agreement, JTS shall deliver to WDC's Quality and Reliability Department copies or originals of the following materials in JTS's possession. Thereafter, JTS shall deliver updates of such materials on at least a [*] basis. All such deliveries shall be at [*] sole expense. To facilitate this process, JTS and WDC shall review these deliverables on a [*] basis. MATERIALS QUALITY -- [*] [*] - [*] - - - - - - - - * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A10 29 - [*] - - - - - - - - - * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. page a11 30 - - [*] - - - - - - - - - - - - - - - - * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A12 31 SECTION A-6: JTS DELIVERABLES TO WDC NEW PRODUCT INTRODUCTION AND ADVANCED MANUFACTURING DEPARTMENT Promptly upon execution of this Agreement, JTS shall deliver to WDC's New Product Introduction and Advanced Manufacturing Department copies or originals of the following materials in JTS's possession. Thereafter, JTS shall deliver updates of such materials on at least a [*] basis. All such deliveries shall be at [*] sole expense. To facilitate this process, JTS and WDC shall review those deliverables [*] . - All drive piece part drawings with critical-to-function ("CTF") parameters identified and process capability ("CpK") figures list - All drive sub-assembly drawings and associated parts list - Head gimbal assembly ("HGA") specification - Disk specification - Track map - ESD requirements and a list of static sensitive components - At least one (1) complete set of functional mechanical parts and sub-assemblies, including labels, seals, etc. - At least one (1) mechanically functional drive that is able to spin-up - Tolerance stack up analysis for the drive itself and all subassemblies - Head stack assembly ("HSA") shipping comb drawing and three (3) samples - Latest revision design drawings for all tools, including disk install, head load, VCM install and cover install - Tooling to tolerance study results - Rights to fabricate/use tools that WDC finds desirable - Permission to contact HGA vendors for answers to questions - JTS contact for design questions * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A13 32 SECTION A-7: JTS DELIVERABLES TO WDC DESIGN ENGINEERING DEPARTMENT Promptly upon execution of this Agreement, JTS shall deliver to WDC's Design Engineering Department copies or originals of the following materials in JTS's possession. Thereafter, JTS shall deliver updates of such materials on at least a [*] basis. All such deliveries shall be at [*] 's sole expense. To facilitate this process, JTS and WDC shall review these deliverables on a [*] basis. [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A14 33 [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A15 34 [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A16 35 [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A17 36 SECTION A-8: JTS DELIVERABLES TO WDC TEST ENGINEERING DEPARTMENT Promptly upon execution of this Agreement, JTS shall deliver to WDC's Test Engineering Department copies or originals of the following materials in JTS's possession. Thereafter, JTS shall deliver updates of such materials on at least a [*] basis. All such deliveries shall be at [*] sole expense. To facilitate this process, JTS and WDC shall review these deliverables on a [*] basis [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A18 37 [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page A19 38 SECTION A-9 JTS DELIVERABLES TO WDC PURCHASING AND MATERIALS DEPARTMENT Promptly upon execution of this Agreement, JTS shall deliver to WDC's Purchasing and Materials Department copies or originals of the following materials in JTS's possession. Thereafter, JTS shall deliver updates of such materials on at least a monthly basis. All such deliveries shall be at JTS's sole expense. To facilitate this process, JTS and WDC shall review these deliverables on a monthly basis. - Complete costed bill of material ("BOM") reflecting the following information (minimum): - JTS part numbers - JTS part descriptors - All current hard tooled suppliers - All targeted hard tooled suppliers - Supplier part numbers The above-referenced list should include piece parts, purchased sub-assemblies and all packaging materials. - Complete book of all parts, including the following information by part number: - Prints - Schematics/specifications - Documented supplier process flow charts - Supplier quotes, with cost break points - Tooling capacities at each supplier (which must support WW volumes requirements for the first 12 months of productions) - Documented cleaning process - Contact names, addresses and telephone numbers for each supplier - Supplier materials and process lead-times - Copies of any supply agreements and/or contracts in existence Page A20 39 - Of primary importance are any custom integrated circuits and/or other components that may be sole sourced. Ownership of design prints and/or mask rights must be identified. Length of support agreements are critical. - Authorization for WDC to purchase against JTS specifications at WDC's prerogative. Page A21 40 EXHIBIT B TO TECHNOLOGY TRANSFER AND LICENSE AGREEMENT NON-EXCLUSIVE LIST OF JTS CAPTURED PATENTS PATENTS ISSUED:
PATENT TITLE INVENTOR ISSUE DATE - ---------- ---------------------------------------------------------------- --------------- ------------ 4,992,899 Low Inertia, Single Component Arm Actuator for Open-Loop Disk S. Kaczeus 02/12/91 Drives G. Kudo 4,949,202 Disk-Track for Locating Zero Track and Generating Timing for T. Kim 08/14/90 Index Signal 5,218,496 Magnetic Disk Drive with Reduced Disk-to-Disk Spacing and S. Kaczeus 06/08/93 Improved Actuator Design
PATENT PENDING APPLICATIONS
DOCKET # TITLE INVENTOR(S) FILE DATE - ---------- ---------------------------------------------------------------- --------------- ------------ [*]
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page B1 41
DOCKET # TITLE INVENTOR(S) FILE DATE - ---------- ---------------------------------------------------------------- --------------- ------------ [*]
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page B2 42 EXHIBIT C TO TECHNOLOGY TRANSFER AND LICENSE AGREEMENT THIRD PARTY LICENSES AND RIGHTS AFFECTING JTS TECHNOLOGY TEAC Corporation Pont Peripherals (Formerly DZU Corporation) Compaq Computer Corporation Page C1 EX-10.28 48 AGREE JT STORAGE & PONT PERIPHERALS 1/31/95 1 EXHIBIT 10.28 January 31, 1995 Agreement By and Between Pont Peripherals Corporation and JT Storage, Inc. dated January 31, 1995 2 January 31, 1995 TABLE OF CONTENTS RECITALS 1 ARTICLE I DEFINITIONS 2 1.01 "ASIC" 2 1.02 "Affiliate" 2 1.03 "Components" 2 1.04 "Improvements" 2 1.05 "Jointly Developed Products" or Jointly Developed Technology" 2 1.06 "JTS Products" 2 1.07 "JTS I Territory" 3 1.08 "JTS II Territory" 3 1.09 "Know-How" 3 1.10 "Micro Code" 3 1.11 "OEM" 3 1.12 "Patents" 3 1.13 "Point 5" 3 1.14 "Pont Final Product" 3 1.15 "JTS Final Product" 3 1.16 "Pont Products" 3 1.17 "Pont I Territory" 3 1.18 "Pont II Territory" 4 1.19 "Products" 4 1.20 "Technical Information" 4 1.21 "Technology" 4 ARTICLE II MANUFACTURING, PATENT AND KNOW-HOW LICENSES 4 2.01 Licenses From JTS to Pont 4 2.02 Licenses From Pont to JTS 5 2.03 Legal Limitation on Licenses 6 2.04 Certain Agreements and Representations of Grantees of Licenses 6 2.05 Certain Agreements and Representations of JTS 8 2.06 Certain Agreements and Representations of Pont 8 2.07 Territorial Restrictions Applicable to Licenses Granted in Article II 9 ARTICLE III MANUFACTURING AND SALE 9 3.01 JTS and Jointly Developed Products 9 3.02 Servo Writer Prototype 10 ARTICLE IV TECHNICAL INFORMATION AND ASSISTANCE 10 4.01 Technical Information 10 4.02 Technical Assistance 11 4.03 Jointly Developed Products and Technology 12
(i) 3
January 31, 1995 ARTICLE V IMPROVEMENTS 13 5.01 Cooperation 13 5.02 Ownership of Improvements 13 ARTICLE VI SECRECY 14 6.01 Confidentiality 14 6.02 Exceptions to Confidentiality 14 6.03 Exercise of Care 14 6.04 Specific Performance 14 ARTICLE VII ROYALTIES 15 7.01 Royalty Rate 15 7.02 When Sold 15 7.03 Net Sales Revenues 15 7.04 Certain Sales Excluded 15 7.05 Royalty Calculation on Items Used or Leased 16 7.06 Payments 16 7.07 Time of Payment and Period for Which Royalty Paid 16 7.08 Late Payments 16 7.09 Records and Reports 16 7.10 Governmental Approvals to U.S. Currency Payments 17 7.11 Royalties to Survive Contractual Patents or Knowledge of Others and Termination of License 17 ARTICLE VIII TERMINATION 17 8.01 Bankruptcy of a Licensee 17 8.02 Bankruptcy of a Licensor 17 ARTICLE IX GENERAL PROVISIONS 18 9.01 Notices 18 9.02 Successors and Assigns 18 9.03 Counterparts 18 9.04 Captions and Paragraph Headings 18 9.05 Entirety of Agreement; Amendments 19 9.06 Construction 19 9.07 Waiver 19 9.08 Governing Law 19 9.09 Remedies 19 9.10 Status of Parties 20 9.11 Severability 20 9.12 Payments in U.S. Currency 20 9.13 Consents Not Unreasonably Withheld 20 9.14 Time is of the Essence 21
(ii) 4 January 31, 1995 THIS AGREEMENT is made as of this 31 day of January, 1995, by and between Pont Peripherals Corporation, a Delaware corporation, formerly known as DZU Corporation, having its principal place of business at 912 West Maude, Sunnyvale, California 94086 ("Pont"), and JT Storage, Inc., a Delaware corporation, having its principal place of business at 1289 Anvilwood Avenue, Sunnyvale, California 94089 ("JTS"). RECITALS WHEREAS, pursuant to the Agreed Order Compromising Controversies (the "Order") entered by the United States Bankruptcy Court, Northern District of California, on February 4, 1994 in the Chapter 11 reorganization of Kalok Corporation, a California corporation (No. 93-54027), Pont and Teac Corporation, a Japanese corporation ("Teac"), acquired certain of the technology and other intellectual property and certain other assets of Kalok, subject to the terms and conditions of the Order and certain other documents referenced in and approved by the Order; WHEREAS, Pont owns rights to certain products and technology that it desires to license to JTS, and JTS desires to obtain such license; WHEREAS, JTS has developed certain products and technology, including ASIC and Micro Code, for use in hard disk drives and desires to license such products and technology to Pont, and Pont desires to obtain such license; WHEREAS, JTS and Pont are each desirous of licensing rights to improvements to the products and technology licensed hereunder made by each of them to the other party; WHEREAS, JTS and Pont desire to cooperate in jointly developing certain technology and products; WHEREAS, JTS and Pont are each desirous of Pont's manufacturing and selling certain products to JTS and to third parties in certain designated territories, and JTS desires to permit Pont to manufacture such products and to purchase certain products from Pont; WHEREAS, JTS desires to sell certain products, including jointly developed products, in sales territories in which Pont has been given exclusive rights to make sales pursuant to the Order, and Pont desires to grant such a license to JTS; and WHEREAS, JTS desires to engage Pont to design and build one engineering prototype Servo Write Station and to engage Pont to manufacture additional Servo Write Stations, and Pont desires to enter into such an arrangement. NOW, THEREFORE, in consideration of the foregoing and the mutual promises herein made, the parties hereto do hereby agree as follows: 1 5 January 31, 1995 ARTICLE I DEFINITIONS 1.01 "ASIC" shall mean Application Specific Integrated Circuits as independently developed by JTS at the date of this Agreement, in addition to any improvements. All such improvements shall be included in the definition of ASIC and be subject to this Agreement. 1.02 "Affiliate" of an entity shall mean an entity actually controlling, controlled by, or under common control with, such other entity. 1.03 "Components" shall mean: (a) Subassemblies and components of a product customarily repaired and not consumed in the repair and maintenance of the product; (b) Nonrepairable and disposable goods customarily consumed in connection with the use, test, maintenance and repair of a product, including by way of example and not limitation, electrical components as resistors, capacitors, integrated circuits, and mechanical components such as brackets, switches, bushings and bearings; and (c) Consumable items sold for use with a product, including, by way of example and not limitation, paper goods, ink and the like. 1.04 "Improvements" shall mean any Improvements, variations, derivative works, refinements, enhancements or other developments, discoveries or modifications, whether patentable or not, relating directly or indirectly to a Product or a Technology, including, but not limited to, any Improvements made with the financial, technical or other support of a third party other than Teac. 1.05 "Jointly Developed Products" or "Jointly Developed Technology" shall be products and Components thereof or technology jointly developed by JTS and Pont as set forth in Section 4.04 of this Agreement. 1.06 "JTS Products" shall mean all products developed and all product developments, of JTS, including, but not limited to, Micro Code and ASIC, and any Components thereof, provided, however, that such term shall not include any product or technology licensed by JTS solely from Teac and under terms which prevent the grant of the license granted hereunder, and provided, further, that such term shall include any product, whether completed or not, and any technology, developed with the direct financial or technical support or assistance of a third party other than Teac or with the assistance of Teac if the terms of such assistance do not prohibit the grant of the licenses contained herein. Any Improvements to the JTS Products shall be included in the term JTS Products and be subject to this Agreement. 2 6 January 31, 1995 1.07 "JTS I Territory'' shall mean the world except for Japan, the Eastern Bloc countries of Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria and former Yugoslavia and the countries comprising the form Soviet Union. 1.08 "JTS II Territory" shall mean the world except for Japan. 1.09 "Know-How" shall mean all factual knowledge and information acquired from time to time concerning the design and manufacture of a product or the design and development of a technology, whether or not in graphic or printed form, which may not be capable of precise separate description but which, in an accumulated form, after being acquired as the result of trial and error, gives to the one acquiring it an ability to produced and market a product or use a technology which one otherwise would not have known how to produce and market or use with the same accuracy, precision, quality or efficiency necessary for commercial success. 1.10 "Micro Code" shall mean Micro Code as independently developed by JTS at the date of this Agreement, in addition to any Improvements. All such Improvements shall be included in the definition of Micro Code and be subject to this Agreement. 1.11 "OEM" shall mean an original equipment manufacturer who incorporates a Product in a product of its own bearing its own label for purposes of resale to an end user. 1.12 "Patents" shall mean any and all patents of any country of the world and any applications therefor, and patents which may issue on such applications, which are owned or controlled by a party, or under which a party has or may acquire the rights to grant a license and which cover inventions pertaining to a product or technology. The term "Patents" shall include, without limitation, patents of importation, improvement patents, patents and certificates of addition and utility, model and design patents, as well as divisions, reissues, reexainnations, continuations-in-part, renewals and extension of, any of the foregoing. 1.13 "Point5" means the Kalok Point 5 Series of products (consisting of Models P-3125, P-3250 and P-3540). 1.14 "Pont Final Product" shall mean a completed Hard Disk Drive product. 1.15 "JTS Final Product" shall mean a completed Hard Disk Drive product. 1.16 "Pont Products" shall mean all products developed and all product developments, whether completed or not, of Pont, including, but not limited to, Point 5, and any Components thereof. 1.17 "Pont I Territory" shall mean the world except Japan and India. 3 7 January 31, 1995 1.18 "Pont II Territory" shall mean the following: (a) commencing on January 1, 1998 "Pont II Territory", for JTS non three and a half inch Disk Drive product, shall mean the world, except for the Pacific Rim (defined as all countries that border the Pacific Ocean except for Mexico) and North America except for Mexico. (b) commencing on June 1, 1998 "Pont II Territory", for JTS non three and a half inch Disk Drive product, shall mean the world, except for Japan and India. 1.19 "Products" shall mean JTS Products, Pont Products and Jointly Developed Products. The singular shall refer to each of the products which comprise the JTS Products, Pont Products and Jointly Developed Products. 1.20 "Technical Information" shall mean all scientific, technical and other information, existing in graphic, printed or computer media form, as may be available from time to time, pertaining to the development, design, manufacture, testing or use of all Products and Technology, Components, circuitry's, tooling and testing requirements, including, by way of illustration and not limitation, all specifications (mechanical and electrical), computer programs (source and object), circuit diagrams, drawings, charts, blueprints, vellums, masks, vendor lists, parts layout, parts lists, automated design programs, design information, object code, source code, program generation tapes, information embodied in any Patent, component lists, technical reports, operation descriptions and manufacturing steps, techniques and processes. 1.21 "Technology" shall mean the principal technology designed and developed for the Products or a Product, including any Improvements to such Technology. ARTICLE II MANUFACTURING, PATENT AND KNOW-HOW LICENSES 2.01 Licenses From JTS to Pont, Subject to the terms, conditions and limitations hereinafter set forth, JTS hereby grants to Pont, and Pont hereby accepts from JTS, a royalty-free, nonexclusive, perpetual license, right and privilege, under the pertinent Patents and Know-How: (a) To use and apply JTS Products Technology for the purposes, and only for the purposes, of making additional Improvements and of manufacturing and assembling any Pont Final Product in the Pont I Territory, having made and assembled any Pont Final Product in the Pont I Territory, using any Pont Final Product in the Pont I Territory and selling any Pont Final Product in the Pont I Territory. (b) To sue and apply Jointly Developed Products Technology for the purposes, and only for the purposes, of making additional Improvements and of manufacturing and assembling any Pont Product in the Pont I Territory, having made and assembled any Pont Product in the Pont I Territory, using any Pont Product in the Pont I Territory and selling any Pont Products in the Pont I Territory. 4 8 January 31, 1995 (c) To use and apply any Improvements made by JTS for the purposes, and only for the purposes, of making additional Improvements and of manufacturing and assembling any Pont Final Product in the Pont I Territory, having made and assembled any Pont Final Product in the Pont I Territory, using any Pont Final Product in the Pont I Territory and selling any Pont Final Products in the Pont I Territory. (d) To manufacture and assemble any JTS Final Product in the Pont I Territory, having made and assembled any JTS Final Product in the Pont I Territory, using any JTS Final Product in the Pont I Territory and selling any JTS Final Products in the Pont I Territory for the purposes, and only for the purposes, of sale by Pont of such JTS Final Products to (i) JTS and (ii) to third party customers located with respect to (a) JTS Final Products which are or include non-three-and-a-half-inch disk drives, within the Pont II Territory and (b) all other JTS Final Products within the Pont I Territory. (e) To manufacture, and assembling any Jointly Developed Product in the Pont I Territory, having made and assembled any Jointly Developed Product in the Pont I Territory, using any Jointly Developed Product in the Pont I Territory and selling any Jointly Developed Product in the Pont I Territory in the Pont I Territory. Patents existing as of the date of this Agreement related to the licenses set forth in Section 2.01 are set forth in Exhibit 2.01 hereto, which also sets forth information regarding the pertinent patent or application number, the party which is the owner or controller of the patent or application and the invention to which such patent or invention relates. 2.02 Licenses From Pont to JTS. Subject to the terms, conditions and limitations hereinafter set forth, Pont hereby grants to JTS, and JTS hereby accepts from Pont, a royalty-free, nonexclusive, perpetual license, right and privilege, under the pertinent Patents and Know-How: (a) To use and apply the Pont Products Technology for the purposes, and only for the purposes, of (i) making additional Improvements, (ii) manufacturing and assembling any JTS Final Product in the JTS I Territory, and (iii) having manufactured and assembled any JTS Final Product in the JTS I Territory (iv) using any JTS Final Product in the JTS I Territory and (v) selling any JTS Final Product in the JTS II Territory. (b) To use and apply Jointly Developed Products Technology for the purposes, and only for the purposes, of (i) making additional Improvements, (ii) manufacturing and assembling any JTS Product or Jointly Developed Product in the JTS I Territory, and (iii) having manufactured and assembled any JTS Product or Jointly Developed Product in the JTS I Territory, (iv) using any JTS Product or Jointly Developed Product in the JTS I Territory, and (v) selling JTS Products and Jointly Developed Products in the JTS II Territory. (c) To use and apply any Improvements made by Pont for the purposes, and only for the purposes, of (i) making additional improvements, (ii) manufacturing and assembling any JTS Final Product in the JTS I Territory, and (iii) having manufactured and assembled any JTS Final Product in the JTS I Territory, (iv) using any JTS Final Product in the JTS Territory and (v) selling any JTS Final Product in the JTS II Territory. 5 9 January 31, 1995 Patents existing as of the date of this Agreement related to the licenses set forth in Section 2.02 are set forth in Exhibit 2.02 hereto, which also sets forth information regarding the pertinent patent or application number, the party which is the owner or controller of the patent or application and the invention to which such patent or invention relates. 2.03 Legal Limitation on Licenses. (a) Each of the licenses granted under Section 2.01 and 2.02 above is granted only to the extent that the rights granted are owned by the grantor free and clear of any legal incapacity to make such grant or only to the extent that the grantor otherwise has the legal right and capacity to grant such rights without thereby breaching or unlawfully interfering with any contract, or incurring any obligation or liability to pay, grant or transfer any money, property, or right to, any third party. Without limiting the generality of the foregoing, the grant of a license under Section 2.01 and 2.02 above shall be subject to any and all legal obligations and requirements with which the grantor is bound by law to comply. (b) None of the licenses granted under Section 2.01 by JTS to Pont may be sublicensed by Pont without the express prior written consent of JTS which may be withheld in the sole and absolute discretion of JTS except that Pont may sublicense such licenses in connection with the manufacturing of Components for use in the manufacture or assembly of Pont Final Product by Pont. All of the licenses granted under Section 2.02 by Pont to JTS may be sublicensed to a third party without the consent of Pont. Other than as permitted in the two preceding sentences, the Products and Technology and the rights thereto conveyed in this Agreement shall not be assigned or transferred to another party, including, but not limited to, an Affiliate of either party, without the express prior written consent of the other party, which may be withheld in such party's sole and absolute discretion, provided, however, that this provision shall not apply to a change in ownership of either party as permitted under the Order. (c) None of the licenses granted under this Article II conveys any right in the grantee to use or to register any trademarks or trade names of the grantor or to use the name of the grantor in any manner whatsoever. (d) Nothing in this Agreement shall be construed as conveying to the grantee of a license, either expressly or by implication, any right under any letters patent of the grantor, other than the pertinent Patents, or any right to use the Patents or Know-How under which a license is granted, except as expressly set forth in this Article II. The proprietary rights in the Patents and in the Know-How under which a license is granted herein shall remain exclusively with the grantor of such license, and nothing in this Agreement shall be interpreted or construed as conferring upon the grantee of such license any proprietary right in such Patents or in such Know-How. (e) NEITHER JTS OR PONT, NOR ANY OF THEIR RESPECTIVE AFFILIATES, MAKES ANY WARRANTY OF MERCHANTABILITY AND/OR FITNESS FOR ANY PARTICULAR PURPOSE OR USE AND/OR ANY OTHER WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, OR OTHERWISE, CONCERNING ANY PRODUCT OR TECHNOLOGY LICENSED BY THIS AGREEMENT. 2.04 Certain Agreements and Representations of Grantees of Licenses. Pont and JTS each agree with and represent to the other that: 6 10 January 31, 1995 (a) It (i) accepts the licenses, rights and privileges granted to it under this Article II and admits the validity of the Patents under which such licenses, rights and privileges are granted to it, corresponding Patents of the grantor of such licenses granted or applied for in any country of the world, and corresponding Patents of the grantor of such licenses to be granted or to be applied for in any country of the world by the grantor during the term of this Agreement, (ii) agrees not to attach or question the validity of the Patents under which such licenses, rights and privileges are granted to it, and corresponding Patents of the grantor now existing, applied for or to be applied for anywhere in the world during the term of this Agreement or thereafter, and (iii) acknowledges that the Know-How under which such licenses are granted to it constitutes one of more trade secrets of the grantor. (b) It shall file as a registered licensee under the Patents held or owned by the other party if such registration is considered necessary or desirable by the other party and shall mark any product manufactured by it under a license granted herein to use a Patent of the other party with "Patent Pending or Patent No." designations identifying such patents or applications of the other party or any other markings with respect to copyrights, mask rights and/or trademarks to the extent required by applicable law or considered desirable by the other party. (c) It agrees that it will give prompt notice in writing to the licensor of a license granted to it hereunder of (i) all acts of any third person of which it obtains knowledge which in any way might constitute infringement of the Patents of such licensor or misappropriation of such licensor's rights in Know-How or any of such licensor's rights under this Agreement and of any information which may assist such licensor in dealing with such infringement or otherwise, and (ii) any action for infringement of the legal rights of others by reason of its alleged or actual use of such license or institution of any proceedings for the revocation of any of the Patents of such licensor. Whether or not such notification is given or received, such licensor shall have the right (but not the obligation) at its own expense and in its own name to institute proceedings against such infringer or misappropriate or to defend such actions brought by third parties or such revocation proceedings, as the case may be. If requested by such licensor, it further agrees to furnish to such licensor all necessary information and assistance relating to such actions or proceedings instituted or defended by such licensor including lending its name thereto if considered necessary or desirable by such licensor, and each of the parties shall pay all costs and expenses including legal expenses which it may incur in connection with such actions or proceedings; provided, however, that the licensee under a license granted hereunder shall pay all such costs and expenses including those of the licensor of such license if any such action or proceeding shall arise by reason of a use by such licensee of the Patents or Know-How which such license is granted in violation of, or in a manner inconsistent with, the provisions of this Agreement, and such licensee shall indemnify such licensor against and hold such licensor harmless from any and all losses, damages or expenses arising directly or indirectly out of or in any way relating to such violation or inconsistent use. (d) With respect to products manufactured by it or Patents or Know-How used by it under a license granted hereby, and with respect to Technical Information or other information obtained by it from the licensor respecting the subject matter of such license, it will not knowingly, directly or indirectly, use, sell or otherwise dispose of such products, Patents, Know-How or information (including any direct product thereof) to persons or countries or for purposes prohibited by the laws or regulations of the government of the country, or any agency or instrumentality thereof, in which the licensor is domiciled which are applicable to such transactions, including, by way of example and not limitation, the Export Control Regulations of the United States Department of Commerce and the Foreign Asset Control Regulations of the United States Department of the Treasury, or knowingly do any other act which would be in violation of any law or regulation of the government of the country, or any agency or instrumentality thereof, in which the licensor is domiciled. 7 11 January 31, 1995 (e) It will otherwise comply with, and assist the other party in obtaining any licenses or other approvals required by, the laws and regulation of the government, or any agency or instrumentality thereof, pertinent to the transactions contemplated hereby, and each party agrees to make all certifications and keep all records required to obtain or retain such licenses or approvals. 2.05 Certain Agreements and Representations of JTS. JTS represents and warrants to Pont that (i) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has fill power and authority to carry on its business as it is currently being conducted and to own or lease the properties and assets it now owns or leases, and is duly qualified to do business and is in good standing as a foreign corporation under the laws of the State of California; (ii) it has all necessary right, power and authority to enter into and perform this Agreement; (iii) the execution and delivery of this Agreement and the performance by JTS of its terms do not conflict with or result in a violation of JTS's certificate of incorporation or bylaws or any judgment, order or decree of any court or arbitrator to which JTS is a party or is subject and do not conflict with and will not constitute a material breach of the terms, conditions or provisions of or constitute a default under any contract, agreement, commitment, indenture, mortgage, note, bond, license or other instrument or obligation to which JTS is a party or to which it, its properties or assets are bound; (iv) this Agreement has been duly and validly executed by JTS and constitutes the valid and binding obligation of JTS enforceable in accordance with its terms; (v) it is the valid owner of the rights which are licensed to JTS pursuant to Section 2.02 of this Agreement; and (vi) no consent, approval or authorization of, or declaration, filing or registration with, any foreign, federal, state or local governmental or regulatory authority, or any other party, is required to be made by JTS in connection with the execution and performance of this Agreement and the transactions contemplated hereby. 2.06 Certain Agreements and Representations of Pont. Pont represents and warrants to JTS that (i) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has fill power and authority to carry on its business as it is now being conducted and to own or lease the properties and assets it currently owns or leases and is duly qualified to do business and is in good standing as a foreign corporation under the laws of the State of California; (ii) it has all necessary right, power and authority to enter into and perform this Agreement; (iii) the execution and delivery of this Agreement and the performance by Pont of its terms do not conflict with or result in a violation of Pont's certificate of incorporation or bylaws or any judgment, order or decree of any court or arbitrator to which Pont is a party or is subject and do not conflict with and will not constitute a material breach of the terms, conditions or provisions of or constitute a default under any contract, agreement, commitment, indenture, mortgage, note, bond, license or other instrument or obligation to which Pont is a party or to which it, its properties or assets are bound; (iv) this Agreement has been duly and validly executed by Pont and constitutes the valid and binding obligation of Pont enforceable in accordance with its terms; (v) it is the valid owner of the rights which are licensed to JTS pursuant to Section 2.02 of this Agreement; and (vi) no consent, approval or authorization of, or declaration, filing or registration with, any foreign, federal, state or local governmental or regulatory authority, or any other party, is required to be made by Pont in connection with the execution and performance of this Agreement and the transactions contemplated hereby. 8 12 January 31, 1995 2.07 Territorial Restrictions Applicable to Licenses Granted in Article II. (a) Pont will not in the case of each license granted in Section 2.01, use any license outside the territory specified in such grant, provided, however, that nothing herein shall prevent Pont or any of its assignees, licensees or sublicensees, if any, from selling, having sold, leasing or having leased such products to any OEM customer located within the specified territory for incorporation as an integral part of systems assembled within the specified territory by such OEM customer for sale or lease within or outside the specified territory. (b) JTS will not in the case of each license granted in Section 2.02, use any license outside the territory specified in such grant, provided, however that nothing herein shall prevent JTS or any of its assignees, licensees or sublicensees, if any, from selling, having sold, leasing or having leased such products to any OEM customer located within the specified territory for incorporation as an integral part of systems assembled within the specified territory by such OEM customer for sale or lease within or outside the specified territory. (c) Each of the parties will exercise their best efforts and take such actions as permitted by law to prevent any circumvention of the intent of this Section by any distributor of products manufactured by them. ARTICLE III MANUFACTURING AND SALE 3.01 JTS and Jointly Developed Products. Subject to the terms, conditions and limitations as set forth in a manufacturing and marketing agreement to be negotiated between the parties, Pont hereby agrees to manufacture and to sell JTS Products and Jointly Developed Products to JTS. The parties agree to negotiate in good faith a marketing and manufacturing agreement that will provide for a standard form purchase order to be used to order any such products. Such purchase order shall contain, at a minimum, in each case: (1) the model number, configuration and description of the JTS Product or Jointly Developed Product requested; (2) the quantity of each such requested product; (3) the delivery date of each such requested product; (4) the delivery destination of each such requested product; and (5) the unit price of each such requested product. 9 13 January 31, 1995 3.02 Servo Writer Prototype (a) Pont shall deliver to JTS by February 28, 1995 one fully tested and integrated engineering Servo Write Station (the "Servo Writer"), which Servo Writer shall be designed for use with Point 5 disk drives and the mounting hardware for JTS Products. For thirty days after delivery of the Servo Writer, JTS may request that Pont make changes to the Servo Writer, provided that Pont shall have no obligation to make such changes and JTS shall be required to accept such Servo Writer, if the technical performance is of a quality that should be reasonably satisfactory to JTS. The software developed for the Servo Writer shall also be adaptable to other disk drives, including JTS Products. (b) JTS has previously advanced the sum of $25,000 and agrees to pay Pont $25,000 upon the execution of this Agreement and $25,000 upon the satisfaction of the condition as to satisfaction described in subsection (a). (c) Upon JTS's acceptance of the Servo Writer, the parties shall negotiate in good faith a purchase order pursuant to which JTS will agree to purchase up to fifty (50) additional Servo Writers at a price of no more than $45,000 per unit. ARTICLE IV TECHNICAL INFORMATION AND ASSISTANCE 4.01 Technical Information. JTS and Pont shall each have the following rights and obligations respecting Technical information of the other. (a) Within thirty (30) days of the date of this Agreement, JTS shall delivery to Pont, free of charge, one reproducible copy of all material constituting Technical Information concerning the JTS Products and Pont shall deliver to JTS, free of charge, one reproducible copy of all material constituting Technical Information concerning the Pont Products. (b) Said Technical Information shall comprise, but not necessarily be limited to, the following: (1) Manufacturing blueprints and vellums in reproducible form and specifications of all parts; (2) Full details of all manufacturing, assembly and testing processes, special tools and equipment, software and procedures then currently used; (3) A description of all parts for use in such manufacture in manufacturer's catalogue form, if available; 10 14 January 31, 1995 (4) Details of all tests and inspection procedures currently being carried out in connection with such manufacture; and (5) Current filed instructions with respect to the item. (c) Each of the parties agrees to deliver promptly to the other, free of charge, one reproducible copy of all Technical Information which it shall generate or which it shall acquire from third parties other than Teac, and which relates to the Products or Products Technology, including, but not limited to, any Improvements thereto. (d) All Technical Information referred to herein shall be delivered in the English language and in the form in which such information is used by the originator, provided that any translation into English of such Technical Information shall be at the originator's sole expense. (e) Neither JTS nor Pont guarantees that the design, engineering, techniques and information related thereto to be furnished by them under this Section is or will in the future be free from defects or that products built or activities undertaken in accordance therewith will perform in the field to the satisfaction or so as to meet the requirements of any particular purchaser or user thereof. (f) Each of the parties specifically agrees that any and all Technical Information described herein and reproductions thereof is and shall remain, the exclusive and sole property of the party who first generated the Technical Information or first acquired it from another party. It is further agreed by the parties that money damages for unauthorized use of any Technical Information or reproductions thereof of which it is not the owner designated by this paragraph will be inadequate, and that the owner of such Technical Information and reproductions designated by this paragraph, shall be entitled, in addition to money damages, to such legal process as would require the other party hereto to cease and desist from such breach of this Agreement and to perform such acts as are necessary to carry out the terms of this paragraph. 4.02 Technical Assistance. (a) For a period not to exceed one year from the start date of the consulting engagement which start date shall be in the sole and absolute discretion of Pont, but in no event may start later than ninety (90) days from the date of this Agreement, JTS shall provide the technical assistance, engineering services, scientific assistance or similar services and advice reasonably necessary to assist Pont with the conversion of ASIC, including, but not limited to, the design, code and documentation related to ASIC, for use with a current, industry supported development platform or platforms and environment or environments. JTS agrees to make Stephen J. Harris available for part-time consultation in connection with such technical assistance, provided that if Mr. Harris is no longer an employee or consultant to JTS. JTS shall provide a replacement of approximately the same experience and knowledge in ASIC to provide such technical assistance. 11 15 January 31, 1995 (b) For a period not to exceed one year from the start date of the consulting engagement which start date shall be in the sole and absolute discretion of Pont, but in no event may start later than ninety (90) days from the date of this Agreement, JTS shall provide the technical assistance, engineering services, scientific assistance or similar services and advice reasonably necessary to assist Pont with the conversion of Micro Code, including, but not limited to, the design, code and documentation related to Micro Code, for use with development platform or platforms and environment or environments to be specified by Pont. JTS agrees to make one suitably qualified employee or consultant available for part-time consultation in connection with such technical assistance. (c) Pont shall reimburse JTS for all reasonable travel expenses of the persons identified in Section 4.02 (a) and (b) to and from Pont's offices, or such other place as Pont shall designate for rendering such technical assistance, including lodging, food and transportation. Pont shall not be responsible for any consulting fee or salary of any employee of JTS or consultant hired by JTS. (d) Except for liability arising out of gross negligence or willful misconduct of Pont, Pont shall assume no liability and shall be indemnified and held harmless by JTS against all claims, liabilities and expenses with respect to all injury, damage and loss to persons and property which may occur to or be caused by or to the personnel rendering technical assistance pursuant to this Article. 4.03 Jointly Developed Products and Technology. (a) Within thirty (30) days after execution of this Agreement, JTS shall deliver data sheets to Pont setting forth the specifications of all JTS Products and JTS Products Technology and the target specifications for all JTS Products and JTS Products Technology, in the detail that would be common in the industry (the "JTS Specifications"), and Pont shall deliver data sheets to JTS setting forth the specifications of all Pont Products and Pont Products Technology and the target specifications of all Pont Products and Pont Products Technology, in the detail that would be common in the industry (the "Pont Specifications"). The Specifications shall be attached hereto as Exhibit B. (b) JTS and Pont may undertake to jointly develop a Product or Technology by so agreeing in a writing executed by both parties and attaching specifications and target specifications for such Jointly Developed Product or Technology, provided such Jointly Developed Product or Technology is not already the subject of JTS or Pont Specifications, in which case such JTS or Pont Specifications shall become the specifications for the Jointly Developed Product or Technology (the "Jointly Developed Specifications," together with the JTS and Pont Specifications, the "Specifications"). Until such agreement to develop a Jointly Developed Product or Technology is terminated in writing or by operation of Section 4.03(c), each party shall own a half-interest in all rights to the Jointly Developed Product or Technology. 12 16 January 31, 1995 (c) Upon ninety days' notice (or such shorter notice as may be agreed to by either party), JTS or Pont may make changes to Jointly Developed Specifications subsequent to the engineering final release of any Jointly Developed Product or Technology. If such changes are not agreed to in writing by the other party, then the party requesting the change may proceed with the proposed change by documenting a new bill of material containing the change and may proceed with that change and sole technical support of Jointly Developed Products or Technology incorporating such change shall be the sole responsibility of the party making the change. The party not agreeing with the change is not required to provide technical support for Jointly Developed Products or Technology incorporating such change. A change in the Specification shall not affect the designation of a Jointly Developed Product or Technology. (d) Ownership of any and all rights to Jointly Developed Products and Technology, including Improvements while a product is designated a Jointly Developed Product or Technology, shall be joint between the parties. Any patents, trade marks or copyrights shall be applied for and owned jointly by the parties and each party will cooperate in the preparation and filing of applications for patents, trademarks and copyrights. (e) Each party shall be responsible for its own expenses and costs in connection with the development of any Jointly Developed Product or Technology. ARTICLE V IMPROVEMENTS 5.01 Cooperation. JTS and Pont shall cooperate closely with one another within the field Covered by this Agreement. Each will from time to time inform the other of their lines of development within the said field and will promptly communicate with one another of all Improvements related to any Product and Technology, in each instance accompanied by all Technical Information. 5.02 Ownership of Improvements. The parties agree that all Improvements are and shall remain the exclusive and sole property of the party discovering or making such Improvements, except for Improvements related to Jointly Developed Products or Technology as provided in Section 4.04 which will be jointly owned. Each of the parties hereby understands that the provisions of Article II includes a license of such Improvements from the party discovering or making such Improvements to the other party. Without in anyway limiting the generality of the foregoing and in furtherance thereof, each of the parties hereby agrees with the other that: (a) It will not, and its Affiliates will not, apply for any patents, or permit its or their employees, directors, officers, or agents to apply for any patents, covering Improvements designated in this Section as being the sole and exclusive property of the other party. (b) It will cooperate with the other party in the preparation and filing, in the name and at the expense of such other party, of applications for patents, trademarks, and copyrights which may be obtainable in all countries covering Improvements which are designated as the sole and exclusive property of such other party under this Section. 13 17 January 31, 1995 ARTICLE VI SECRECY 6.01 Confidentiality. Each of the parties hereto shall treat and maintain as confidential all Know-How under which such party is a licensee hereunder and all Technical Information provided by a party to the other party. Each party shall not, and shall cause its Affiliates to not, disclose any aspect of such Know-How or Technical Information to any person, including any association, corporation or governmental or quasi-governmental agency, except as may be specifically contemplated by this Agreement or as required by law; provided, however, that each party shall have the right, during the terms of this Agreement, to disclose such Know-How or Technical Information to its directors, officers, employees, agents or Affiliates to the extent, and only to the extent, necessary to accomplish the objectives of this Agreement and to customers only to the extent necessary to permit satisfactory operation of any products. 6.02 Exceptions to Confidentiality. The parties further agree that the provisions of Section 6.01 shall not apply to information which is first acquired from a third party after the date of this Agreement, if there is no obligation to keep the information from such third party confidential, or information which is or becomes generally available to the public through no act or omission on the part of the party who would otherwise be required to keep such information confidential pursuant to Section 6.01. 6.03 Exercise of Care. With respect to the Know-How and Technical Information which a party is required to keep confidential under Section 6.01, and without limiting the generality of Section 6.01, each party agrees to exercise at least such degree of care and take at least such precautions to maintain such confidentiality as such party would exercise and take to maintain the confidentiality of what such party regards as its most valuable and confidential trade secrets, Know-How, processes and practices. Each party shall be absolutely liable to the other for the non permitted disclosure directly or indirectly of any details of the Know-How or Technical Information which it is required to keep confidential hereunder by its directors, officers, employees, agents or Affiliates. 6.04 Specific Performance. Each party agrees with the other that money damages for breaches of this Article VI will be inadequate and that the nonbreaching party shall, with respect to such breach, be entitled, in addition to money damages, to such legal process as would required the breaching party to cease the breach and to perform such further acts as are necessary to carry out the terms of this Article. 14 18 January 31, 1995 ARTICLE VI ROYALTIES 7.01 Royalty Rate. Pont agrees to pay to JTS, in accordance with the terms of this Article, in addition to all other sums due or which may become due under this Agreement, a royalty rate of: (a) for the first [*] beginning on the date that Pont begins to produce and sell non-three-and-a-half-inch disk drive JTS Products, [*] of the net sales revenues from sales during the [*] period of 2500 or more of such non-three-and-a-half-inch disk drive JTS Products to an OEM or into the distribution or end user markets; and (b) for the following [*] , [*] of the net sales revenues from sales during the [*] period of 2500 or more of such non-three-and-a-half-inch disk drive JTS Products to an OEM or into the distribution or end user markets; provided, in each instance, such royalty rate shall be due on the sale of the first 2499 such products upon the sale of the 2500th such product during the period specified. 7.02 When Sold. For purposes of Section 7.01 and 7.07, an item shall be considered sold by Pont when first invoiced or shipped, whichever is sooner, to a third party, 7.03 Net Sales Revenues. The net sales revenue shall be calculated by deducting from the gross sales price the following items to the extent they are included in the gross sales price: (a) Sales, turnover or other taxes on the sale or use; (b) Transportation and insurance charges payable by the seller on shipments to the destination specified by the purchaser or user; (c) Trade or quantity discounts (but not cash discounts or agents' commissions to the purchaser, user, representatives or Affiliates); (d) Credits allowed for items returned or not accepted by the purchaser or user. 7.04 Certain Sales Excluded. No royalty shall be charged on direct sales to JTS, or on the use of an item by Pont or its Affiliates for experimental, testing or sales demonstration purposes only. 15 19 January 31, 1995 7.05 Royalty Calculation on Items Used or Leased. For the purpose of computing royalties on items used by Pont or its Affiliates (except for items used for experimental testing or sales demonstration purposes only), such items shall be deemed sold at Pont's quoted F.O.B. factory (based upon the location at which such items are principally manufactured) sales price for such in effect as of the time the royalty on such items accrues under Section 7.02, or if no such items are so quoted, at the quoted price for the most similar item then being so quoted by Pont. 7.06 Payments. All payments hereunder by Pont to JTS shall be made in United States currency at a bank to be designated by JTS net of any deductions or withholdings for taxes or charges of any kind which Pont is required to withhold or deduct by law, provided that nothing in this Agreement shall be construed or deemed as imposing upon Pont the obligation to make any such deduction or withholding. To the extent any such deduction or withholding is made by Pont, Pont agrees promptly to forward such amount withheld or deducted to the pertinent agencies or entities imposing such charges. To compute net sales and to determine amounts payable pursuant to this Article, any currency other than United States legal tender shall be converted into United States legal tender in accordance with Section 9.10 hereof. 7.07 Time of Payment and Period for Which Royalty Paid. Royalties shall accrue during each quarterly-yearly period (or shorter period for the first and last periods for which royalties shall accrue) ending on March 31st, June 30th, September 30th, and December 31st of each year, and the corresponding payments shall be made thirty days after each quarterly period, respectively. 7.08 Late Payments. Any royalty payments made after the due date shall include interest from the due date of payment until the actual date of payment at the prime rate of interest in New York City publicly quoted by Chase Manhattan Bank N.A. for unsecured commercial loans to its more favored commercial customers ("Prime Rate") in effect on the due date, or the last business day prior to the due date if the due date is a bank holiday ("the Initial Prime Rate"), plus one and one-half percent (1.5%); if any such payments shall remain unpaid for more than 60 days after the due date, the Initial Prime Rate shall continue in effect until the first business day of the month next occurring after the month in which such sixty (60) day period shall end, where upon the Prime Rate to be used in computing interest hereunder for the month beginning on such first day and ending on the first business day of the next succeeding month shall be the Prime Rate in effect on that first business day and for each such monthly period occurring thereafter the Prime Rate in effect on the first business day of each such month. If Chase Manhattan Bank N.A. shall not be quoting such Prime Rate at any time, then the Prime Rate of any other United States Bank reasonably desiganted by JTS shall be used. 7.09 Records and Reports. Royalty payments under this Article shall be supported by a reasonably detailed statement of account for all transactions subject to royalty showing the basis for calculating the royalty due and the detail and purpose of the sums paid, and certified as accurate by Pont's chief financial officer or its representatives. Pont shall keep, at its usual place of business, and require its Affiliates to likewise keep, all books of account relating to the manufacture and sale, lease or use of items subject to royalties under this Article and shall produce such books for inspection by any authorized certified auditor or financial officer of JTS at reasonable times during normal business hours for the purpose of verifying the accuracy and adequacy of royalties due hereunder. If any audit shall find an error greater than 10% not in favor of JTS, then Pont shall pay the reasonable costs of such audit. 16 20 January 31, 1995 7.10 Governmental Approvals to U.S. Currency Payments. Pont agrees to obtain the approval of any foreign country authorities, if necessary, and to take whatever steps may be required, to remit to JTS in United States Dollars the royalties payable hereunder. 7.11 Royalties to Survive Contractual Patents or Knowledge of Others and Termination of License. Pont specifically acknowledges that notwithstanding JTS' proprietary rights in the Patents and Know-How under which Pont is being licensed to manufacture the items subject to royalty hereunder, it is agreeing to pay the royalties due hereunder in lieu of significant initial charges in return for JTS facilitating Pont's manufacture of the items subject to royalty and thereby permitting Pont to commence the manufacture of such items earlier than it would have otherwise been able to engage in such manufacture even if JTS had no proprietary rights in such Patents and Know-How. Accordingly, Pont agrees to pay the royalties due under this Article irrespective of the validity or term of the Patents, or whether patent applications presently pending fail to issue, or whether patent applications first made in the future covering JTS Products or Technology or Components thereof or Improvements thereto fail to issue, or whether third parties acquire knowledge of the Know-How. Additionally, Pont agrees that the provisions of this Article VII shall survive any termination of this Agreement or the license granted under Section 2.01 or any determination that the license granted under Section 2.01 is invalid for any reason and shall apply to any sales by Pont and its Affiliates following such termination or determination, whether or not such sales are consistent with the terms of this Agreement, as though such termination had not occurred or such determination had not been made. ARTICLE VIII TERMINATION 8.01 Bankruptcy of a Licensee. If a licensee under this Agreement shall be adjudicated insolvent, or files a petition in bankruptcy, or for reorganization, or if a licensee shall take advantage of any insolvency act, or make an assignment for the benefit of creditors, then, and in any such event, the licensee's rights but not its obligations under this Agreement shall forthwith terminate and the license herein granted shall not constitute an asset in reorganization, bankruptcy or insolvency which may be assigned or which may accrue to any court- or creditor-appointed referee, receiver or committee. Such licensee shall also promptly deliver to the licensor all materials embodying information or data transferred pursuant to this Agreement, including, but not limited to, all Technical information. 8.02 Bankruptcy of a Licensor. If a licensor under this Agreement shall be adjudicated insolvent, or files a petition in bankruptcy, or for reorganization, or if a licensor shall take advantage of any insolvency act, or make an assignment for the benefit of creditors, then, and in any such event, the licensor's rights but not its obligations under this Agreement shall forthwith terminate. 17 21 January 31, 1995 ARTICLE IX GENERAL PROVISIONS 9.01 Notices. All notices, requests demands, waivers, consents and other communications hereunder shall be in writing, shall be delivered either in person, by telegraphic, facsimile or other electronic means, by overnight air courier or by mail, and shall be deemed to have been duly given and to have become effective (a) upon receipt if delivered in person or by telegraphic, facsimile or other electronic means (b) one business day after having been delivered to an air courier for overnight delivery or (c) three business days after having been deposited in the mails as certified or registered mail, return receipt requested, all fees prepaid, directed to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by a party hereto): If to JTS, addressed to: JT Storage, Inc. 1289 Anvilwood Avenue Sunnyvale, California 94089 Attn: President Facsimile: (408)-747-0849 If to Pont, addressed to: Pont Peripherals Corporation 912 West Maude Sunnyvale, California 94086 Attn: President Facsimile: (408)-749-9499 9.02 Successors and Assigns. The rights under this Agreement shall not be assignable or transferable nor the duties delegable by either party without the prior written consent of the other; and nothing contained in this Agreement, express or implied, is intended to confer upon any person or entity, other than the parties hereto and their permitted successors-in-interest and permitted assignees, any rights or remedies under or by reason of this Agreement unless so stated to the contrary. 9.03 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.04 Captions and Paragraph Headings. Captions and paragraph headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 18 22 January 31, 1995 9.05 Entirety of Agreement: Amendments. This Agreement (including any schedules and exhibits hereto) contains the entire understanding between the parties concerning the subject matter of this Agreement and supersedes all prior understandings and agreements, whether oral or written, between them with respect to the subject matter hereof and thereof. There are no representations, warranties, agreements, arrangements or understandings, oral or written, between the parties hereto relating to the subject matter of this Agreement and such other documents and instruments which are not fully expressed herein or therein. This Agreement may be amended or modified only by an agreement in writing signed by each of the parties hereto. All exhibits and schedules attached to or delivered in connection with this Agreement are integral parts of this Agreement as If fully set forth herein. 9.06 Construction. This Agreement and any documents or instruments delivered pursuant hereto shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this agreement or such other documents and instruments. 9.07 Waiver. The failure of a party to insist, in any one or more instances, on performance of any of the terms, covenants and conditions of this Agreement shall not be construed as a waiver or relinquishment of any rights granted hereunder or of the future performance of any such term, covenant or condition, but the obligations of the parties with respect thereto shall continue in full force and effect. No waiver of any provision or condition of this Agreement by a party shall be valid unless in writing signed by such party or operational by the terms of this Agreement. A waiver by one party of the performance of any covenant, condition, representation or warranty of the other party shall not invalidate this Agreement, nor shall such waiver be construed as a waiver of any other covenant, condition, representation or warranty. A waiver by any party of the time for performing any act shall not constitute a waiver of the time for performing any other act or the time for performing an identical act required to be performed at a later time. 9.08 Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of California, without regard to the principles of conflicts of law thereof. 9.09 Remedies. (a) All disputes, controversies or claims arising out of, or relating to this Agreement, or the making, validity, interpretation, performance or breach of this Agreement, shall be settled by arbitration in San Jose, California under the commercial arbitration rules of the American Arbitration Association in effect on the date of this Agreement. The arbitration shall be conducted by one arbitrator selected in accordance with Section 12 of the Rules. The arbitrator shall render a written decision, stating the reasons therefor, and shall render his award within 12 months of the request for arbitration. The award shall be final, binding and enforceable, and may be entered in any court of competent jurisdiction. The successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in the arbitration or any court proceeding, in addition to any other relief to which such party is entitled. Such arbitration proceedings shall constitute a condition precedent to any actions brought in the courts of any jurisdiction which may have cognizance of this Agreement. 19 23 January 31, 1995 (b) Each party's obligation under this Agreement is unique. If any party should default in its obligations under the Agreement, the parties each acknowledge that it would be extremely impractical to measure the resulting damages; accordingly, the nondefaulting party, in addition to any other available rights or remedies, may sue in equity for specific performance, and the parties each expressly waive the defense that a remedy in damages will be adequate. Nothing contained herein is intended to, nor shall limit or affect, any rights at common law or by statute or otherwise of any party aggrieved as against any other party for breach or threatened breach of any provision of this Agreement, it being the intention by this provision to make clear the agreement of the parties that the respective rights and obligations of the parties shall be enforceable in equity as well as at law or otherwise. (c) NOTWITHSTANDING ANY OTHER TERM OF THIS AGREEMENT, NEITHER PARTY HEREUNDER NOR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES OR AGENTS SHALL BE LIABLE TO THE OTHER PARTY HEREUNDER OR TO ANY THIRD PARTY FOR ANY LOSS OF USE, LOSS OF GOODWILL, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST REVENUES OR PROFITS) OR SIMILAR DAMAGES, WHETHER BASED ON TORT (INCLUDING, WITHOUT LIMITATION, NEGLIGENCE OR STRICT LIABILITY), CONTRACT OR OTHER LEGAL OR EQUITABLE GROUNDS, EVEN IF SUCH PARTY HAS BEEN ADVISED OR HAD REASON TO KNOW OF THE POSSIBILITY OF SUCH DAMAGES. 9.10 Status of Parties. JTS and Pont are and intend to remain independent contractors, and this Agreement shall not constitute, create or be interpreted as a joint venture, partnership or formal business organization of any kind. Nothing in this Agreement shall be construed to constitute either party the agent of the other for the purpose of accepting service of legal process or binding either party as principal to any representation, commitments or agreements made by the other in connection with the manufacture, sale, distribution, use or application of the Products or Technology referred to herein or otherwise. 9.11 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be valid, binding and enforceable under applicable law, but if any provision of this Agreement is held to be invalid, void (or voidable) or unenforceable under applicable law, such provision shall be ineffective only to the extent held to be invalid, void (or voidable) or unenforceable, without affecting the remainder of such provision or the remaining provisions of this Agreement. 9.12 Payments in U.S. Currency. All payments from one party to the other and the calculation of all amounts due will be in United States dollars. Any conversions to United States dollars shall be based upon the midpoint between the official banking buying and selling rate of United States dollars at the close of business on the business day immediately preceding the day on which such conversion is to be calculated for purposes of carrying out the terms of this Agreement. 9.13 Consents Not Unreasonably Withheld. Wherever the consent or approval of any party is required under this Agreement, such consent or approval shall not be unreasonably withheld, unless such consent or approval is to be given by such party at the sole or absolute discretion of such party or is otherwise similarly qualified. 20 24 January 31, 1995 9.14 Time Is of the Essence. Time is hereby expressly made of the essence with respect to each and every term and provision of this Agreement. The parties acknowledge that each will be relying upon the timely performance by the other of its obligations hereunder as a material inducement to each party's execution of this Agreement. Neither party shall be liable for any delay or failure in its performance of any of the acts required by this Agreement when such delay or failure arises beyond the control and without the fault or negligence of such party. Such causes may include, without limitation, acts of God or public enemies, labor disputes, material or component shortages, embargoes, rationing, acts of local, State or national governments or public agencies, utility or communication failures or delays, fire, flood, epidemics, riots or strikes. The time for performance of any act delayed by such events may be postponed for a period equal to the delay. IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written. JTS JT STORAGE, INC. By: /s/ Sirjang L. Tandon ------------------------- Its: Chairman & CEO ------------------------ Pont PONT PERIPHERALS CORPORATION By: /s/ Daniel Dooley ------------------------- Its: President ------------------------ 21 EX-21.1 49 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 List of Subsidiaries 1. Atari Corp. (U.K.) Ltd., a corporation organized under the laws of the United Kingdom. 2. Modular Electronics (India) Pvt. Ltd., a corporation organized under the laws of India. EX-23.1 50 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP /S/ Arthur Andersen ---------------------------------- San Jose, California June 17, 1996 EX-23.2 51 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.2 CONSENT OF DELOITTE & TOUCHE LLP We consent to the use in this Registration Statement of JT Storage Inc. on Form S-4 of our report dated March 1, 1996 (April 8, 1996 as to Note 16) relating to Atari Corporation, appearing in the Joint Proxy Statement/Prospectus, which is a part of this Registration Statement, and to the references to us under the heading "Experts" in such Joint Proxy Statement/Prospectus. /s/ Deloitte & Touche - ---------------------------------- DELOITTE & TOUCHE LLP San Jose, California June 19, 1996 EX-27.1 52 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS YEAR APR-28-1996 JAN-28-1996 JAN-29-1996 JAN-30-1996 APR-28-1996 JAN-28-1996 5,116 547 0 0 10,694 2,016 1,086 730 12,983 2,093 1,585 240 20,221 10,774 4,009 2,831 46,871 19,813 61,669 27,116 0 0 29,697 27,785 0 0 0 0 (50,876) (38,573) 46,871 19,813 17,481 13,502 17,581 18,777 19,434 28,548 29,587 50,588 56 32 356 726 542 589 (12,855) (33,050) 0 0 (12,855) (30,050) 0 0 0 0 0 0 (12,855) (33,050) (1.47) (7.17) (1.47) (7.17)
EX-99.1 53 FORM OF JTS PROXY 1 EXHIBIT 99.1 JTS CORPORATION PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints David T. Mitchell and W. Virginia Walker, jointly and severally, proxies with full power of substitution, to vote all shares of Common Stock and Series A Preferred Stock of JT Storage, Inc., a Delaware corporation, which the undersigned is entitled to vote at the Special Meeting of Stockholders to be held at the offices of the Company, located at 166 Baypointe Parkway, San Jose, California, on July , 1996 at 9:00 a.m., local time, or any adjournment thereof. The proxies are being directed to vote as specified below or, if no specification is made, FOR the proposal to approve (a) the Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 between Atari Corporation, a Nevada corporation ("Atari"), and JTS Corporation, and (b) the merger of Atari with and into JTS Corporation, and in accordance with their discretion on such other matters that may properly come before the meeting. The directors recommend a FOR vote on each item. (continued and to be signed on reverse side.) 1. 2 PLEASE MARK YOUR VOTES AS THIS: /X/ 1. Proposal to approve (a) the Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 between Atari and JTS Corporation, and (b) the merger of Atari with and into JTS Corporation. FOR AGAINST ABSTAIN / / / / / / I plan to attend the Meeting: Dated:_________________________________ _______________________________________ (Signature) _______________________________________ (Signature) (Signature(s) must be exactly as name(s) appear on this proxy.) (If signing as attorney, executor, administrator, trustee or guardian, please give full title as such, and, if signing for a corporation, please give your title. When shares are in the names of more than one person, each should sign this Proxy.) 2. EX-99.2 54 FORM OF ATARI PROXY 1 EXHIBIT 99.2 ATARI CORPORATION PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Jack Tramiel and Sam Tramiel, jointly and severally, proxies with full power of substitution, to vote all shares of Common Stock of Atari Corporation, a Nevada corporation, which the undersigned is entitled to vote at the Special Meeting of Stockholders to be held at the offices of Wilson Sonsini Goodrich & Rosati, P.C., legal counsel to the Company, located at 650 Page Mill Road, Palo Alto, California, on July , 1996 at 9:00 a.m., local time, or any adjournment thereof. The proxies are being directed to vote as specified below or, if no specification is made, FOR the proposal to approve (a) the Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 between Atari and JTS Corporation, a Delaware corporation ("JTS"), and (b) the merger of Atari with and into JTS, and in accordance with their discretion on such other matters that may properly come before the meeting. The directors recommend a FOR vote on each item. (Continued and to be signed on reverse side.) 2 PLEASE MARK YOUR VOTES AS THIS: /X/ 1. Proposal to approve (a) the Amended and Restated Agreement and Plan of Reorganization dated as of April 8, 1996 between Atari and JTS, and (b) the merger of Atari with and into JTS. FOR AGAINST ABSTAIN / / / / / / I plan to attend the Meeting: Dated:______________________________ ____________________________________ (Signature) ____________________________________ (Signature) (Signature(s) must be exactly as name(s) appear on this proxy.) (If signing as attorney, executor, administrator, trustee or guardian, please give full title as such, and, if signing for a corporation, please give your title. When shares are in the names of more than one person, each should sign this Proxy.) -2- -----END PRIVACY-ENHANCED MESSAGE-----