-----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, UyMx/l69BZ7bH5rgKIRJNvKA5mfEO438WqynmhqjcFMyawJW7M9DoJVYnnsNJkxz u+CA0QDdvFMsr+vc0cWccw== 0000892569-01-500314.txt : 20010518 0000892569-01-500314.hdr.sgml : 20010518 ACCESSION NUMBER: 0000892569-01-500314 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20010517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROCOM TECHNOLOGY INC CENTRAL INDEX KEY: 0001025711 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 330268063 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-54462 FILM NUMBER: 1642903 BUSINESS ADDRESS: STREET 1: 58 DISCOVERY CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9497944257 MAIL ADDRESS: STREET 1: 58 DISCOVERY CITY: IRVINE STATE: CA ZIP: 92618 S-3/A 1 a68857a1s-3a.txt AMENDMENT NO. 1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2001 REGISTRATION NO. 333-54462 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- PROCOM TECHNOLOGY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 33-0268063 - --------------------------------- ------------------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 58 DISCOVERY IRVINE, CALIFORNIA 92618 (949) 852-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------------- ALEX AYDIN EXECUTIVE VICE PRESIDENT - FINANCE AND ADMINISTRATION, AND CHIEF FINANCIAL OFFICER PROCOM TECHNOLOGY, INC. 58 DISCOVERY IRVINE, CALIFORNIA 92618 (949) 852-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: J. JAY HERRON LAIRD H. SIMONS III TERRENCE R. ALLEN KATHERINE TALLMAN SCHUDA O'MELVENY & MYERS LLP R. GREGORY ROUSSEL 610 NEWPORT CENTER DRIVE, SUITE 1700 FENWICK & WEST LLP NEWPORT BEACH, CALIFORNIA 92660 TWO PALO ALTO SQUARE (949) 760-9600 PALO ALTO, CALIFORNIA 94306 (650) 494-0600 -------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]____________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 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 THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 PROSPECTUS 2,000,000 SHARES PROCOM TECHNOLOGY, INC. COMMON STOCK ---------------- We are offering for sale up to 2,000,000 shares of our common stock. Our common stock trades on the Nasdaq National Market under the symbol "PRCM." The last reported sale price of our common stock on May 16, 2001 was $13.15 per share. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- ================================================================================ PLACEMENT PROCEEDS TO PRICE TO PUBLIC AGENT'S FEE(1) COMPANY(2) - -------------------------------------------------------------------------------- PER SHARE - -------------------------------------------------------------------------------- TOTAL ================================================================================ (1) We have agreed to pay to Merrill Lynch & Co., as placement agent, a fee in connection with the arrangement of this offering, to reimburse them for certain expenses and to indemnify them against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of approximately $260,000 payable by us. WE ARE OFFERING THESE SHARES OF COMMON STOCK ON A BEST EFFORTS BASIS PRINCIPALLY TO SELECTED INSTITUTIONAL INVESTORS AND STRATEGIC INVESTORS. WE HAVE RETAINED MERRILL LYNCH & CO. TO ACT AS THE EXCLUSIVE PLACEMENT AGENT IN CONNECTION WITH THE ARRANGEMENT OF THIS OFFERING. THE PLACEMENT AGENT IS NOT REQUIRED TO SELL A SPECIFIC NUMBER OR DOLLAR AMOUNT OF SHARES BUT WILL USE ITS BEST EFFORTS TO SELL ALL OF THE SHARES BEING OFFERED. FUNDS FROM INVESTORS WILL BE DEPOSITED INTO AN ESCROW ACCOUNT AND WILL NOT BE RELEASED UNTIL A MINIMUM OF $20,000,000, OR SUCH LESSER AMOUNT AS MAY BE AGREED TO BY US AND THE PLACEMENT AGENT, HAS BEEN DEPOSITED WITH THE ESCROW AGENT. We reserve the right to withdraw, cancel, modify or reject any order for the purchase of these shares in whole or in part for any reason. We reserve the right to terminate this offering at any time. Our executive offices are located at 58 Discovery, Irvine, California 92618, and the telephone number at that address is (949) 852-1000. MERRILL LYNCH & CO. The date of this prospectus is , 2001. 3 TABLE OF CONTENTS PAGE ---- Recent Developments......................................... 3 Risk Factors................................................ 4 Forward-Looking Statements.................................. 18 Use of Proceeds............................................. 19 Plan of Distribution........................................ 20 Description of Capital Stock ............................... 21 Validity of the Shares...................................... 23 Experts..................................................... 23 Where You Can Find More Information......................... 23 ---------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS. NEITHER WE NOR THE PLACEMENT AGENT HAVE AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH ANY DIFFERENT OR ADDITIONAL INFORMATION. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. INFORMATION CONTAINED IN OUR WEB SITE DOES NOT CONSTITUTE PART OF THIS PROSPECTUS. We have filed for federal trademark registration for Procom Technology, Inc., and many of our product names. All trademarks and trade names appearing in this prospectus are the property of their respective holders. 2 4 RECENT DEVELOPMENTS Our third fiscal quarter ended on April 30, 2001. We estimate that our total revenues for this quarter will be in the range of $7.6 million to $8.0 million and that revenues from sales of our NAS products during this quarter will be in the range of $5.6 million to $6.0 million. 3 5 RISK FACTORS Before investing in our common stock, you should be aware that there are risks inherent in our business, including those indicated below. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business could be harmed. In that case, the trading price of our common stock could decline, and you might lose part or all of your investment. You should carefully consider the following risk factors as well as the other information in this prospectus. COMPETING DATA STORAGE TECHNOLOGIES MAY EMERGE AS A STANDARD FOR DATA STORAGE SOLUTIONS, WHICH COULD CAUSE GROWTH IN THE NAS MARKET NOT TO MEET OUR EXPECTATIONS AND DEPRESS OUR STOCK PRICE. The market for data storage is rapidly evolving. There are other storage technologies in use, including storage area network technology, which provide an alternative to network attached storage. We are not able to predict how the data storage market will evolve. For example, it is not clear whether usage of a number of different solutions will grow and co-exist in the marketplace or whether one or a small number of solutions will be dominant and displace the others. It is also not clear whether network attached storage technology will emerge as a dominant or even prevalent solution. Whether NAS becomes an accepted standard will be due to factors outside our control. If a solution other than network attached storage emerges as the standard in the data storage market, growth in the network attached storage market may not meet our expectations. In such event, our growth and the price of our stock would suffer. IF GROWTH IN THE NAS MARKET DOES NOT MEET OUR EXPECTATIONS, OUR FUTURE FINANCIAL PERFORMANCE COULD SUFFER. We believe our future financial performance will depend in large part upon the continued growth in the NAS market and on emerging standards in this market. We intend for NAS products to be our primary business. The market for NAS products, however, may not continue to grow. Long-term trends in storage technology remain unclear and some analysts have questioned whether competing technologies, such as storage area networks, may emerge as the preferred storage solution. If the NAS market grows more slowly than anticipated, or if NAS products based on emerging standards other than those adopted by us become increasingly accepted by the market, our operating results could be harmed. THE REVENUE AND PROFIT POTENTIAL OF NAS PRODUCTS IS UNPROVEN, AND WE MAY BE UNABLE TO ATTAIN REVENUE GROWTH OR PROFITABILITY FOR OUR NAS PRODUCT LINES. NAS technology is relatively recent, and our ability to be successful in the NAS market may be negatively affected by not only a lack of growth of the NAS market but also the lack of market acceptance of our NAS products. Additionally, we may be unable to achieve profitability as we transition to a greater emphasis on NAS products. 4 6 IF WE FAIL TO SUCCESSFULLY MANAGE OUR TRANSITION TO A FOCUS ON NAS PRODUCTS, OUR BUSINESS AND PROSPECTS WOULD BE HARMED. We began developing NAS products in 1997. Since then, we have focused our efforts and resources on our NAS business, and we intend to continue to do so. We expect to continue to wind down our non-NAS product development and marketing efforts. In the interim, we expect to continue to rely in part upon sales of our non-NAS products to fund operating and development expenses. Net sales of our non-NAS products have been declining in amount and as a percentage of our overall net sales, and we expect these declines to continue. If the decline in net sales of our non-NAS products varies significantly from our expectations, or the decline in net sales of our non-NAS products is not substantially offset by increases in sales of our NAS products, we may not be able to generate sufficient cash flow to fund our operations or to develop our NAS business. We also expect our transition to a NAS-focused business to require us to continue: - engaging in significant marketing and sales efforts to achieve market awareness as a NAS vendor; - reallocating resources in product development and service and support of our NAS appliances; - modifying existing and entering into new channel partner relationships to include sales of our NAS appliances; and - expanding and reconfiguring manufacturing operations. In addition, we may face unanticipated challenges in implementing our transition to a NAS-focused company. We may not be successful in managing any anticipated or unanticipated challenges associated with this transition. Moreover, we expect to continue to incur costs in addressing these challenges, and there is no assurance that we will be able to generate sufficient revenues to cover these costs. If we fail to successfully implement our transition to a NAS-focused company, our business and prospects would be harmed. THE CALIFORNIA ENERGY CRISIS IS CAUSING US TO EXPERIENCE SIGNIFICANTLY HIGHER ENERGY COSTS AND PERIODIC INTERRUPTIONS IN OUR SUPPLY OF ELECTRICAL POWER, WHICH COULD DISRUPT OUR BUSINESS, HARM OUR OPERATING RESULTS AND DEPRESS THE PRICE OF OUR COMMON STOCK. California is currently experiencing a shortage of electrical power and other energy sources. This shortage has resulted in significantly higher electricity and other energy costs and has periodically resulted in rolling brown-outs, or the temporary and generally unannounced loss of the primary electrical power source. The computer and manufacturing equipment and other systems in our headquarters in Irvine, California, are powered by electricity. Currently, we do not have secondary electrical power sources to mitigate the impacts of temporary or longer-term electrical outages. It is not anticipated that the energy shortages will abate soon; therefore, we expect to continue to experience higher costs for electricity and other energy sources, as well as brown-outs and black-outs. We may also become subject to usage restrictions or other energy consumption regulations that could adversely impact or disrupt our manufacturing and other activities. Continued higher energy costs could materially harm our profitability and depress the price of our common stock. In addition, if we experience interruptions in our supply of electricity, our manufacturing and other operations would be disrupted, which could materially adversely affect our results of operations and depress the price of our common stock. IF U.S. OR WORLD ECONOMIC CONDITIONS WORSEN, INFORMATION TECHNOLOGY SPENDING ON DATA STORAGE AND OTHER CAPITAL EQUIPMENT COULD DECLINE. IF TECHNOLOGY SPENDING IS REDUCED, OUR SALES AND OPERATING RESULTS COULD BE HARMED. Many of our customers are affected by economic conditions in the United States and throughout the world. Many companies have recently announced that they will reduce their spending on data storage and other capital equipment. If spending on data storage technology products is reduced by customers and potential customers, our sales could be harmed, and we may experience greater pressures on our gross margins. If economic conditions do not improve, or if our customers reduce their overall information technology purchases, our sales, gross profits and operating results may be reduced. OUR AGREEMENT WITH HEWLETT-PACKARD COMPANY IS UNLIKELY TO GENERATE SIGNIFICANT NET SALES. We believe our relationship with Hewlett-Packard Company helped us accomplish our strategy to increase penetration in the NAS market. There is no minimum purchase commitment under our agreement with Hewlett-Packard. We do not currently, and are unlikely ever to, generate significant net sales under this agreement. The Hewlett-Packard agreement has a five-year term, and there is no assurance that the agreement can or will be renewed. We commenced limited shipments under the agreement in April 2000 and sales to Hewlett-Packard have never been significant. In February 2001, Hewlett-Packard notified us that they do not anticipate they will purchase additional NAS products from us in the future. While neither they nor we have formally terminated the agreement, we do not anticipate that future sales to Hewlett-Packard will be significant. 5 7 IF WE FAIL TO INCREASE THE NUMBER OF DIRECT AND INDIRECT SALES CHANNELS FOR OUR NAS PRODUCTS, OUR ABILITY TO INCREASE NET SALES MAY BE LIMITED. In order to grow our business, we will need to increase market awareness and sales of our NAS appliances. To achieve these objectives, we believe it will be necessary to increase the number of our direct and indirect sales channels. We plan to significantly increase the number of our direct sales personnel. However, there is intense competition for these professionals, and we may not be able to attract and retain sufficient new sales personnel. We also plan to expand revenues from our indirect sales channels, including distributors, VARs, OEMs and systems integrators. To do this, we will need to modify and expand our existing relationships with these indirect channel partners, as well as enter into new indirect sales channel relationships. We may not be successful in accomplishing these objectives. If we are unable to expand our direct or indirect sales channels, our ability to increase revenues may be limited. BECAUSE WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS OR RESELLERS, SUCH AS INGRAM MICRO, TECH DATA, COMPUCOM AND CUSTOM EDGE, THESE CUSTOMERS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF COMPETITORS, WHICH COULD HARM OUR OPERATING RESULTS. Our distributors and resellers generally offer products of several different companies, including products of our competitors. Accordingly, these distributors and resellers, such as Ingram Micro, Tech Data, Compucom and Custom Edge (formerly Inacom), may give higher priority to products of our competitors, which could harm our operating results. In addition, our distributors and resellers often demand additional significant selling concessions and inventory rights, such as limited return rights and price protection. We cannot assure you that sales to our distributors or resellers will continue, or that these sales will be profitable. BECAUSE WE HAVE ONLY APPROXIMATELY THREE YEARS OF OPERATING HISTORY IN THE NAS MARKET, WHICH IS NEW AND RAPIDLY EVOLVING, OUR HISTORICAL FINANCIAL INFORMATION IS OF LIMITED VALUE IN PROJECTING OUR FUTURE OPERATING RESULTS OR PROSPECTS. We have been manufacturing and selling our NAS products for only approximately three years. For the year ended July 31, 2000 and the first six months of the current fiscal year 2001, these products accounted for less than 41% and 66%, respectively, of our total net sales. We expect sales of our NAS products to represent an increasing percentage of our net sales in the future. Because our operating history in the NAS product market is only approximately three years, as well as the rapidly evolving nature of the NAS market, it is difficult to evaluate our business or our prospects. In particular, our historical financial information is of limited value in projecting our future operating results. MARKETS FOR BOTH OUR NAS APPLIANCES AND OUR NON-NAS PRODUCTS ARE INTENSELY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, WE MAY LOSE MARKET SHARE OR BE REQUIRED TO REDUCE PRICES. The markets in which we operate are intensely competitive and characterized by rapidly changing technology. Increased competition could result in price reductions, reduced gross margins or loss of market share, any of which could harm our operating results. We compete with other NAS companies, direct-selling storage providers and smaller vendors that provide storage solutions to end-users. In our non-NAS markets, we 6 8 compete with computer manufacturers that provide storage upgrades for their own products, as well as with manufacturers of hard drives, CD servers and arrays and storage upgrade products. Many of our current and potential competitors have longer operating histories, greater name recognition, larger customer bases and greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products, and reduce prices to increase market share. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We may not be able to compete successfully against current or future competitors. In addition, new technologies may increase competitive pressures. WE DEPEND ON A FEW CUSTOMERS, INCLUDING DISTRIBUTORS SUCH AS INGRAM MICRO AND TECH DATA AND SPECIALIZED END-USERS, FOR A SUBSTANTIAL PORTION OF OUR NET SALES AND ACCOUNTS RECEIVABLE, AND CHANGES IN THE TIMING AND SIZE OF THESE CUSTOMERS' ORDERS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE. Three customers accounted for approximately 42% and 45% of our total accounts receivable at July 31, 1999 and July 31, 2000, respectively, and one individual customer accounted for approximately 9% and 7% of our net sales for fiscal 1999 and 2000. One customer, Storway, a European storage service provider, accounted for approximately 20% of our net sales for the first six months of the current fiscal year 2001, and three customers, Storway, Ingram Micro and J-Dot Technology, accounted for approximately 56% of our total accounts receivable at January 31, 2001. In fiscal 1999 and 2000, we sold our non-NAS products principally to distributors and master resellers such as Ingram Micro, Tech Data, Custom Edge (previously Inacom) and Compucom. Unless and until we diversify and expand our customer base for NAS products, our future success will depend to a large extent on the timing and size of future purchase orders, if any, from these customers. In addition, we expect that single site purchasers of large installations of our NAS products will purchase large volumes of our NAS products over relatively short periods of time. This will cause both our sales and our accounts receivable to be highly concentrated and significantly dependent on one or only a few customers, as has occurred during the first six months of the current fiscal year 2001. If we lose a major customer, or if one of our customers significantly reduces its purchasing volume or experiences financial difficulties and is unable to pay its debts, our results of operations could be harmed. We cannot be certain that customers that have accounted for significant revenues in past periods will continue to purchase our products in future periods. OUR GROSS MARGINS OF OUR VARIOUS PRODUCT LINES HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY. FOR EXAMPLE, WE MAY SEE REDUCED SALES OF HIGHER-MARGIN CD SERVICES OR NOTEBOOK UPGRADE PRODUCTS AND WE MAY NOT SEE INCREASED SALES OF OUR NAS APPLIANCES. Historically, our gross margins have fluctuated significantly. Our gross margins vary significantly by product line and distribution channel, and, therefore, our overall gross margin varies with the mix of products we sell. Our markets are characterized by intense competition and declining average unit selling prices over the course of the relatively short life cycles of individual products. For example, we derive a significant portion of our sales from disk drives, CD servers and arrays, and storage upgrade products. The market for these products is highly competitive and subject to intense pricing pressures. Some of these products, such as CD servers and arrays and some laptop storage upgrade systems, have historically generated high gross margins, although we 7 9 have experienced significant declines in sales of these products. Sales of disk drive upgrade systems generally generate lower gross margins than those of our NAS products. If we fail to increase sales of our NAS appliances, or if demand, sales or gross margins for CD servers and arrays and our laptop storage upgrade systems decline rapidly, we believe our overall gross margins will continue to decline. Our gross margins have been and may continue to be affected by a variety of other factors, including: - new product introductions and enhancements; - competition; - changes in the distribution channels we use; - the mix and average selling prices of products; and - the cost and availability of components and manufacturing labor. IF WE ARE UNABLE TO TIMELY INTRODUCE COST-EFFECTIVE HARDWARE OR SOFTWARE SOLUTIONS FOR NAS ENVIRONMENTS, OR IF OUR PRODUCTS FAIL TO KEEP PACE WITH TECHNOLOGICAL CHANGES IN THE MARKETS WE SERVE, OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. Our future growth will depend in large part upon our ability to successfully develop and introduce new hardware and software for the NAS market. Due to the complexity of products such as ours, and the difficulty in estimating the engineering effort required to produce new products, we face significant challenges in developing and introducing new products. We may be unable to introduce new products on a timely basis or at all. If we are unable to introduce new products in a timely manner, our operating results could be harmed. Even if we are successful in introducing new products, we may be unable to keep pace with technological changes in our markets and our products may not gain any meaningful market acceptance. The markets we serve are characterized by rapid technological change, evolving industry standards, and frequent new product introductions and enhancements that could render our products obsolete and less competitive. As a result, our position in these markets could erode rapidly due to changes in features and functions of competing products or price reductions by our competitors. In order to avoid product obsolescence, we will have to keep pace with rapid technological developments and emerging industry standards. We may not be successful in doing so, and if we fail in this regard, our operating results could be harmed. WE RELY UPON A LIMITED NUMBER OF SUPPLIERS FOR SEVERAL KEY COMPONENTS USED IN OUR PRODUCTS, INCLUDING DISK DRIVES, COMPUTER BOARDS, POWER SUPPLIES, MICROPROCESSORS AND OTHER COMPONENTS, AND ANY DISRUPTION OR TERMINATION OF THESE SUPPLY ARRANGEMENTS COULD DELAY SHIPMENT OF OUR PRODUCTS AND HARM OUR OPERATING RESULTS. We rely upon a limited number of suppliers of several key components used in our products, including disk drives, computer boards, power supplies and microprocessors. In the past, we have experienced periodic shortages, selective supply allocations and increased prices for these and other components. We may experience similar supply issues in the future. Even if we are able to obtain component supplies, the quality of these components may not meet our requirements. For example, in order to meet our product performance 8 10 requirements, we must obtain disk drives of extremely high quality and capacity. Even a small deviation from our requirements could render any of the disk drives we receive unusable by us. In the event of a reduction or interruption in the supply or a degradation in quality of any of our components, we may not be able to complete the assembly of our products on a timely basis or at all, which could force us to delay or reduce shipments of our products. If we were forced to delay or reduce product shipments, our operating results could be harmed. In addition, product shipment delays could adversely affect our relationships with our channel partners and current or future end-users. UNDETECTED DEFECTS OR ERRORS FOUND IN OUR PRODUCTS, OR THE FAILURE OF OUR PRODUCTS TO PROPERLY INTERFACE WITH THE PRODUCTS OF OTHER VENDORS, MAY RESULT IN DELAYS, INCREASED COSTS OR FAILURE TO ACHIEVE MARKET ACCEPTANCE, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS. Complex products such as those we develop and offer may contain defects or errors, or may fail to properly interface with the products of other vendors, when first introduced or as new versions are released. Despite internal testing and testing by our customers or potential customers, we do, from time to time, and may in the future encounter these problems in our existing or future products. Any of these problems may: - cause delays in product introductions and shipments; - result in increased costs and diversion of development resources; - require design modifications; or - decrease market acceptance or customer satisfaction with these products, which could result in product returns. In addition, we may not find errors or failures in our products until after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could significantly harm our operating results. Our current or potential customers might seek or succeed in recovering from us any losses resulting from errors or failures in our products. IF WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. Net sales to our international customers, including export sales from the United States, accounted for approximately 60% of our net sales for the first six months of current fiscal year 2001 as compared to 44% of our net sales for the first six months of fiscal year 2000, 41% of our net sales for the year ended July 31, 2000 and approximately 33% of our net sales for the year ended July 31, 1999. We believe that our growth and profitability will require successful expansion of our international operations to which we have committed significant resources. Our international operations will expose us to operational challenges that we would not otherwise face if we conducted our operations only in the United States. These include: - currency exchange rate fluctuations, particularly when we sell our products in denominations other than U.S. dollars; - difficulties in collecting accounts receivable and longer accounts receivable payment cycles; 9 11 - reduced protection for intellectual property rights in some countries, particularly in Asia; - legal uncertainties regarding tariffs, export controls and other trade barriers; - the burdens of complying with a wide variety of foreign laws and regulations; and - seasonal fluctuations in purchasing patterns in other countries, particularly in Europe. Any of these factors could have an adverse impact on our existing international operations and business or impair our ability to continue expanding into international markets. For example, our reported sales can be affected by changes in the currency rates in effect during any particular period. The effects of currency fluctuations were evident in our results of operations for the first six months of the current fiscal year 2001. During this period, the Euro and two currencies whose values are pegged to the Euro, declined in value significantly, and then increased in value significantly in the quarter ended January 31, 2001. As a result, in the quarter ended October 31, 2000, we incurred a foreign currency loss of approximately $160,000 while, in the quarter ended January 31, 2001, we realized a gain of $219,000. Also, these fluctuation gains can cause us to report higher or lower sales by virtue of the translation of the subsidiary's sales into US dollars at an average rate in effect throughout the quarter. In addition, we have funded operational losses of our subsidiaries of approximately $2.8 million between the date of purchase and January 31, 2001, and if our subsidiaries continue to incur operational losses, our cash and liquidity would be negatively impacted. In order to successfully expand our international sales, we must strengthen foreign operations, hire additional personnel and recruit additional international distributors and resellers. Expanding internationally and managing the financial and business operations of our foreign subsidiaries will also require significant management attention and financial resources. For example, our foreign subsidiaries in Europe have incurred operational losses. To the extent that we are unable to address these concerns in a timely manner, our growth, if any, in international sales will be limited, and our operating results could be materially adversely affected. In addition, we may not be able to maintain or increase international market demand for our products. OUR PROPRIETARY SOFTWARE RELIES ON OUR INTELLECTUAL PROPERTY, AND ANY FAILURE BY US TO PROTECT OUR INTELLECTUAL PROPERTY COULD ENABLE OUR COMPETITORS TO MARKET PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS, WHICH WOULD ADVERSELY AFFECT OUR NET SALES. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary software or technology. We believe the protection of our proprietary technology is important to our business. If we are unable to protect our intellectual property rights, our business could be materially adversely affected. We currently rely on a combination of copyright and trademark laws and trade secrets to protect our proprietary rights. In addition, we generally enter into confidentiality agreements with our employees and license agreements with end-users and control access to our source code and other intellectual property. We have applied for the registration of some, but not all, of our trademarks. We have applied for U.S. patents with respect to the design and operation of our NetFORCE product, and we anticipate that we may apply for additional patents. It is possible that no patents will issue from our currently pending applications. New patent applications may not result in issued patents and may not provide us with any competitive advantages over, or may be challenged by, third parties. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries, and the enforcement 10 12 of those laws, do not protect proprietary rights to as great an extent as do the laws of the United States. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent issued to us or other intellectual property rights of ours. In addition, we may initiate claims or litigation against third parties for infringement of our proprietary rights to establish the validity of our proprietary rights. This litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel. WE MAY FROM TIME TO TIME BE SUBJECT TO CLAIMS OF INFRINGEMENT OF OTHER PARTIES' PROPRIETARY RIGHTS OR CLAIMS THAT OUR OWN TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS ARE INVALID, AND IF WE WERE TO SUBSEQUENTLY LOSE OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY AFFECTED. We may from time to time receive claims that we are infringing third parties' intellectual property rights or claims that our own trademarks, patents or other intellectual property rights are invalid. For example, we have been recently notified by Intel Corporation that our products may infringe some of the intellectual property rights of Intel. In its notification, Intel offered us a non-exclusive license for patents in their portfolio. We are investigating whether our products infringe the patents of Intel, and we have had discussions with Intel regarding this matter. We do not believe that we infringe the patents of Intel, but our discussions and our investigation are preliminary, and we expect we will continue discussions with Intel. We cannot assure you that Intel would not be successful in asserting a successful claim of infringement, or if we were to seek a license from Intel regarding its patents, that Intel would continue to offer us a non-exclusive license on any terms. We expect that companies in our markets will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. The resolution of any claims of this nature, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays, require us to redesign our products or require us to enter into royalty or licensing agreements, any of which could harm our operating results. Royalty or licensing agreements, if required, might not be available on terms acceptable to us or at all. The loss of access to any key intellectual property right could harm our business. OUR NET SALES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY FLUCTUATIONS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE. In recent periods, we have experienced significant declines in net sales and gross profit and incurred operating losses, causing our quarterly operating results to vary significantly. If we fail to meet the expectations of investors or securities analysts, as well as our internal operating goals, as a result of any future fluctuations in our quarterly operating results, the market price of our common stock could decline significantly. Our net sales and quarterly operating results are likely to fluctuate significantly in the future due to a number of factors. These factors include: - market acceptance of our new products and product enhancements or those of our competitors; - the level of competition in our target product markets; 11 13 - delays in our introduction of new products; - changes in sales volumes through our distribution channels, which have varying commission and sales discount structures; - changing technological needs within our target product markets; - the impact of price competition on the selling prices for our non-NAS products, which continue to represent a majority of our net sales; - the availability and pricing of our product components; - our expenditures on research and development and the cost to expand our sales and marketing programs; and - the volume, mix and timing of orders received. Due to these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. In addition, it is difficult for us to forecast accurately our future net sales. This difficulty results from our limited operating history in the emerging NAS market, as well as the fact that product sales in any quarter are generally booked and shipped in that quarter. Because we incur expenses, many of which are fixed, based in part on our expectations of future sales, our operating results may be disproportionately affected if sales levels are below our expectations. Our revenues in any quarter may also be affected by product returns and any warranty obligations in that quarter. Many of our distribution and reseller customers have limited return rights. In addition, we generally extend warranties to our customers that correspond to the warranties provided by our suppliers. If returns exceed applicable reserves or if a supplier were to fail to meet its warranty obligations, we could incur significant losses. In fiscal 2000, we experienced a 14% product return rate. This rate may vary significantly in the future, and we cannot assure you that our reserves for product returns will be adequate in any future period. IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY. Our continued success depends, in part, on our ability to identify, attract, motivate and retain qualified technical and sales personnel. Competition for qualified engineers and sales personnel, particularly in Orange County, California, is intense, and we may not be able to compete effectively to retain and attract qualified, experienced employees. Should we lose the services of a significant number of our engineers or sales people, we may not be able to compete successfully in our targeted markets and our business would be harmed. We believe that our success will depend on the continued services of our executive officers and other key employees. In particular, we rely on the services of our four founders, Messrs. Razmjoo, Alaghband, Aydin and Shahrestany. We maintain employment agreements with each of our founders. We do not maintain key-person life insurance policies on these individuals. The loss of any of these executive officers or other key employees could harm our business. 12 14 WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY, AND OUR FAILURE TO DO SO COULD REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US ON FAVORABLE OR ANY TERMS. In recent periods, we have experienced significant declines in net sales and gross profit, and we have incurred operating losses. We incurred operating losses of $5.2 million for fiscal 1999, $12.1 million for fiscal 2000 and $5.6 million (including a charge for in-process research and development) for the first six months of the current fiscal year 2001. We expect to continue to incur operating losses through at least the third quarter of fiscal 2001. As part of our strategy to focus on the NAS market, we plan to significantly increase our direct sales force and to increase our investment in research and development and marketing efforts. We will need to significantly increase our revenues from our NAS products to achieve and maintain profitability. The revenue and profit potential of these products is unproven. We may not be able to generate significant or any revenues from our NAS products or achieve or sustain profitability in the future. In addition, we have invested substantial cash in our new corporate headquarters. If we are unable to achieve or sustain profitability in the future, we will have to seek additional financing in the future, which may not be available to us on favorable or any terms. CONTROL BY OUR EXISTING SHAREHOLDERS COULD DISCOURAGE POTENTIAL ACQUISITIONS OF OUR BUSINESS THAT OTHER SHAREHOLDERS MAY CONSIDER FAVORABLE. As of March 31, 2001, our executive officers and directors and their affiliates beneficially owned approximately 6,400,000 shares, or approximately 52% of the outstanding shares of common stock. Acting together, these shareholders would be able to exert substantial influence on matters requiring approval by shareholders, including the election of directors. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could in turn have an adverse effect on the market price of our common stock or prevent our shareholders from realizing a premium over the market price for their shares of common stock. THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD RESULT IN A DECLINE IN YOUR INVESTMENT'S VALUE. The market price for our common stock has been volatile in the past, and particularly volatile in the last twelve months, and may continue to fluctuate substantially in the future. The value of your investment in our common stock could decline due to the impact of any of the above or of the following factors upon the market price of our common stock: - fluctuations in our operating results; - fluctuations in the valuation of companies perceived by investors to be comparable to us; - a shortfall in net sales or operating results compared to securities analysts' expectations; - changes in analysts' recommendations or projections; - announcements of new products, applications or product enhancements by us or our competitors; and - changes in our relationships with our suppliers or customers. 13 15 WE HAVE ISSUED CONVERTIBLE DEBENTURES, AND THE OBLIGATIONS OF THE DEBENTURES POSE RISKS TO THE PRICE OF OUR COMMON STOCK AND OUR OPERATIONS. On October 31, 2000, we issued 3-year $15 million convertible debentures to a private investor. The debentures provide that, in certain circumstances, the holder of the debentures may convert its position into our stock, or demand that we repay outstanding amounts with cash. The terms and conditions of the debentures pose unique and special risks to our operations and the price of our common stock. Some of those risks are discussed in more detail below. OUR ISSUANCE OF STOCK UPON THE CONVERSION OF THE DEBENTURES AND THE EXERCISE OF THE WARRANTS, AS WELL AS ADDITIONAL SALES OF OUR COMMON STOCK BY THE INVESTOR, MAY DEPRESS THE PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY DILUTE YOUR SHARES. We have registered for resale by the investor in our debentures a total of 2,322,149 shares of our common stock. This number represents approximately 235% of the number of shares of our common stock issuable if our debentures were to remain outstanding until their stated maturity on October 31, 2003 and all interest on the debentures were to be paid in shares of our stock valued at $8.55 per share, the closing price of our stock on April 18, 2001, plus the number of shares of our common stock issuable if the investor's warrant were to be exercised in full. As is noted in the risk factor immediately below, if the investor were to convert the debentures during a period when the re-set conversion price is in effect, we could be required to issue a substantially greater number of our shares to the investor. The issuance of all or any significant portion of the shares of our common stock that we have registered for resale, together with any additional shares that we may be required to register for resale if the debentures are converted during a period when the re-set conversion price is in effect, could result in substantial dilution to the interests of our other shareholders and a decrease in the price of our stock. A decline in the price of our common stock could encourage short sales of our stock, which could place further downward pressure on the price of our stock. THE CONVERSION PRICE UNDER THE DEBENTURES WILL AUTOMATICALLY RE-SET PERIODICALLY. IF THE INVESTOR CONVERTS SOME OR ALL OF THE DEBENTURES DURING THE RESET PERIODS AND WE DO NOT REPAY IN CASH THE DEBENTURES THAT THE INVESTOR THEN DESIRES TO CONVERT, WE WILL HAVE TO ISSUE SHARES SUBSTANTIALLY IN EXCESS OF THOSE ORIGINALLY CONTEMPLATED, AND THOSE ADDITIONAL SHARES WILL DILUTE YOUR SHARES. The conversion price under the debentures will automatically re-set periodically. During these re-set periods, the conversion price will, for five consecutive trading days, adjust to 90% of the average closing price of our stock during the 10 trading days preceding each re-set period if this amount is less than the conversion price that would otherwise apply. The first re-set period begins on May 15, 2001, the next one begins on October 31, 2001 and additional re-set periods will occur every six months thereafter. During the first re-set period, the investor may elect to convert up to one-third of the debentures, plus any unpaid interest on that amount, at the re-set conversion price. Up to two-thirds of the debentures, plus any unpaid interest on that amount, may be converted at the re-set conversion price beginning on October 31, 2001, and up to the full amount of the debentures, plus any unpaid interest, may be converted at the re-set conversion price during any subsequent re-set period. We have the right to pay the selling shareholder in cash the principal amount of any portion of the debentures the investor elects to convert during a re-set period. If we do not make such election to pay cash, the number of shares of our common stock that we would be required to issue upon conversion of the debentures at the re-set conversion price could be substantial. For example, if the 10-trading day average of our shares preceding a re-set period were to be $1.30 per share, which is 75% lower than the lowest closing price reached by our shares since the date the debentures were issued, the re-set conversion price would be approximately $1.17 per share. If all of the debentures were to be converted at this price, we would be required to issue the investor approximately 12,845,215 shares, which would result in the investor owning 47.6% of our outstanding stock after giving effect to such issuance to the investor and the issuance of 2,000,000 shares in the offering to which this prospectus relates. WE WILL RECORD A CHARGE IF THE DEBENTURES ARE CONVERTED AT A CONVERSION PRICE THAT IS LESS THAN $22.79. If we issue shares of our common stock at a conversion price that is less than $22.79 per share, we will record a charge to our statement of operations in an amount equal to the intrinsic value of the beneficial conversion feature. This value would be determined by subtracting the number of shares of our common stock issuable upon conversion of the applicable portion of the debentures at a conversion price of $22.79 from the number of shares issuable upon conversion of that portion of the debentures at the lower conversion price, and multiplying the difference by $22.79, the closing price of our common stock on the date we issued the debentures. Any such charge, if recorded, would be a non-cash charge and would not affect our net shareholders' equity. 14 16 IF OUR SHARES ARE ISSUED TO THE INVESTOR, THOSE SHARES MAY BE SOLD INTO THE MARKET, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND ENCOURAGE SHORT SALES OF OUR STOCK. To the extent the debentures are converted or interest on the debentures is paid in shares of our common stock rather than cash, a significant number of these shares of our common stock may be sold into the market, which could decrease the price of our common stock and encourage short sales. Short sales could place further downward pressure on the price of our common stock. In that case, we could be required to issue an increasingly greater number of shares of our common stock upon future conversions of the debentures as a result of the adjustments described above, sales of which could further depress the price of our common stock. THE DEBENTURES PROVIDE FOR VARIOUS EVENTS OF DEFAULT THAT WOULD ENTITLE THE INVESTOR TO REQUIRE THE COMPANY TO REPAY THE ENTIRE AMOUNT OWED IN CASH WITHIN THREE DAYS. IF AN EVENT OF DEFAULT OCCURS, WE MAY BE UNABLE TO IMMEDIATELY REPAY THE AMOUNT OWED, AND ANY REPAYMENT MAY LEAVE US WITH LITTLE OR NO WORKING CAPITAL IN OUR BUSINESS. The debentures provide for various events of default, including the following: - the occurrence of an event of default under our loan agreements with The CIT Group; - our failure to pay the principal, interest or any liquidated damages due under the debentures; - our failure to make any payment on any indebtedness of $1 million or more to any third party if that failure results in the acceleration of the maturity of that indebtedness; - an acquisition after October 31, 2000 by any individual or entity, other than the investor and its affiliates, of more than 40% of our voting or equity securities; - the replacement of more than 50% of the persons serving as our directors as of October 31, 2000, unless the replacement director or directors are approved by our directors as of October 31, 2000 or by successors whose nominations they have approved; - a merger or consolidation of our company or a sale of more than 50% of its assets unless the holders of our securities immediately prior to such transaction continue to hold at least a majority of the voting rights and equity interests of the surviving entity or the acquirer of our assets; - our entry into bankruptcy; - our common stock fails to be listed or quoted for trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market; - our completion of a "going private" transaction under SEC Rule 13e-3; - a holder of shares issuable under the debentures or the warrant is not permitted to sell those securities under our registration statement covering those shares for a period of five or more trading days; 15 17 - after the effective date of the registration statement covering the resale of the shares issuable pursuant to the debentures and the investor's warrant, the investor is not permitted, for five or more trading days, to sell our shares under that registration statement or any replacement registration statement we may file; - our failure to deliver certificates evidencing shares of our common stock underlying the debentures or the warrant within five days after the deadline specified in our transaction documents with the investor; - our failure to have a sufficient number of authorized but unissued and otherwise unreserved shares of our common stock available to issue such stock upon any exercise or conversion of the warrant and the debentures; - the exercise or conversion rights of the investor under the warrant or the debentures are suspended for any reason, except as provided in the applicable transaction documents; - our default on specified obligations under our registration rights agreement with the investor and failure to cure that default within 60 days; and - other than the specified defaults under the registration rights agreement referred to above, our default in the timely performance of any obligation under the transaction documents with the investor and failure to cure that default for 20 days after we are notified of the default. If an event of default occurs, the investor can require us to repurchase all or any portion of the principal amount of any outstanding debentures at a repurchase price equal to the greater of 110% of such outstanding principal amount, plus all accrued but unpaid interest on such outstanding debentures through the date of payment, or the total value of all of our shares issuable upon conversion of such outstanding debentures, valued based on the average closing price of our common stock for the preceding five trading days, plus any accrued but unpaid interest on such outstanding debentures. In addition, upon an event of default under the debentures, the investor could also require us to repurchase from the investor any of our shares of common stock issued to the investor upon conversion of the debentures within the preceding 30 days, which would be valued at the average closing price of our common stock over the preceding five trading days. We would be required to complete these repurchases no later than the third trading day following the date an event of default notice is delivered to us. If we were required to make a default payment at a time when all of the debentures were outstanding, the payment required would be a minimum of $16.5 million and could be substantially greater depending upon the market price of our common stock at the time. In addition, if we default in the timely performance of specified obligations under our registration rights agreement with the investor, we would also be obligated to pay as liquidated damages to the investor an amount equal to $300,000 each month until any such default is cured. Some of the events of default include matters over which we may have some, little or no control, such as various corporate transactions in which the control of our company changes, or if our common stock ceases to be listed on a trading market. If an event of default occurs, we may be unable to repay any part or all of the entire amount in cash. Any such repayment could leave us with little or no working capital for our business. 16 18 THE PAYMENT TO BRIGHTON CAPITAL, LTD. IN CONNECTION WITH OUR SALE OF OUR CONVERTIBLE DEBENTURES MAY BE INCONSISTENT WITH THE PROVISIONS OF SECTION 15 OF THE SECURITIES EXCHANGE ACT AND MAY ENABLE THE INVESTOR TO RESCIND ITS INVESTMENT. We paid Brighton Capital, Ltd. $375,000 for its introduction to us of the purchaser of our 6% convertible debentures. The Staff of the Securities and Exchange Commission has informed us that the receipt by Brighton Capital of this payment may be inconsistent with the registration provisions of Section 15 of the Securities Exchange Act of 1934, as amended. If this payment were determined to be inconsistent with Section 15, then, under Section 29 of the Securities Exchange Act: - Montrose Investments L.P., the purchaser of our debentures, might have the right to rescind its purchase of these securities, which would require us to repay to Montrose Investments L.P. the $15.0 million that it invested in us; - We might be subject to regulatory action; and - We might be able to recover the $375,000 fee that we paid to Brighton Capital in connection with the transaction. THE DEBENTURES RESTRICT OUR ABILITY TO RAISE ADDITIONAL EQUITY WITHOUT THE CONSENT OF THE INVESTOR, WHICH COULD HINDER OUR EFFORTS TO OBTAIN ADDITIONAL NECESSARY FINANCING TO OPERATE OUR BUSINESS OR TO REPAY THE DEBENTURE HOLDERS. The agreements we executed when we issued these debentures prohibit us from obtaining additional equity or equity equivalent financing for a period of 90 trading days after the effective date of the registration statement covering the resale of the shares issuable upon conversion of the debentures. We also agreed that for a period of 180 trading days after the effective date of the registration statement covering the resale of the shares issuable upon conversion of the debentures, we would not, without the investor's consent, obtain additional equity or equity equivalent financing unless we first offer the investor the opportunity to provide such financing upon the terms and conditions proposed. These restrictions have several exceptions, such as issuances of options to employees and directors, strategic transactions and acquisitions and bona fide public offerings with proceeds exceeding $20 million in gross proceeds. The restrictions described in this paragraph may make it extremely difficult to raise additional equity capital during the 90-day and 180-day periods. We may need to raise such additional capital, and if we are unable to do so, we may have little or no working capital for our business, and the market price of our stock may decline. WE MAY BE REQUIRED TO PAY LIQUIDATED DAMAGES IF WE DO NOT OBTAIN SHAREHOLDER APPROVAL FOR ISSUANCE OF OUR COMMON STOCK, OR IF WE ARE UNABLE TO TIMELY REGISTER THESE SHARES. We are subject to National Association of Securities Dealers Rule 4350, which generally requires shareholder approval of any transaction that would result in the issuance of securities representing 20% or more of an issuer's outstanding listed securities. Upon conversion or the payment of interest on debentures we are not able to issue more than 2,322,150 shares, or 19.99% of our outstanding common stock on October 30, 2000, 17 19 the day prior to the date of issuance of the debentures. The terms of the convertible debentures purchase agreement also provide that the shareholder desiring to convert has the option of requiring us either to seek shareholder approval within 75 days of the request or to pay the converting holder the monetary value of the debentures that cannot be converted, at a premium to the converting holder. If the shareholder requires that we convert the debentures into shares and we have not obtained the requisite shareholder approval within 75 days, we would be obligated to pay the monetary value to the purchaser as liquidated damages. Also, under the terms of the Registration Rights Agreement, we will incur liquidated damages of approximately $300,000 per month if the investor is not permitted, for five or more trading days, to sell our shares under our registration statement covering the resale of those shares or under any replacement registration statement that we may file. EVEN IF WE NEVER ISSUE OUR STOCK UPON THE CONVERSION OF THE DEBENTURES OR UPON EXERCISE OF THE INVESTOR'S WARRANTS, WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD REDUCE YOUR OWNERSHIP PERCENTAGE AND DILUTE THE VALUE OF YOUR SHARES. Other events over which you have no control could result in the issuance of additional shares of our common stock, which would dilute your ownership percentage in Procom. Our issuance of 480,000 shares in connection with the acquisition of Scofima Software S.r.l. is an example of an issuance of additional shares to finance an acquisition that may dilute your ownership. In the future, we may issue additional shares of common stock or preferred stock: to raise additional capital or finance acquisitions, upon the exercise or conversion of outstanding options, warrants and shares of convertible preferred stock, or in lieu of cash payment of dividends. Our issuance of additional shares would dilute your shares. In addition, resales of the shares covered by this prospectus could adversely affect the market price of our stock. FORWARD-LOOKING STATEMENTS Certain forward-looking statements, including statements regarding our expected financial position, business and financing plans are contained in this prospectus or in documents incorporated by reference in this prospectus. These forward-looking statements reflect our views with respect to future events and financial performance. The words "believe," "expect," "plans" and "anticipate" and similar expressions identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from such expectations are disclosed in this prospectus, including, without limitation, under "Risk Factors" and in reports filed by us with the Securities and Exchange Commission and incorporated by reference in this prospectus, and all subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 18 20 USE OF PROCEEDS We estimate that our net proceeds from the sale of shares of common stock by us in this offering will be approximately $20,310,000, after deducting the placement agent's fee and offering expenses payable by us. We intend to use the net proceeds from this offering as follows: o approximately $5.0 million for expanding our sales and marketing organization; o approximately $4.0 million for research and development; o if the investor elects to convert some part or all of the $5.0 million of debentures that it is entitled to convert during the re-set period beginning on May 15, 2001, to pay the investor such amount in cash; o for other general corporate purposes, including working capital and the potential repayment of additional debt. We are currently attempting to negotiate and complete a sale-leaseback transaction involving our headquarters building in Irvine, California. We cannot assure you that we will be able to complete this transaction on favorable or any terms. If we complete this transaction, we would be required to use a portion of the sale proceeds to repay approximately $4.0 million of outstanding principal and accrued interest on our one-year term loan with CIT Business Credit, which bears interest at the lender's prime rate (8.0% at April 30, 2001) plus 1.0% and which was used to finance the completion of our corporate headquarters. If we do not complete a sale-leaseback transaction, we may use proceeds from this offering to repay this loan to CIT Business Credit. In addition, if the investor in our debentures elects to convert some or all our debentures during re-set periods beginning after May 15, 2001, we may use proceeds from this offering to repay in cash the portion of the debentures that the investor elects to convert during those re-set periods. We may use a portion of the net proceeds to acquire or make investments in businesses, products or technologies that we believe will complement our current or future business. While we are currently evaluating potential transactions and transaction prospects, we do not currently have agreements or commitments with respect to any acquisition or investment. We will retain broad discretion in the allocation of the net proceeds of this offering. Pending such uses, we plan to invest the net proceeds in short-term, investment grade, interest-bearing securities. 19 21 PLAN OF DISTRIBUTION We are offering the shares of common stock principally to selected institutional investors and strategic investors. We have retained Merrill Lynch, Pierce, Fenner & Smith Incorporated as our placement agent in connection with the arrangement of offers and sales on a best efforts basis. The placement agent is not obligated and does not intend to purchase any of the shares offered by this prospectus. We anticipate that the placement agent will seek indications of interest from potential investors to purchase an aggregate of 2,000,000 shares. We will not seek effectiveness of the registration statement of which this prospectus forms a part and we will not accept any investor funds until indications of interest have been received for a number of shares acceptable to us and, if required under the terms of our debentures, the holder of those debentures. Confirmations and definitive prospectuses will be distributed to all investors at the time of pricing, informing investors of the closing date, which will be scheduled for three business days after pricing. We will not accept any investor funds before the effectiveness of the registration statement. Funds from investors will be deposited into an escrow account and will not be released until a minimum of $20.0 million, or such lesser amount as may be agreed to by us and the placement agent, has been deposited with the escrow agent. The placement agent is a member in good standing of the National Association of Securities Dealers, Inc. and is registered as a broker/dealer with the Securities and Exchange Commission. We have agreed to pay the placement agent, as the placement fee, an aggregate of 6.5% of the gross proceeds of this offering and, if the gross proceeds from this offering are less than $20.0 million, to reimburse the placement agent for its accountable expenses on this offering up to a total of $150,000. We have also granted the placement agent a right of first refusal to provide investment banking or advisory services with respect to certain future financings and business combinations. We have also agreed to indemnify the placement agent against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the placement agent may be required to make in respect of those liabilities. In addition to the compensation paid to the placement agent, we also expect to incur expenses of approximately $260,000. There can be no assurance that the placement agent will be successful in placing any or all of the shares offered by this prospectus. The placement agent does not intend to place any shares to any account over which it may exercise discretionary authority. The above is a brief summary of the material provisions of the placement agent agreement between us and the placement agent and does not purport to be a complete statement of the respective terms and conditions of the agreement. A copy of the placement agent has been filed as an exhibit to the registration statement of which this prospectus forms a part. 20 22 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 65,000,000 shares of $0.01 par value common stock and 10,000,000 shares of $0.01 par value preferred stock. As of May 15, 2001, there were 12,149,230 shares of our common stock outstanding. Upon completion of this offering, and assuming the sale of all 2,000,000 shares of common stock offered by this prospectus and no other issuances of our common stock, we will have outstanding 14,149,230 shares of common stock. COMMON STOCK Holders of our common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of our common stock are entitled to receive ratably the dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. In the event of the liquidation, dissolution or winding up of our business, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. PREFERRED STOCK Our articles of incorporation, as amended and restated, authorize 10,000,000 shares of preferred stock. Our board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of each series, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of each series, without further vote or action by the shareholders. Issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from acquiring, a majority of our outstanding stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. At present, we have no plans to issue any of the preferred stock. DEBENTURES General On October 31, 2000, we issued to a private investor a total of $15.0 million of our convertible debentures due October 31, 2003. We also issued the investor warrants to purchase up to 32,916 shares of our common stock at an exercise price of $32.55 per share, subject to adjustment as described below. The net proceeds to us from this private placement were approximately $14.4 million. In connection with this transaction, we paid Brighton Capital, Ltd., an unrelated party, a fee of $375,000. This fee was payable upon closing and was paid on October 31, 2000. Interest The debentures bear interest at the rate of 6% per annum, payable quarterly. We have the option of paying this interest in cash or in shares of our common stock. If we pay interest in common stock, that stock will be valued at the average of the closing prices of our common stock as reported by Nasdaq for the five trading days preceding the date that interest payment is due or the first trading day after that date if the interest payment date is not a trading day. Conversion Conversion at the option of the investor. Fixed Conversion Price Except during the periods described below, the debentures are convertible at the option of the investor at any time after issuance at a conversion price of $22.79, subject to anti-dilution adjustment as a result of such events as stock dividends, distributions, subdivisions, combinations or reclassifications of our common stock. The conversion price is also subject to a weighted average adjustment if, subject to certain exceptions, we issue our common stock (other than to the investor) at a price below the conversion price then in effect for the debentures. The weighted average adjustment means that if we issue our stock at a per share price less than the debenture conversion price then in effect, the conversion price will be reduced on a weighted average basis, which will allow the investor to convert the debentures into a greater number of shares of our common stock. Under the weighted average adjustment provisions of the debentures, the more shares we issue (other than to the investor), and the greater the discount at which these shares are issued to the conversion price then in effect, the greater the resulting reduction in the conversion price. The issuance of our shares in the offering to which this prospectus relates will result in an adjustment to the conversion price of the debentures. If we were to issue 2,000,000 shares in this offering at a price of $11.00 per share, the conversion price of the debentures would be reduced from $22.79 to approximately $21.20 as a result of the anti-dilution adjustment provisions of the debentures. Re-set Conversion Price During five-trading-day periods beginning on May 15, 2001, October 31, 2001 and at six-month intervals after October 31, 2001, the conversion price of the debentures automatically re-sets to the lesser of the conversion price that would otherwise then apply or 90% of the average closing price of our stock during the ten trading days preceding each such date. During the re-set period beginning on May 15, 2001, the investor may elect to convert up to one-third of the principal amount of the debentures, plus any unpaid interest on that amount, at the re-set conversion price. Up to two-thirds of the principal amount of the debentures, plus any unpaid interest on that amount, can be converted at the re-set conversion price during the re-set period beginning on October 31, 2001, and up to the full principal amount of the debentures, plus any unpaid interest, can be converted at the re-set conversion price during each subsequent five-trading day period. After the end of each re-set period, the conversion price will automatically revert to the fixed conversion price, which will remain in effect until the next re-set period. If the investor elects to convert the applicable portion of the debentures during any period when the re-set conversion price is in effect, we have the right under the debentures to pay the investor in cash the principal amount of the portion of the debentures desired to be converted, plus any unpaid interest on that portion. If we pay cash, the portion of the debentures paid for in cash will be retired and may not be converted into our shares at the re-set or any conversion price. If we do not pay cash, we will have to issue shares of our common stock at the re-set conversion price. The number of shares issuable to the investor in such event, and the percentage of our total outstanding common stock that the investor would have the right to acquire, would be substantial based on the recent market price of our stock. Further decreases in the market price of our stock would require us to issue an even greater number of our shares if we do not pay cash. Sales of our stock by the investor received as a result of any such conversion or from the exercise of the investor's warrants could depress the price of our stock, which could in turn require us to issue a greater number of our shares upon any subsequent conversions of the debentures at the re-set conversion price by the investor. The following table sets forth the number of shares of our common stock that we would be required to issue to the investor if the debentures were to be converted in full at hypothetical re-set conversion prices, and the resulting percentage of our outstanding stock that would then be owned by the investor giving effect to the indicated issuance to the investor and our issuance of 2,000,000 shares of our common stock in the offering to which this prospectus relates.
Number of Shares Issuable on Hypothetical Conversion Re-Set at Re-set Percentage of Prices Conversion Price(1) Outstanding Stock(2) ------------ ------------------- -------------------- 4.67(3) 3,211,304 18.5% 3.50(-25%)(4) 4,281,738 23.2% 2.34(-50%)(5) 6,422,608 31.2% 1.17(-75%)(6) 12,845,215 47.6%
- ------------- (1) The number of shares of common stock issuable upon conversion of the debentures at the re-set conversion price by the investor assumes that 100% of the debentures are converted but does not include any shares that may be issuable to pay interest on the debentures. The share figure also does not include any shares issuable upon exercise of any part or all of the investor's warrant. (2) Calculated based on 12,149,230 shares of our common stock issued and outstanding as of May 15, 2001 and after giving effect to the indicated issuance to the investor and our issuance of 2,000,000 shares of our common stock in the offering to which this prospectus relates. (3) Represents a hypothetical re-set conversion price equal to 90% of $5.19, the closing price of our common stock on April 9, 2001, which was the lowest closing price of our common stock for any trading day since the closing of the sale of the debentures and warrant to the investor on October 31, 2000. (4) Represents a hypothetical re-set conversion price that is 25% lower than the hypothetical re-set conversion price specified in footnote (3). (5) Represents a hypothetical re-set conversion price that is 50% lower than the hypothetical re-set conversion price specified in footnote (3). (6) Represents a hypothetical re-set conversion price that is 75% lower than the hypothetical re-set conversion price specified in footnote (3). Conversion at our option. If the market price of our common stock for 20 consecutive trading days exceeds 135% of the conversion price then in effect under the debentures, we can require the investor to convert the outstanding debentures into shares of our common stock at the conversion price then in effect. If we were to require conversion of the full amount of the debentures at a time when the conversion price were equal to $21.20 per share, which would be the approximate conversion price as adjusted to reflect the issuance of 2,000,000 shares in this offering at an assumed price of $11.00 per share, the debentures would convert into 707,696 shares of our common stock, giving the investor approximately 4.8% of our outstanding shares of common stock after giving effect to such issuance to the investor and the issuance of 2,000,000 shares of our common stock in this offering. Repurchase Right We have the right, upon 20 trading days' notice to the investor, to repurchase for cash all or any portion of the outstanding debentures at a price equal to 110% of the outstanding principal amount of the debentures plus all accrued but unpaid interest through the date of our repurchase. 21 23 WARRANTS At the same time we issued the debentures, we also issued to the investor five-year warrants to purchase up to 32,916 shares of our common stock at an exercise price equal to $32.55 per share. The exercise price and the number of shares of our common stock issuable upon exercise of the warrants are subject to anti-dilution adjustments that are similar to those described above for the debentures. For example, the exercise price is subject to adjustment as a result of such events as stock dividends, distributions, subdivisions, combinations or reclassifications of our common stock. The exercise price is also subject to a weighted average adjustment if we issue our common stock at a price below the exercise price then in effect for the warrants. The weighted average adjustment means that if we issue our stock at a per share price less than the warrant exercise price then in effect, the exercise price will be reduced on a weighted average basis, which will allow the holder of the warrants to receive a greater number of shares of our common stock upon exercise of the warrants. Under the weighted average adjustment provisions of the warrants, the more shares we issue in the future (other than to the warrant holder), and the greater the discount at which these shares are issued to the warrant exercise price then in effect, the greater the resulting reduction in the exercise price of the warrants. The issuance of our shares in the offering to which this prospectus relates will result in an adjustment to the exercise price of the warrants and the number of our shares issuable upon exercise of the warrants. For example, if we were to issue 2,000,000 shares in this offering at an assumed price of $11.00 per share, the exercise price of the warrants would be reduced from $32.55 to approximately $30.27 as a result of the anti-dilution adjustment provisions of the warrants. In addition, under the same adjustment provisions of the warrants, the number of shares issuable upon exercise of the warrants would be increased from 32,916 to 35,392. If the warrants were exercised for all of the adjusted number of shares at the adjusted exercise price, we would receive a total of $1,071,416 in proceeds from such exercise. ANTI-TAKEOVER PROVISIONS Some provisions of our articles of incorporation and bylaws may have the effect of delaying or preventing changes in our control or our management. These provisions include those: o authorizing the issuance of preferred stock without shareholder approval; o providing for a classified board of directors; o prohibiting cumulative voting in the election of directors; o requiring the approval of our shareholders and our board of directors to amend some provisions of our articles and bylaws; o limiting the persons who may call special meetings of shareholders; and o establishing advance notice requirements for nomination for election to the board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is U.S. Stock Transfer Company, located in Glendale, California. 22 24 VALIDITY OF THE SHARES O'Melveny & Myers LLP will pass upon the validity of the shares of common stock on our behalf. Fenwick & West LLP, Palo Alto, California, will pass upon legal matters for the placement agent. EXPERTS The consolidated financial statements of operations, shareholders' equity and cash flows, and schedule for the year ended July 31, 1998 incorporated by reference in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said report. The consolidated financial statements and schedule as of July 31, 1999 and 2000 and for the years then ended have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Commission. You may read and copy any document we file at the public reference facilities of the Commission located at 450 Fifth Street N.W., Washington D.C. 20549. You may obtain information on the operation of the Commission's public reference facilities by calling the Commission at 1-800-SEC-0330. You can also access copies of this material electronically on the Commission's home page on the World Wide Web at http://www.sec.gov. This prospectus is part of a registration statement (Registration No. 333-54462) we filed with the Commission. The Commission permits us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information we file with the Commission after the date of this prospectus will automatically update and supersede this information. Any statement contained in a document incorporated by reference in this prospectus will be deemed to be modified or replaced by any statement contained in this prospectus or in any document incorporated by reference in this prospectus that modifies or replaces that statement. Any such statement modified or replaced in that manner will not be deemed a part of this prospectus except as modified or replaced. We incorporate by reference the following documents filed by us with the Commission. Our file number with the Commission is 0-21053. We also incorporate by reference any future filings made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the date of this prospectus until the termination of this offering. 1. Our Annual Report on Form 10-K for the year ended July 31, 2000, as amended; 2. Our Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, as amended; 3. Our Current Report on Form 8-K filed on November 3, 2000; 4. Our Current Report on Form 8-K filed on January 12, 2001, as amended; 5. Our Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2001; 6. Our Current Report on Form 8-K filed on May 17, 2001; and 7. The description of our common stock contained in our Form S-1 registration statement dated October 30, 1996, including any amendments or reports filed for the purpose of updating such descriptions. If you request a copy of any or all of the documents incorporated by reference, then we will send to you the copies you requested at no charge. However, we will not send exhibits to these documents, unless the exhibits are specifically incorporated by reference in these documents. You should direct any request for copies to Alex Aydin, Chief Financial Officer, 58 Discovery, Irvine, California, 92618, (949) 852-1000. 23 25 2,000,000 SHARES COMMON STOCK --------------- PROSPECTUS , 2001 --------------- MERRILL LYNCH & CO. 26 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee, and the Nasdaq National Market additional listing fee. SEC registration fee.......................................... $ 8,750 NASD filing fee............................................... 4,313 Nasdaq National Market listing fee............................ 10,000 Printing and engraving........................................ 15,000 Legal fees and expenses....................................... 175,000 Accounting fees and expenses.................................. 40,000 Blue sky fees and expenses.................................... 0 Transfer agent fees........................................... 1,000 Miscellaneous................................................. 5,937 -------- Total....................................................... $260,000(1) ======== - -------------- (1) We have agreed to reimburse the placement agent for up to $150,000 of its accountable expenses if gross proceeds from the offering are less than $20.0 million, which amount is not reflected in the above expense estimate. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS We have adopted provisions in our Amended and Restated Articles of Incorporation that limit the liability of our directors in certain instances. As permitted by the California General Corporation Law, directors will not be liable to us for monetary damages arising from a breach of their fiduciary duty as directors in certain circumstances. See Item 17 of this registration statement regarding the opinion of the Securities and Exchange Commission as to indemnification of liabilities arising under the Securities Act. Such limitation does not affect liability for any breach of a director's duty to us or our shareholders (i) with respect to approval by the director of any transaction from which he derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that he believes to be contrary to our best interests or the best interest of our shareholders, that involve intentional misconduct or a knowing and culpable violation of law, that constitute an unexcused pattern of inattention that amounts to an abdication of his duty to us or our shareholders, or that show a reckless disregard for his duty to us or our shareholders in circumstances in which he was, or should have been, aware, in the ordinary course of performing his duties, of a risk of serious injury to us or our shareholders or (iii) based on transactions between us and our directors or another corporation with interrelated directors or on improper distributions, loans, or guarantees under applicable sections of the California General Corporation Law. Such limitation of liability also does not affect the availability of equitable remedies such as injunctive relief or rescission, although in certain circumstances equitable relief may not be available as a practical matter. The limitation may relieve the directors of monetary liability to us for grossly negligent conduct, including conduct in situations involving attempted takeovers. No claim or litigation is currently pending against our directors that would be affected by the limitation of liability. Our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws provide that we shall indemnify our directors and may indemnify our officers to the fullest extent permitted by California law, including circumstances in which indemnification is otherwise discretionary under California law. ITEM 16. EXHIBITS Exhibit Number Description - ------- ----------- 1.1 Form of Placement Agent Agreement 4.1 Form of Subscription Agreement 4.2 Form of Escrow Agreement 5.1 Opinion of O'Melveny & Myers LLP 10.1 Agreement for Wholesale Financing (Security Agreement) between Procom Technology, Inc. and IBM Credit Corporation (incorporated by reference to Exhibit 10.1 in Amendment No. 1 to Registration Statement on Form S-3 of Procom filed on January 16, 2001) 23.1 Consent of KPMG LLP 23.2 Consent of Arthur Andersen LLP, independent public accountants 23.3 Consent of O'Melveny & Myers LLP (contained in Exhibit 5.1) II-1 27 ITEM 17. UNDERTAKINGS We hereby undertake that, for purposes of determining any liability under the Securities Act, each filing of our annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement 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. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to the California Corporations Code, our Articles of Incorporation or the Bylaws, indemnification agreements entered into between us and our officers and directors, the Underwriting Agreement, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by any of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 28 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Procom Technology, Inc. certifies that it has reasonable ground to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on this 17th day of May, 2001. PROCOM TECHNOLOGY, INC. By: /s/ ALEX RAZMJOO ----------------------- Alex Razmjoo President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ALEX RAZMJOO Chairman of the Board May 17, 2001 - -------------------------------- President and Chief Alex Razmjoo Executive Officer (Principal Executive Officer /s/ ALEX AYDIN Executive Vice President, May 17, 2001 - -------------------------------- Finance and Administration Alex Aydin (Principal Financial and Accounting Officer) and Director * Director May 17, 2001 - -------------------------------- Frank Alaghband * Director May 17, 2001 - -------------------------------- Nick Shahrestany Director - -------------------------------- Dom Genovese Director - -------------------------------- David Blake
* Alex Aydin, by signing his name hereto, signs this document on behalf of each of the persons indicated above pursuant to the powers of attorney duly executed by such persons and set forth on the signature page of the Registration Statement filed with the Securities and Exchange Commission. By: /s/ ALEX AYDIN --------------------------- Alex Aydin II-3 29 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Placement Agent Agreement 4.1 Form of Subscription Agreement 4.2 Form of Escrow Agreement 5.1 Opinion of O'Melveny & Myers LLP 10.1 Agreement for Wholesale Financing (Security Agreement) between Procom Technology, Inc. and IBM Credit Corporation (incorporated by reference to Exhibit 10.1 in Amendment No. 1 to Registration Statement on Form S-3 of Procom filed on January 16, 2001) 23.1 Consent of KPMG LLP 23.2 Consent of Arthur Andersen LLP, independent public accountants 23.3 Consent of O'Melveny & Myers LLP (contained in Exhibit 5.1) EX-1.1 2 a68857a1ex1-1.txt EXHIBIT 1.1 1 EXHIBIT 1.1 ================================================================================ PROCOM TECHNOLOGY, INC. (a California corporation) PLACEMENT AGENCY AGREEMENT Dated: February 28, 2001 ================================================================================ 2 TABLE OF CONTENTS PAGE ---- PLACEMENT AGENCY AGREEMENT.................................................. 1 SECTION 1. Representations and Warranties................................... 2 (a) Representations and Warranties by the Company.................... 2 (i) Compliance with Registration Requirements............... 2 (ii) Incorporated Documents.................................. 3 (iii) Independent Accountants................................. 3 (iv) Financial Statements.................................... 3 (v) No Material Adverse Change in Business.................. 3 (vi) Good Standing of the Company............................ 4 (vii) Good Standing of Subsidiaries........................... 4 (viii) Capitalization.......................................... 4 (ix) Authorization of Agreement.............................. 4 (x) Authorization and Description of Securities............. 5 (xi) Absence of Defaults and Conflicts....................... 5 (xii) Absence of Labor Dispute................................ 5 (xiii) Absence of Proceedings.................................. 5 (xiv) Accuracy of Exhibits.................................... 6 (xv) Possession of Intellectual Property..................... 6 (xvi) Absence of Further Requirements......................... 6 (xvii) No Other Sales.......................................... 6 (xviii) Possession of Licenses and Permits...................... 6 (xix) Title to Property....................................... 7 (xx) Compliance with Cuba Act................................ 7 (xxi) Environmental Laws...................................... 7 (b) Officers' Certificates........................................... 8 SECTION 2. Appointment of Placement Agent; Fees; Rights of First Refusal.... 8 (a) Appointment of Placement Agent................................... 8 (b) Fees............................................................. 8 (c) Right of First Refusal - Business Combination.................... 8 (d) Right of First Refusal - Subsequent Offering..................... 9 (e) Subsequent Sale or Business Combination.......................... 9 (f) Escrow........................................................... 9 (g) Closing.......................................................... 9 SECTION 3. Covenants of the Company......................................... 10 (a) Compliance with Securities Regulations and Commission Requests... 10 (b) Filing of Amendments............................................. 10 (c) Delivery of Registration Statements.............................. 10 (d) Delivery of Prospectuses......................................... 10 (e) Continued Compliance with Securities Laws........................ 11 (f) Blue Sky Qualifications.......................................... 11 (g) Rule 158......................................................... 11 (h) Use of Proceeds.................................................. 11 (i) Listing.......................................................... 11 (j) Reporting Requirements........................................... 12 (k) Closing Documents................................................ 12 i 3 TABLE OF CONTENTS (Continued) PAGE ---- SECTION 4. Payment of Expenses............................................ 12 SECTION 5. Conditions of Placement Agent's Obligations...................... 12 (a) Effectiveness of Registration Statement.......................... 13 (b) Opinion of Counsel for Company................................... 13 (c) Opinion of Counsel for Placement Agent........................... 13 (d) Officers' Certificate............................................ 13 (e) Accountant's Comfort Letter...................................... 13 (f) Bring-down Comfort Letter........................................ 14 (g) Approval of Listing.............................................. 14 (h) No Objection..................................................... 14 (i) Additional Documents............................................. 14 SECTION 6. Indemnification.................................................. 14 (a) Indemnification of Placement Agent............................... 14 (b) Indemnification of Company, Directors and Officers............... 15 (c) Actions against Parties; Notification............................ 15 (d) Settlement without Consent if Failure to Reimburse............... 16 SECTION 7. Contribution..................................................... 16 SECTION 8. Representations, Warranties and Agreements to Survive Delivery... 17 SECTION 9. Termination of Agreement......................................... 18 (a) Termination; General............................................. 18 (b) Liabilities...................................................... 18 (c) Loss of Rights of First Refusal.................................. 18 SECTION 10. Notices......................................................... 18 SECTION 11. Parties......................................................... 18 SECTION 12. Governing Law and Time.......................................... 18 SECTION 13. Effect of Headings.............................................. 19 SCHEDULE Schedule A - List of Subsidiaries...............................Sch A-1 EXHIBITS Exhibit A - Form of Opinion of Company's Counsel................... A-1 Exhibit B - Form of Opinion of Placement Agent's Counsel........... B-1 ii 4 PLACEMENT AGENCY AGREEMENT February 28, 2001 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated as Placement Agent North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Procom Technology, Inc. (the "Company") confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Placement Agent") with respect to the issue and sale by the Company and the placement by the Placement Agent of up to $35,000,000 of Common Stock, par value $.01 per share, of the Company ("Common Stock"), subject to such adjustment as may be agreed by the Company and the Placement Agent. The shares of Common Stock to be placed by the Placement Agent are hereinafter called the "Securities." The Company understands that the Placement Agent proposes to obtain indications of interest from institutional investors and/or strategic investors to purchase the Securities as and when the Placement Agent deems advisable. The parties intend that one or more of these investors (the "Investors") will purchase the Securities from the Company on terms to be set forth in a purchase or subscription agreement (the "Subscription Agreement") between the Investors and the Company. The Company shall have the right to reject any proposed purchaser of Securities. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-_____) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Immediately upon the contemplated pricing of the Securities, the Company will prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations. The information included in such prospectus that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information." Each prospectus used before such registration statement became effective, and any prospectus that omitted the Rule 430A Information that was used after such effectiveness, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became 5 effective and including the Rule 430A Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the form first furnished to the Placement Agent for use in connection with the offering of the Securities is herein called the "Prospectus." For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus or the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement, any preliminary prospectus or the Prospectus (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the Registration Statement, such preliminary prospectus or the Prospectus, as the case may be. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to the Placement Agent as of the date hereof and as of the Closing Time referred to in Section 2(g) hereof, and agrees with the Placement Agent, as follows: (i) Compliance with Registration Requirements. The Company meets the requirements for use of Form S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time, the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain 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 not misleading. Neither the Prospectus nor any amendments or supplements thereto, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time, 2 6 included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by the Placement Agent expressly for use in the Registration Statement or Prospectus. Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Placement Agent for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Incorporated Documents. The documents incorporated or deemed to be incorporated by reference in the Registration Statement and the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Prospectus, at the time the Registration Statement became effective, at the time the Prospectus was issued and at the Closing Time, did not and will not contain 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 not misleading. (iii) Independent Accountants. The accountants who certified the financial statements and supporting schedule included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements. The financial statements included in the Registration Statement and the Prospectus, together with the related schedule and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, shareholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedule included in the Registration Statement presents fairly in accordance with GAAP the information required to be stated therein. The selected financial data included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. (v) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, 3 7 financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of Subsidiaries. Each of Procom Technology FSC, Megabyte Computerhandels AG, Invincible Technology Acquisition Corp., Procom AG, Procom SPA, Procom Technology, UK and Scofima Software S.r.l. has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such subsidiary. The only subsidiaries of the Company are the subsidiaries listed on Schedule A hereto and no subsidiary of the Company other than Megabyte Computerhandels AG is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X. (viii) Capitalization. The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (ix) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company. 4 8 (x) Authorization and Description of Securities. The Securities have been duly authorized for issuance and sale and, when issued and delivered by the Company against payment of the consideration therefor, will be validly issued, fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectus and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (xi) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement (including the Subscription Agreement, the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xii) Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. 5 9 (xiii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the Subscription Agreement or the performance by the Company of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiv) Accuracy of Exhibits. There are no contracts or documents which are required to be described in the Registration Statement, the Prospectus or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required. (xv) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xvi) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities or the consummation of the transactions contemplated by this Agreement or the Subscription Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (xvii) No Other Sales. The Company has not and will not, directly or indirectly (except through the Placement Agent) sell or offer, or solicit any offer to buy, or otherwise negotiate in respect of, the Securities. (xviii) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; 6 10 the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xix) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectus, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xx) Compliance with Cuba Act. The Company has complied with, and is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. (xxi) Environmental Laws. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. 7 11 (b) Officers' Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to counsel for the Placement Agent shall be deemed a representation and warranty by the Company to the Placement Agent as to the matters covered thereby. SECTION 2. Appointment of Placement Agent; Fees; Rights of First Refusal. (a) Appointment of Placement Agent. The Placement Agent will act as exclusive placement agent for the Company in the placement of the Securities. The Placement Agent will seek to complete the placement on a reasonable best efforts basis, acting as the Company's agent and not as a principal in the sale and placement of the Securities. The Placement Agent may separately engage, at its own expense and with the prior approval of the Company, sub-agents as it may deem necessary or appropriate. (b) Fees. The Company shall pay the Placement Agent for its services a fee (the "Placement Fee"), equal to 6.5% of the aggregate purchase price of Securities sold, payable at the Closing Time. (c) Right of First Refusal - Business Combination. In the event that, during the period beginning on January 18, 2001 and ending 12 months after the earlier of the final closing of a sale of Securities or the termination of this Agreement pursuant to Section 9 hereof (the "Covered Period"), the Company decides to pursue a Business Combination (in lieu of or in addition to the placement of the Securities), the Placement Agent shall have the right, but not the obligation, to act as exclusive financial advisor to the Company in connection with such Business Combination on terms customarily established by major investment banking firms for similar services in similar circumstances at such time, which shall be set forth in an engagement letter to be mutually agreed on between the Company and the Placement Agent. "Business Combination" means, whether effected in one transaction or a series of transactions, (a) any merger, consolidation, reorganization or other business combination involving the Company in which the shareholders of the Company immediately prior to the transaction cease to own at least a majority of the voting power of the Company or the surviving entity in that transaction, including, without limitation, any joint venture, (b) the acquisition, directly or indirectly, by one or more Purchasers of more than 30% of the then outstanding capital stock of the Company, (c) the acquisition, directly or indirectly, by one or more Purchasers of all or a substantial portion of the assets of, or of any right to all or a substantial portion of the revenues or income of, the Company by way of a negotiated purchase, lease, license, exchange, joint venture or other means, or (d) the acquisition, directly or indirectly, by one or more parties to a Business Combination of control of the Company otherwise than through the acquisition of the Company's capital stock; provided that "Business Combination" shall not include any transaction having a transaction value of less than $50,000,000. Further, with respect to any Business Combination, it is specifically agreed that any fees paid or payable to any other financial advisor engaged by the Company will be the sole obligation of the Company and shall have no effect on any fees that may be paid to the Placement Agent. 8 12 (d) Right of First Refusal - Subsequent Offering. The Placement Agent shall, during the Covered Period, have the right, but not the obligation, to act as sole book-running lead manager or exclusive placement agent, as the case may be, for any public or private offering of equity or debt securities undertaken by the Company or any of its subsidiaries (on terms customarily established by major investment banks for such transactions in similar circumstances at such time) other than an offering by the Company to Montrose Investments Ltd. pursuant to any right of first refusal that it has pursuant to that certain Securities Purchase Agreement dated as of October 31, 2000, between the Company and Montrose Investments Ltd. (e) Subsequent Sale or Business Combination. If, at any time during the Covered Period, the Company or any of its affiliates sells Common Stock, or any equity interest substantially similar to the Securities, to any party contacted or proposed to be contacted by the Placement Agent during its engagement hereunder (so long as that party (i) purchases any Securities or (ii) is identified to the Company in writing in lists provided by the Placement Agent to the Company (y) at least monthly through the period ending ten business days after the earlier of the final closing of a sale of Securities or the termination of this Agreement pursuant to Section 9 hereof and (z) prior to the date that the Company or its affiliate closes the applicable transaction), the Company shall pay to the Placement Agent the Placement Fee with respect to such transaction, calculated in accordance with Section 2(b) hereof). If, at any time during the Covered Period, a Business Combination is consummated with any party contacted or proposed to be contacted by the Placement Agent during its engagement hereunder (subject to the condition in the earlier parenthetical in this paragraph), the Company shall pay to the Placement Agent fees customarily established by major investment banking firms for similar services in similar circumstances at such time. (f) Escrow. The Placement Agent and the Company will arrange for the deposit of all funds received from the Investors for the purchase of the Securities into an escrow account to be established by the Company (the "Escrow") with a nationally recognized bank or trust company acting as the escrow agent ("Escrow Agent") as selected by the Company, subject to the approval of the Placement Agent, which approval will not be unreasonably withheld. (g) Closing. Payment of the purchase price for, and delivery of certificates for, the Securities shall be made at the offices of O'Melveny and Myers LLP, 610 Newport Center Drive, Newport Beach, California 92660 or at such other place as shall be agreed upon by the Investors and the Company, at 7:00 A.M. (California time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date the Registration Statement is declared effective, or such other time not later than ten business days after such date as shall be agreed upon by the Investors and the Company (such time and date of payment and delivery being herein called "Closing Time"). The Placement Agent and the Company will provide such joint escrow instructions (the "Escrow Instructions") to the Escrow Agent as necessary and appropriate to effect the release at the Closing Time from Escrow to the Company of the purchase price for the Securities. 9 13 SECTION 3. Covenants of the Company. The Company covenants with the Placement Agent as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A and will notify the Placement Agent immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Placement Agent notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)) or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Placement Agent with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Placement Agent or counsel for the Placement Agent shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Placement Agent and counsel for the Placement Agent, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts. The copies of the Registration Statement and each amendment thereto furnished to the Placement Agent will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to the Placement Agent, without charge, as many copies of each preliminary prospectus as the Placement Agent reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to the Placement Agent, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as the Placement Agent may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Placement Agent will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. 10 14 (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Placement Agent or for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to an Investor, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the Placement Agent such number of copies of such amendment or supplement as the Placement Agent may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the Placement Agent, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions as the Placement Agent may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds". (i) Listing. The Company will use its best efforts to effect and maintain the quotation of the Securities on the Nasdaq National Market and will file with the Nasdaq National Market all documents and notices required by the Nasdaq National Market of companies quotations for which are reported by the Nasdaq National Market. 11 15 (j) Reporting Requirements. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. (k) Closing Documents. The Company will cause the Subscription Agreement to provide that the Placement Agent shall be a third party beneficiary of the representations of the Investors therein, and such representations shall be reasonably acceptable to the Placement Agent. The Company will deliver, or cause to be delivered, to the Placement Agent a copy of each document delivered to any Investor at the Closing Time and will cause each counsel who is furnishing an opinion to an Investor and each independent public accountant who is furnishing an accountant's letter to an investor to address it to the Placement Agent (or to furnish the Placement Agent with a letter stating that it may rely on such opinion or letter as though it were addressed to the Placement Agent). SECTION 4. Payment of Expenses. The Company will pay all expenses incident to the offering, issuance and sale of the Securities and the performance of its obligations under this Agreement, whether or not the transactions contemplated by this Agreement are consummated, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation and delivery to the Investors of the Subscription Agreement, the preparation and delivery to the Escrow Agent of the Escrow Instructions and the preparation and delivery of such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Investors, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, (vi) the printing and delivery to the Placement Agent of copies of each preliminary prospectus and of the Prospectus and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Placement Agent of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of the Escrow Agent and any transfer agent or registrar for the Securities; (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Placement Agent in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities; (x) the fees and expenses incurred in connection with the inclusion of the Securities in the Nasdaq National Market; and (xi) the Placement Agent's reasonable documented expenses incurred in connection with the activities hereunder, including the fees and disbursements of counsel for the Placement Agent and the travel, lodging and entertainment expenses of its personnel ("Expenses"), but not in excess of $150,000, not if the Placement Agent terminates this Agreement without cause prior to May 18, 2001 and only if less than $20,000,000 of the Securities are sold hereunder. 12 16 SECTION 5. Conditions of Placement Agent's Obligations. The obligations of the Placement Agent to provide the Escrow Instructions are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective prior to Closing Time and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Placement Agent. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of rule 430A). (b) Opinion of Counsel for Company. At Closing Time, the Placement Agent shall have received the opinion, dated as of Closing Time, of O'Melveny & Myers LLP, counsel for the Company, substantially to the effect set forth in Exhibit A hereto. (c) Opinion of Counsel for Placement Agent. At Closing Time, the Placement Agent shall have received the favorable opinion, dated as of Closing Time, of Fenwick & West LLP, counsel for the Placement Agent, to the effect set forth in Exhibit B hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of California and the federal law of the United States, upon the opinions of counsel reasonably satisfactory to the Placement Agent. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Placement Agent shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (e) Accountant's Comfort Letter. At the time of the effectiveness of the Registration Statement, the Placement Agent shall have received from each of KPMG LLP and Arthur Andersen LLP a letter dated such date, in form and substance satisfactory to the Placement Agent, containing statements and information of the type ordinarily included in accountants' "comfort letters" with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. 13 17 (f) Bring-down Comfort Letter. At Closing Time, the Placement Agent shall have received from each of KPMG LLP and Arthur Andersen LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (g) Approval of Listing. At Closing Time, the Securities shall have been approved for inclusion in the Nasdaq National Market, subject only to official notice of issuance. (h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (i) Additional Documents. At the Closing Time, counsel for the Placement Agent shall have been furnished with such documents as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Placement Agent and counsel for the Placement Agent. SECTION 6. Indemnification. (a) Indemnification of Placement Agent. (1) The Company agrees to indemnify and hold harmless the Placement Agent, its affiliates and each person, if any, who controls the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any document, including without limitation any information furnished or made available by the Company (directly, through the Placement Agent, or otherwise) to any offeree of the Securities or any of their representatives or in the Registration Statement (or any amendment thereto), including the Rule 430A Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; 14 18 (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Placement Agent), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; and (iv) against any and all losses, claims, damages and liabilities arising out of any transaction contemplated by this Agreement. provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of 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 the Placement Agent expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that the Company will not be liable under clause (iv) hereof to the extent that any loss, claim, damage or liability is found in a final judgment by a court of competent jurisdiction to have resulted from the Placement Agent's bad faith or gross negligence. (b) Indemnification of Company, Directors and Officers. The Placement Agent agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by the Placement Agent expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by the Placement Agent, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An 15 19 indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time the Indemnified Party shall have requested an indemnifying party to reimburse the Indemnified Party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its consent if such indemnifying party (i) reimburses such Indemnified Party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the Indemnified Party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Placement Agent on the other hand from the offering of the Securities pursuant to this Agreement (whether or not the offering is consummated) or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Placement Agent on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. 16 20 The relative benefits received by the Company on the one hand and the Placement Agent on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same proportion as the total value received or contemplated to be received (before deducting expenses) by the Company as a result of or in connection with the offer and sale of the Securities bears to the total Placement Fee paid or contemplated to be paid. The relative fault of the Company on the one hand and the Placement Agent on the other hand shall be determined by reference to, among other things, whether any such 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 Company or by the Placement Agent and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Placement Agent agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, the Placement Agent shall not be required to contribute any amount in excess of the amount by which the aggregate Placement Fee actually paid to the Placement Agent under this Agreement exceeds the amount of damages that the Placement Agent has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Placement Agent, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties, indemnities and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Placement Agent or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Investors. 17 21 SECTION 9. Termination of Agreement. (a) Termination; General. The Placement Agent may terminate this Agreement and all of its obligations hereunder, with cause, upon ten days' notice to the Company. Either the Placement Agent or the Company may terminate this Agreement, with or without cause, at any time after May 18, 2001 upon ten days' notice to the Placement Agent. Neither the Placement Agent nor the Company may terminate this Agreement prior to May 18, 2001 without cause. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 2, 6, 7, 8, 10 and 12 shall survive such termination and remain in full force and effect. Within ten days of such termination, if at least $20,000,000 of the Securities have not been sold, the Company will reimburse the Placement Agent for the Expenses, but not in excess of $150,000 (reduced by the amount of any Expenses previously reimbursed). (c) Loss of Rights of First Refusal. Notwithstanding any contrary provision in this Agreement, if the Company terminates this Agreement pursuant to Section 9(a) hereof, the Placement Agent shall lose its rights under Sections 2(a), (c) and (d) hereof and, if the Placement Agent terminates this Agreement pursuant to Section 9(a) hereof, the Placement Agent shall lose its rights under Sections 2(a), (c), (d) and (e) hereof. SECTION 10. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Placement Agent shall be directed to the Placement Agent at North Tower, World Financial Center, New York, New York 10281-1201, Attn: Gary Dolan, Esq.; 101 California Street, Suite 1420, San Francisco, California 94111, Attn: Julie Levenson; 5500 Sears Tower, Chicago, Illinois 60606, Attn: Steven Moss; and notices to the Company shall be directed to it at 58 Discovery, Irvine, California 92618, attention of Alex Aydin. SECTION 11. Parties. This Agreement shall each inure to the benefit of and be binding upon the Placement Agent and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Placement Agent and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Placement Agent and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. 18 22 SECTION 13. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Placement Agent and the Company in accordance with its terms. Very truly yours, PROCOM TECHNOLOGY, INC. By ------------------------------ Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By ------------------------------------ Authorized Signatory 19 23 SCHEDULE A List of Subsidiaries Procom Technology FSC Megabyte Computerhandels AG Invincible Technology Acquisition Corp. Procom AG Procom SPA Procom Technology, UK Scofima Software S.r.l. Sch A-1 24 Exhibit A FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) March __, 2001 Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, As Placement Agent North Tower World Financial Center New York, New York 10281-1209 Re: Sale of Up to $35,000,000 of Common Stock of Procom Technology, Inc. Ladies and Gentlemen: We have acted as counsel to Procom Technology, Inc., a California corporation (the "Company"), in connection with the issuance and sale by the Company of up to $35,000,000 of its Common Stock, $.01 par value (the shares comprising such amount being referred to as the "Company Shares"). This opinion is being delivered to you pursuant to Section 5(b) of the Placement Agency Agreement dated February 28, 2001 between the Company and you (the "Placement Agreement"). The terms used herein without definition shall have the meanings given those terms in the Placement Agreement. In our capacity as counsel to the Company, we have examined originals or copies of those corporate and other records and documents we considered appropriate. As to relevant factual matters, we have relied upon, among other things, the Company's factual representations in the Company Certificate dated March __, 2001 (the "Company Certificate"), a copy of which has been delivered to you. In addition, we have obtained and relied upon those certificates of public officials we considered appropriate. We have examined the registration statement on Form S-3, File No. 333-_______, filed by the Company with the Securities and Exchange Commission (the "Commission") for the purpose of registering the sale of the Company Shares under the Securities Act of 1933, as amended (the "Act"), [any Amendments to the Registration Statement(1)] and the prospectus, dated March __, 2001. The registration statement, as amended, and the prospectus, excluding the documents incorporated in them by reference, are herein referred to as the "Registration Statement" and the "Prospectus," respectively. We also have examined the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2000, its Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2000, and its Current Reports on Form 8-K filed with the Commission on November 3, 2000 and January 12, 2001 (collectively, the "Incorporated Documents"). - -------- 1 To be identified as applicable. A-1 25 On the basis of such examination and our consideration of those questions of law we have considered relevant, our reliance upon the assumptions in this opinion, and subject to the limitations and qualifications in this opinion, we are of the opinion that: (i) The Company has been duly incorporated and is validly existing in good standing under the laws of the State of California. (ii) The Company has the corporate power and corporate authority to own, lease and operate its properties and conduct its business as described in the Prospectus. (iii) The authorized capital stock of the Company consists of 65,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. Holders of the capital stock of the Company are not entitled to any preemptive or other right to subscribe to any additional shares of the Company's capital stock under the Company's Articles of Incorporation or Bylaws. (iv) The Company Shares to be sold by the Company have been duly authorized and will be, upon issuance and delivery against payment therefor in accordance with the terms of the applicable Subscription Agreements, validly issued, fully paid and non-assessable. No personal liability for the debts of the Company will be imposed on any holders of the Company Shares under the laws of the State of California solely as a result of the ownership of such Company Shares. (v) The Company has the corporate power and corporate authority to enter into the Placement Agreement, to issue, sell and deliver the Company Shares to the Placement Agent and/or the purchasers of the Company Shares pursuant to the applicable Subscription Agreements and to perform its obligations under the Placement Agreement. A-2 26 (vi) The execution, delivery and performance of the Placement Agreement have been duly authorized by all necessary corporate action on the part of the Company, and the Placement Agreement has been duly and validly executed and delivered by the Company. Assuming the due authorization, execution and delivery by you, the Placement Agreement constitutes the legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity, contribution and advancement of expenses may be limited by applicable law, and except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. (vii) The Registration Statement has been declared effective under the Act and, to our knowledge, no stop order suspending the effectiveness of the Registration Statement or preventing the use of the Prospectus has been issued by the Commission and no proceedings for that purpose have been instituted or are pending or threatened; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b). (viii) The Registration Statement, on the date it was filed, appeared on its face to comply in all material respects with the requirements as to form for registration statements on Form S-3 under the Act and the related rules and regulations in effect at the date of filing, except that we express no opinion concerning the financial statements and other financial information contained or incorporated by reference therein. The Incorporated Documents, on the respective dates they were filed, appeared on their face to comply in all material respects with the requirements as to form for reports on Form 10-K, Form 10-Q and Form 8-K, as the case may be, under the Securities Exchange Act of 1934, as amended, and the related rules and regulations in effect at the respective dates of their filing, except that we express no opinion concerning the financial statements and other financial information contained therein. (ix) The statements in the Prospectus under the caption "Description of Capital Stock - Common Stock," insofar as they summarize provisions of the Company's Articles of Incorporation and Bylaws, are correct in all material respects. (x) The form of certificate evidencing the Company's Common Stock, par value $.01 per share, complies with the California General Corporation Law and with any applicable requirements of the Company's Articles of Incorporation or Bylaws. (xi) To our knowledge, (a) no legal or governmental actions, suits or proceedings are pending or threatened to which the Company is a party or to which the property of the Company is subject that are required to be described in the Registration Statement or the Prospectus and (b) no contract or other document is required to be filed as an exhibit to the Registration Statement that has not been filed as required. A-3 27 (xii) The execution, delivery and performance of the Placement Agreement and the issuance of the Company Shares to be sold by the Company will not result in any violation of or conflict with the Company's Articles of Incorporation or Bylaws or violate or conflict with any applicable statute, rule or regulation known to us, or, to our knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company. (xiii) No order, consent, permit or approval of any California or federal governmental authority that we have, in the exercise of customary professional diligence, recognized as applicable to the Company or to the transactions of the type contemplated hereby, is required on the part of the Company for the execution and delivery of, and performance of its obligations under, the Placement Agreement or the issuance and sale of the Company Shares to be sold by the Company, except such as have been obtained under the Act and such as may be required under state or other securities or Blue Sky laws governing the purchase or distribution of the Company Shares. In connection with our participation in conferences in connection with the preparation of the Registration Statement and the Prospectus, we have not independently verified the accuracy, completeness or fairness of the statements contained or incorporated therein, and the limitations inherent in the examination made by us and the knowledge available to us are such that we are unable to assume, and we do not assume, any responsibility for such accuracy, completeness or fairness, except as otherwise specifically stated in paragraphs (viii) and (ix) above. However, on the basis of our participation in conferences in connection with the preparation of the Registration Statement and the Prospectus, and relying as to materiality to a large extent upon the opinions of officers and other representatives of the Company, we do not believe that the Registration Statement and the Incorporated Documents, considered as a whole as of the effective date of the Registration Statement, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein not misleading, and we do not believe that the Prospectus and the Incorporated Documents, considered as a whole on the date hereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. However, we express no opinion or belief as to any document filed by the Company under the Securities Exchange Act of 1934, as amended, whether before or after the effective date of the Registration Statement, except to the extent that any such document is an Incorporated Document read together with the Registration Statement or the Prospectus and considered as a whole, nor do we express any opinion or belief as to the financial statements and other financial information contained or incorporated by reference in the Registration Statement, the Prospectus or the Incorporated Documents. A-4 28 Our opinion in paragraph (vi) above as to the enforceability of the Placement Agreement is subject to the unenforceability under certain circumstances of choice of law provisions. We have, with your approval, assumed that the certificates for the Company Shares conform to the specimens examined by us, that the signatures on all documents examined by us are genuine, that all items submitted to us as originals are authentic, that all items submitted to us as copies conform to the originals, and that you are authorized to execute and deliver and did execute and deliver the Placement Agreement, assumptions which we have not independently verified. Our use of the terms "known to us," "to our knowledge," or similar phrases to qualify a statement in this opinion means that those attorneys in this firm who have given substantive attention to the representation described in the introductory paragraph of this opinion do not have current actual knowledge that the statement is inaccurate. Such terms do not include any knowledge of other attorneys within our firm (regardless of whether they have represented or are representing the Company in connection with any other matter) or any constructive or imputed notice of any matters or items of information. We have not undertaken any independent investigation to determine the accuracy of such statements; and no inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of the Company in connection with this opinion letter or in other matters. This opinion is furnished by us as counsel to the Company to you as the Placement Agent in connection with the sale of the Company Shares and to the purchasers of the Company Shares from the Company, is solely for your benefit and the benefit of such purchasers and may not be relied upon by, nor may copies be delivered to, any other person without our prior written consent. Respectfully submitted, A-5 29 Exhibit B FORM OF OPINION OF PLACEMENT AGENT'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(c) (i) The Company has been duly incorporated and is validly existing in good standing under the laws of the State of California. (ii) The Company has corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Placement Agency Agreement. (iii) The Securities have been duly authorized for issuance and sale in accordance with the Placement Agency Agreement and, when issued and delivered by the Company pursuant to the Subscription Agreements against payment of the consideration set forth in the Prospectus, will be validly issued and fully paid and non-assessable. (iv) The issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Company arising under the articles of incorporation or bylaws of the Company. (v) The Placement Agency Agreement has been duly authorized, executed and delivered by the Company. (vi) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; the Prospectus has been filed pursuant to Rule 424(b) within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (vii) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information, as applicable, the Prospectus, excluding the documents incorporated by reference therein, and each amendment or supplement to the Registration Statement and Prospectus, excluding the documents incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedule included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (viii) The form of certificate used to evidence the Common Stock complies in all material respects with the California General Corporate Law and with any applicable requirements of the charter and by-laws of the Company. (ix) The information in the Prospectus under "Description of Capital Stock - Common Stock" to the extent that it constitutes summaries of the Company's charter and bylaws has been reviewed by us and is correct in all material respects. Nothing has come to our attention that would cause us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information (except for financial statements and schedule and other financial data included or incorporated by reference therein, as to which we need make no statement), on the date of such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedule and other financial data included or incorporated by reference therein, as to which we need make no statement), on the date of the Prospectus, on the date of any such amended or supplemented prospectus or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-1 EX-4.1 3 a68857a1ex4-1.txt EXHIBIT 4.1 1 EXHIBIT 4.1 PROCOM TECHNOLOGY, INC. COMMON SHARES SUBSCRIPTION AGREEMENT MAY , 2001 TO EACH OF THE INVESTORS WHO ARE SIGNATORIES HERETO Ladies and Gentlemen: Procom Technology, Inc., a California corporation (the "COMPANY"), hereby agrees with each of you as follows: 1. AUTHORIZATION OF SALE OF THE SECURITIES. The Company has authorized the sale and issuance of up to $35,000,000 of its common stock, $.01 par value per share (the "COMMON SHARES"), as described in the Prospectus dated May , 2001 (the "PROSPECTUS"). The shares of Common Shares sold hereunder shall be referred to herein as the "SHARES." 2. AGREEMENT TO SELL AND PURCHASE THE SHARES. 2.1 SALE OF SHARES. Subject to the terms of this Common Shares Subscription Agreement (this "SUBSCRIPTION AGREEMENT"), at the Closing (as defined in Section 3.1 hereof), the Company agrees to sell to each purchaser of Shares that has executed a counterpart execution page to this Subscription Agreement (each an "INVESTOR"), and each Investor agrees to purchase from the Company, the aggregate number of Shares set forth above such Investor's signature on the counterpart execution page hereof, at a purchase price of [$ ] per Share. 2.2 SEPARATE AGREEMENT. Each Investor shall severally, and not jointly, be liable for only the purchase of the Shares that appears above such Investor's signature and that relates to such Investor. The Company's agreement with each of the Investors is a separate agreement, and the sale of Shares to each of the Investors is a separate sale. The obligations of each Investor hereunder are expressly not conditioned on the purchase by any or all of the other Investors of the Shares such other Investors have agreed to purchase. 2.3 ACCEPTANCE OF PROPOSED PURCHASE OF SHARES. Each Investor understands and agrees that the Company, in its sole discretion, reserves the right to accept or reject, in whole or in part, any proposed purchase of Shares. The Company shall have no obligation hereunder with respect to any Investor until the Company shall execute and deliver to such Investor an executed copy of this Subscription Agreement. If this Subscription Agreement is not executed and delivered by the Company or the offering is terminated, this Subscription Agreement shall be of no further force and effect. 2.4 ESCROW OF PURCHASE PRICE. Each Investor understands and agrees that upon such Investor's receipt of the Prospectus and execution and delivery hereof, the Investor shall deposit the purchase price for all of the Shares 2 being purchased by such Investor, via wire transfer in immediately available funds, with the Escrow Agent under that certain Escrow Agreement entered by and among the Company, California Bank and Trust and Merrill Lynch & Co. (the "PLACEMENT AGENT"), a form of which is attached hereto as Appendix I (the "ESCROW AGREEMENT"). Wire instructions for the Escrow Agent are set forth on Exhibit 2.4 hereto. 3. CLOSING AND DELIVERY. 3.1 CLOSING. The closing of the purchase and sale of the Shares pursuant to this Subscription Agreement (the "CLOSING") shall be held as soon as practicable after the satisfaction or waiver of all conditions to Closing set forth in Sections 6 and 7 hereof, at 10:00 a.m. (Pacific Time) at the offices of O'Melveny & Myers LLP, located at 610 Newport Center Drive, Newport Beach, California, or on such other date and place as may be agreed to by the Company and the Investors. Prior to the Closing, each Investor shall execute any related agreements or other documents required to be executed hereunder. 3.2 DELIVERY OF THE SHARES AT THE CLOSING. At the Closing, the Company shall deliver to each Investor stock certificates registered in the name of such Investor, or in such nominee name(s) as designated by such Investor, representing the Shares to be purchased by such Investor at the Closing, against payment of the purchase price for such Shares. The name(s) in which the stock certificates are to be issued to each Investor are set forth in the Investor's counterpart execution page hereto, as completed by each Investor. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company hereby represents and warrants as of the date hereof to, and covenants with, the Investors as follows: 4.1 ORGANIZATION AND STANDING. The Company and each of its subsidiaries is duly incorporated and validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with corporate power and corporate authority to own, lease and operate its properties and conduct its current business as described in the Prospectus; the Company is duly qualified to do business as a foreign corporation and in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing is not reasonably likely to have a material adverse effect on the condition (financial or otherwise), operations, business or business prospects of the Company (hereinafter, a "MATERIAL ADVERSE EFFECT"); no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; except as described in the Prospectus, the Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from federal, state and other regulatory authorities except where the failure to possess or be in compliance with any of the foregoing is not reasonably likely to have a Material Adverse Effect, all of which are valid and in full force and effect. Except as set forth on Schedule 4.1, The Company does not own or control, directly or indirectly, any corporation, association or other entity. -2- 3 4.2 CORPORATE POWER; AUTHORIZATION. The Company has full legal right, power and authority to enter into this Subscription Agreement and to perform the transactions contemplated hereby and thereby. This Subscription Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by each of the other parties hereto, constitutes a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. The making, execution and performance of this Subscription Agreement by the Company and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which its properties may be bound, (ii) the Articles of Incorporation or bylaws of the Company or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, administrative agency, regulatory body, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or its properties, except for any conflict, breach, violation or default which is not reasonably likely to have a Material Adverse Effect. 4.3 PROSPECTUS; FINANCIAL STATEMENTS. The Prospectus did not contain any untrue statement of a material fact or omit to state material facts required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included in the documents filed by the Company with the Securities and Exchange Commission ("SEC") and referenced in, or contained in documents incorporated by reference in, the Prospectus (the "FINANCIAL STATEMENTS") comply in all respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied ("GAAP") and fairly present the financial position of the Company at the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring adjustments and the absence of complete footnotes). Except as and to the extent reflected in the Financial Statements, the Company did not have, as of the date of the Financial Statements, any liabilities or obligations (other than obligations of continued performance under contracts and other commitments and arrangements entered into in the ordinary course of business) which GAAP would require the Company to reflect in the Financial Statements. Except as otherwise disclosed in the Prospectus, there have not been any changes in the assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not had a Material Adverse Effect. 4.4 PROPERTIES. Except as set forth in the Prospectus, (i) the Company has good title to all properties and assets described in the Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than as would not have a Material Adverse Effect, (ii) the agreements to which the Company is a party described in the Prospectus are valid agreements, enforceable by the Company, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable -3- 4 principles and, to the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) the Company has valid and enforceable leases for all properties described in the Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Prospectus, the Company owns or leases all such properties as are necessary to the Company's operations as now conducted. 4.5 CAPITALIZATION. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities. The capital stock of the Company conforms to the description thereof contained in the Prospectus. The Shares have been duly authorized for issuance and sale to the Investors pursuant to this Subscription Agreement, and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Subscription Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in the Prospectus, no preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders exists with respect to any of the Shares or the issuance and sale thereof other than those that have been satisfied or expressly waived prior to the date hereof and those that will automatically expire upon and will not apply to the consummation of the transactions contemplated on or before the Closing. No further approval or authorization of any shareholder or the Board of Directors of the Company is required for the issuance and sale or transfer of the Shares. Except as disclosed in the Prospectus, any document incorporated by reference in the Prospectus, and the Financial Statements and the related notes thereto incorporated by reference in the Prospectus, and subject to the applicable anti-dilution provisions of securities described in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. 4.6 LITIGATION. There is not pending or, to the Company's knowledge, threatened, any action, suit, claim or proceeding against the Company or any of its respective officers, properties, assets or rights before any court, administrative agency, regulatory body, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its respective officers, properties, or otherwise which (i) is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect or is reasonably likely to materially and adversely affect the Company's properties, assets or rights or (ii) is reasonably likely to prevent consummation of the transactions contemplated hereby, and, in each case, is not so disclosed in the Prospectus. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency, government or governmental agency or body domestic or foreign, that could reasonably be expected to have a Material Adverse Effect. The Company and each of its subsidiaries has conducted and is conducting its business in compliance with all applicable federal, state, local and foreign statutes, laws, rules, regulations, ordinances, codes, decisions, decrees, directives and orders, except where the failure to do so would not reasonably be likely, singly or in the aggregate, to have a Material Adverse Effect. -4- 5 4.7 LISTED SHARES. The Common Shares are registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and are approved for quotation on The Nasdaq National Market (the "NNM"). The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Shares under the Exchange Act or delisting the Common Shares from the NNM. 4.8 INTELLECTUAL PROPERTY. The Company owns or possesses rights to use all patents, patent rights, inventions, trademarks, service marks, trade names and copyrights and possesses all of the trade secrets and know-how which are material and necessary to conduct its business as now conducted and as described in the Prospectus. Except as disclosed in the Prospectus, the Company has not received any written notice of, nor has it any actual knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights that are reasonably likely to have a Material Adverse Effect that would prevent the Company from carrying out its business substantially as described in the Prospectus. Except as disclosed in the Prospectus, the Company has not received any written notice of, nor has it any knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, is reasonably likely to have a Material Adverse Effect that would prevent the Company from carrying out its business substantially as described in the Prospectus. 4.9 NO CHANGE. Subsequent to the respective dates as of which information is given in the Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company (not including reductions in the cash position of the Company in the ordinary course consistent with past practices since the date of the Prospectus), (ii) any transaction that is material to the Company, (iii) any obligation, direct or contingent, incurred by the Company, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company, except the incurrence of trade debt and obligations incurred in the ordinary course consistent with past practices, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, (vi) any default in the payment of principal of or interest on any outstanding debt obligations, or (vii) any loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a Material Adverse Effect. 4.10 NO DEFAULTS. The Company is not (a) in violation of its Articles of Incorporation or bylaws or (b) in default (upon notice or lapse of time or both) in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness, or in any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which it is a party or by which its properties may be bound, or (c) in violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or its properties except in the case of (b) or (c) for any default or violation not reasonably likely to have a Material Adverse Effect. -5- 6 4.11 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Subscription Agreement ("CONSENTS") except for (a) such Consents which are not material, (b) compliance with the securities and Blue Sky laws in the states and other jurisdictions in which Shares are offered and/or sold, which compliance will be effected in accordance with such laws and (c) consents required by the NNM, the National Association of Securities Dealers, Inc., and the SEC. The Company has not been advised, and has no reason to believe, that either it or any of its subsidiaries is not conducting business in compliance in all material respects with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including but not limited to, all applicable federal, state and local environmental laws and regulations, except for any failure to comply which is not reasonably likely to have a Material Adverse Effect. 4.12 LABOR; EMPLOYEES. No labor disturbance by the employees of the Company exists or, to the Company's knowledge, is imminent. The Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subcontractors, authorized dealers or international distributors that is reasonably likely to result in a Material Adverse Effect. No collective bargaining agreement exists with any of the Company's employees and, to the Company's knowledge, no such agreement is imminent. 4.13 TAXES. The Company has timely filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the Company's knowledge, that might be asserted against the Company that is reasonably likely to have a Material Adverse Effect. All tax liabilities are adequately provided for on the books of the Company. 4.14 INVESTMENT COMPANY ACT. The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 ACT"), and the rules and regulations thereunder, and is not, and intends in the future to conduct its and its subsidiaries' affairs in such a manner as to ensure that it is not and will not become, an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. 4.15 TRANSACTIONS WITH AFFILIATES. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of its subsidiaries or any shareholder who owns beneficially more than five percent (5%) of the Common Shares of the Company or any of the members of the families of any of them, except as disclosed in the Prospectus. 4.16 ENVIRONMENTAL MATTERS. (i) The Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("ENVIRONMENTAL LAWS") which are applicable to its business, except where the failure to comply would not reasonably be likely to have a Material Adverse Effect, (ii) the Company has not received any written notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim would be -6- 7 required to be disclosed in its filings with SEC under the Exchange Act, (iii) to the Company's knowledge, the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is, or has been, owned, leased or occupied by the Company has, to the Company's knowledge, been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended, or otherwise designated as a contaminated site under applicable state or local law. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTORS. Each of the Investors hereby represents and warrants as of the date hereof to the Company as follows: 5.1 Such Investor has full legal right, power and authority to enter into this Subscription Agreement and to perform the transactions contemplated hereby. This Subscription Agreement has been duly authorized, executed and delivered by such Investor and, assuming due authorization, execution and delivery by the Company, constitutes a valid and binding agreement on the part of such Investor, enforceable in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. The making, execution and performance of this Subscription Agreement by the Investor and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) the charter or other organizational documents of such Investor, as applicable or (ii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, administrative agency, regulatory body, government or governmental agency or body, domestic or foreign, having jurisdiction over such Investor or its properties, except for any conflict, breach, violation or default which is not reasonably likely to have a material adverse effect on such Investor's performance of its obligations hereunder or the consummation of the transactions contemplated hereby. 5.2 Such Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Shares and is an accredited investor, as that term is defined in Regulation D promulgated under the Securities Act of 1933, as amended. 5.3 Such Investor acknowledges and agrees that the Placement Agent may rely on the representations of such Investor stated in this Subscription Agreement. 6. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING. The Company's obligations to complete the sale and issuance of the Shares and to deliver Shares to each Investor, individually, as set forth in the Schedule of Investors shall be subject to the following conditions (to the extent not waived by the Company): 6.1 ESCROW AGREEMENT. The Escrow Agreement shall have been executed and delivered by the Escrow Agent and the Placement Agent. -7- 8 6.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by such Investor in Section 5 hereof shall be true and correct when made, and shall be true and correct on the Closing. 6.3 DELIVERY OF PURCHASE PRICE. The purchase price for the Shares being purchased shall have been delivered by all of the Investors. 7. CONDITIONS TO INVESTORS' OBLIGATIONS AT THE CLOSING. Each Investor's obligation to accept delivery of the Shares and to pay for the Shares shall be subject to the following conditions (to the extent not waived by such Investor): 7.1 ESCROW AGREEMENT. The Escrow Agreement shall have been executed and delivered by all of the parties thereto. 7.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 4 shall be true and correct when made and as of the Closing and each Investor shall have received a certificate signed by the chief executive officer and chief financial officer of the Company, or such other officers of the Company as agreed upon by the parties hereto, that each of such representations and warranties, as appropriate, is true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made or given on and as of the Closing (except for any representations and warranties given as of a specified date), and that such party has performed and complied in all material respects with all of its obligations under this Subscription Agreement which are to be performed or complied with on or prior to the Closing. 8. ARBITRATION. 8.1 SCOPE. Resolution of any and all disputes arising from or in connection with this Subscription Agreement, whether based on contract, tort, common law, equity, statute, regulation, order or otherwise ("DISPUTES"), shall be exclusively governed by and settled in accordance with the provisions of this Section 8; provided, that the foregoing shall not preclude equitable or other judicial relief to enforce the provisions hereof or to preserve the status quo pending resolution of Disputes hereunder. 8.2 BINDING ARBITRATION. The parties hereby agree to submit all Disputes to arbitration for final and binding resolution. Either party may initiate such arbitration by delivery of a demand therefor (the "ARBITRATION DEMAND") to the other party. The arbitration shall be conducted in Los Angeles, California by a sole arbitrator selected by agreement of the parties not later than 10 days after delivery of the Arbitration Demand, or, failing such agreement, appointed pursuant to the Commercial Arbitration Rules of the American Arbitration Association, as amended from time to time (the "AAA RULES"). If the arbitrator becomes unable to serve, his successor(s) shall be similarly selected or appointed. 8.3 PROCEDURE. The arbitration shall be conducted pursuant to the Federal Arbitration Act and such procedures as the parties may agree or, in the absence of or failing such agreement, pursuant to the AAA Rules. Notwithstanding the foregoing, (a) each party shall have the right to conduct limited discovery of information relevant to the Dispute; (b) each party shall provide to -8- 9 the other, reasonably in advance of any hearing, copies of all documents that a party intends to present in such hearing; (c) all hearings shall be conducted on an expedited schedule; and (d) all proceedings shall be confidential, except that either party may at its expense make a stenographic record thereof. 8.4 TIMING. The arbitrator shall use best efforts to complete all hearings not later than 90 days after his or her selection or appointment, and shall use best efforts to make a final award not later than 30 days thereafter. The arbitrator shall apportion all costs and expenses of the arbitration, including the arbitrator's fees and expenses, and fees and expenses of experts ("ARBITRATION COSTS") between the prevailing and non-prevailing party as the arbitrator shall deem fair and reasonable. In circumstances where a Dispute has been asserted or defended against on grounds that the arbitrator deems manifestly unreasonable, the arbitrator may assess all Arbitration Costs against the non-prevailing party and may include in the award the prevailing party's attorney's fees and expenses in connection with any and all proceedings under this Section 8. Notwithstanding the foregoing, in no event may the arbitrator award multiple or punitive damages. 9. MISCELLANEOUS. 9.1 WAIVERS AND AMENDMENTS. Neither this Subscription Agreement nor any provision hereof may be changed, waived, discharged, terminated, modified or amended except upon the written consent of the Company and holders of at least a majority of the Shares, or, in the case of non-material or ministerial amendments, upon the written consent of the Company and the Placement Agent. 9.2 HEADINGS. The headings of the various sections of this Subscription Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Subscription Agreement. 9.3 BROKER'S FEE. The Company and each Investor (i) (severally and not jointly) hereby represent that, except for amounts to be paid to the Placement Agent by the Company, there are no brokers or finders entitled to compensation in connection with the sale of the Shares, and (ii) shall indemnify each other for any such fees for which they are responsible. 9.4 SEVERABILITY. In case any provision contained in this Subscription Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 9.5 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) upon receipt when sent by first-class registered or certified mail, return receipt requested, postage prepaid, or (d) upon receipt after deposit with a nationally recognized overnight express courier, postage prepaid, specifying next day delivery with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth below or at such other address as such party may designate -9- 10 by ten (10) days' advance written notice to the Company. All communications shall be addressed as follows: (a) if to the Company, to: PROCOM TECHNOLOGY, INC. 58 Discovery Irvine, California 92618 Telephone: (949) 852-1000 Facsimile: (949) 261-5481 Attention: Chief Executive Officer with a copy so mailed to: O'MELVENY & MYERS LLP 610 Newport Center Drive Newport Beach, California 92660 Telephone: (949) 823-6930 Facsimile: (949) 823-6994 Attention: Terrence Allen (b) if to an Investor, at the address as set forth on the Counterpart Execution Page of this Subscription Agreement. 9.6 GOVERNING LAW. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts entered into and performed entirely in California by California residents, without regard to conflicts of law principles. 9.7 COUNTERPARTS. This Subscription Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. 9.8 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Subscription Agreement, all covenants, agreements, representations and warranties made by the Company and each Investor herein shall survive the execution of this Subscription Agreement, the delivery to the Investors of the Shares and the payment therefor until 90 days after the Closing. 9.9 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. Neither the terms "successors" nor "assigns" as used herein shall include any entity or person who purchases Shares from any Investor after the Closing and is not an affiliate of an Investor. -10- 11 9.10 ENTIRE AGREEMENT. This Subscription Agreement and the other documents delivered pursuant hereto, including the exhibits, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 9.11 PAYMENT OF FEES AND EXPENSES. Each of the Company and the Investors shall bear its own expenses and legal fees incurred on its behalf with respect to this Subscription Agreement and the transactions contemplated hereby (the "OFFERING"); provided, however, that the Company shall reimburse the Placement Agent for certain fees and expenses incurred by the Placement Agent in connection with the Offering, as set forth in the Placement Agency Agreement with the Placement Agent dated February 28, 2001 (the "Placement Agency Agreement"). Each Investor acknowledges that the Placement Agent will receive a commission in the amount described in the Prospectus and hereby authorizes the Placement Agent to deduct the amount of such commission, together with any expenses to which the Placement Agent is entitled to reimbursement from the Company pursuant to the Placement Agency Agreement, from the gross proceeds payable to the Company from the sale of the Shares hereunder. If any action at law or in equity is necessary to enforce or interpret the terms of this Subscription Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 9.12 CONFIDENTIALITY. Each Investor acknowledges and agrees that any information or data it has acquired from the Company, not otherwise properly in the public domain, was received in confidence. Except to the extent authorized by the Company and required by any federal or state law, rule or regulation or any decision or order of any court or regulatory authority, Investor agrees that it will refrain from disclosing any such information to any person other than to any agent, attorneys, accountants, employees, officers and directors of Investor who need to know such information in connection with Investors' purchase of the Shares, and who agree to be bound by the confidentiality provisions of this Subscription Agreement. In the event that Investor or its agents are required by federal or state or other law, rule or regulation or any decision or order of any court or regulatory authority to release such information, it shall give the Company sufficient prior notice so that the Company may seek a stay or other release or waiver from disclosing such information. Each Investor agrees not to use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any confidential information of the Company. 9.13 KNOWLEDGE. The phrases "knowledge," "to the Company's knowledge," "to our knowledge," "of which the Company is aware" and similar language as used herein shall mean the actual knowledge and current awareness, or knowledge which a reasonable person would have acquired following a reasonable investigation, of Alex Razmjoo, Alex Aydin, Frank Alaghband, Nick Sharestany and Frederick Judd; provided, however, that the term "actual knowledge of the Company" shall mean the actual knowledge and current awareness of such persons. -11- 12 If this Subscription Agreement is satisfactory to you, please so indicate by executing the counterpart execution page to this Subscription Agreement and returning such page to the Company. Upon the Company's receipt of your counterpart execution page and the Company's execution and delivery to you of a counterpart signature page to this Subscription Agreement, this Subscription Agreement will become binding between us in accordance with its terms. PROCOM TECHNOLOGY, INC. a California corporation By: ------------------------------ Name: Title: -12- 13 COMMON SHARES SUBSCRIPTION AGREEMENT COUNTERPART EXECUTION PAGE By signing below, the undersigned agrees to the terms of the Procom Technology, Inc. Common Shares Subscription Agreement and to purchase the number of Shares set forth below. Number of Shares being purchased: ------------------------------------ INVESTOR: ------------------------------------ By: -------------------------------- Name: Title: Address: Facsimile: PLEASE COMPLETE THE FOLLOWING: 1. The exact name that your Shares ----------------------------- are to be registered in (this is the name that will appear on your Shares certificate(s)). You may use a nominee name if appropriate: 2. The relationship between the purchaser of ----------------------------- the Shares and the Registered Holder listed in response to item 1 above: 3. The mailing address and facsimile number of ----------------------------- the Registered Holder listed in response to ----------------------------- item 1 above (if different from above): Facsimile: ------------------ ----------------------------- 4. (FOR UNITED STATES INVESTORS:) The Social Security Number or Tax Identification Number of the Registered Holder listed in the response to item 1 above: 14 APPENDIX I ESCROW AGREEMENT 15 EXHIBIT 2.4 WIRE INSTRUCTIONS ----------------- EX-4.2 4 a68857a1ex4-2.txt EXHIBIT 4.2 1 EXHIBIT 4.2 ESCROW AGREEMENT Procom Technology, Inc., a California corporation (the "Issuer"), California Bank and Trust (the "Escrow Agent") and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Placement Agent") mutually agree as follows: 1. PURPOSE. The purpose of this Agreement is to provide an arrangement that will ensure that proceeds from the sale of the Issuer's Common Stock, par value $.01 per share (the "Common Shares") under its offering (the "Offering") as contemplated by that certain Placement Agency Agreement, dated February 28, 2001 (the "Placement Agency Agreement"), will not be disbursed until at least the Escrow Amount (as defined below) has been received by the Escrow Agent in the form of immediately available funds, and if such amount has not been received by May 31, 2001, that such funds as have been received for the Common Shares will be returned to the proposed purchasers and the conditional securities transactions terminated. 2. ESCROW AMOUNT. The minimum amount which must be deposited with the Escrow Agent before any delivery to the Issuer and the Placement Agent of proceeds from the sale of the Common Shares shall be $20,000,000 or such lesser amount as mutually agreed to by the Issuer and the Placement Agent, which agreement shall not be unreasonably withheld, conditioned or delayed by the Placement Agent (the "Escrow Amount"). Additional amounts above the Escrow Amount shall also be disbursed in accordance with Section 11. 3. APPOINTMENT. The Issuer hereby appoints the Escrow Agent to serve as Escrow Agent for the purposes set forth herein and the Escrow Agent hereby accepts the appointment. The Placement Agent hereby agrees to such appointment. 4. DELIVERY OF PROCEEDS. The Placement Agent and the Issuer shall promptly deliver, or cause to be wired or deposited, by noon of the business day following receipt, to the Escrow Agent in accordance with Rule 15c2-4 under the Securities Exchange Act of 1934, as amended, any proceeds from the sale of the Issuer's Common Shares under the Offering that the Placement Agent or the Issuer receives from an investor. In no event shall the Escrow Agent accept delivery of any proceeds, whether from the Placement Agent, the Issuer or any other person or entity, after the Escrow Agent has been notified by the Issuer or the Placement Agent to stop accepting delivery of proceeds. 5. CHECK COLLECTION PROCEDURE; REJECTED PURCHASERS. The Escrow Agent is hereby authorized to forward any and all checks received for collection and, upon collection of proceeds of each such check, deposit the collected proceeds in the Escrow Account. "Collection" shall mean the normal process by which a bank clears checks and collects funds thereon. Any check returned unpaid to the Escrow Agent shall be held by the Escrow Agent pending instructions from the Issuer and the Placement Agent. In such cases, the Escrow Agent will promptly notify the Issuer and the Placement Agent of such return. Prior to disbursement of proceeds under Section 11, the Escrow Agent shall charge back any returned item against the Escrow Account (defined below). If the Issuer rejects any or all offers to purchase shares of the Common Shares and delivers written instruction of such rejection to the Escrow Agent, (i) if the Escrow Agent has already received such funds by wire transfer or collected a proposed purchaser's funds, the 2 Escrow Agent shall promptly issue a refund check to each rejected proposed purchaser in an amount equal to such rejected proposed purchaser's deposit, with any interest thereon, (ii) if the Escrow Agent has not yet collected funds but has submitted a rejected proposed purchaser's check for collection, the Escrow Agent shall promptly issue a check in the amount of the proposed purchaser's check to the rejected proposed purchaser after clearance of such funds, and (iii) if the Escrow Agent has not yet submitted a rejected proposed purchaser's check for collection, the Escrow Agent shall promptly remit the rejected proposed purchaser's check directly to the rejected proposed purchaser. 6. SEPARATE ACCOUNT. All moneys delivered to or collected by the Escrow Agent pursuant to this Agreement shall be deposited immediately by the Escrow Agent in a separate interest bearing account designated substantially as follows: "Procom Technology, Inc. Escrow Account" (hereinafter sometimes referred to as "Escrow Account"). The Escrow Agent will provide its standard account statements to the Issuer and the Placement Agent at intervals mutually acceptable to all parties. 7. NATURE OF ESCROW ACCOUNT. The Escrow account will be an interest bearing deposit account. 8. INSPECTION. The parties agree that all records relating to transactions made pursuant to this Agreement and the Escrow Account shall be available, at all reasonable times, for inspection, examination and reproduction by the securities authorities in any state in which this Offering is registered, such authorities' delegates or representatives, any party hereto, or any representative of any party hereto, and such persons are authorized to examine and audit the Escrow Account pursuant hereto and the Escrow Agent hereby is expressly authorized and directed to permit such examination and audit. 9. OWNERSHIP OF FUNDS. Until the Escrow Amount is disbursed as provided in paragraph 11 hereof, all amounts deposited in the Escrow Account shall be considered the property of the various proposed purchasers of the Common Shares in proportion to the amount contributed by each proposed purchaser; provided, however, that no purchaser shall have the right to withdraw, revoke or rescind its deposit without the prior written consent of the Issuer and the Placement Agent. The proceeds from the sale of such shares of Common Shares pursuant to the Offering shall not become the property or assets of the Issuer or the Placement Agent, nor subject to their debts or obligations, unless and until the Escrow Amount has been disbursed to them. 10. TERM. If the Escrow Amount is not deposited and collected on or before May 31, 2001 (which period may be extended for periods in the aggregate not to exceed an additional 60 days upon mutual written consent of the Issuer and the Placement Agent), the Escrow Agent shall comply with written instructions from the Issuer or the Placement Agent for the return to each proposed purchaser of the amount of money paid and deposited by such proposed purchaser into the Escrow Account, with any interest thereon, and the disbursement shall be the property of such purchaser, free and clear of any and all claims of the parties hereto (other than returned check claims, if any, by the Escrow Agent) or of any of their creditors. At such time as the Escrow Amount and any additional funds deposited are either disbursed in accordance with paragraph 11 hereof or returned to the purchasers, the Escrow Agent shall be completely discharged and released of any and all further liabilities and obligations hereunder. 3 11. DISBURSEMENT OF FUNDS. After the Escrow Amount has been deposited and collected by the Escrow Agent, and after the conditions set forth in the last two sentences of this paragraph 11 have been satisfied, the Escrow Agent shall promptly distribute, in immediately available funds, any funds and any accumulated interest in the Escrow Account in accordance with joint written instructions delivered to the Escrow Agent signed by the Issuer and the Placement Agent. The Issuer and the Placement Agent agree that the Escrow Agent needs no further written or other authority to distribute such funds. The Issuer and the Placement Agent agree that the Placement Agent's commission and any expenses to which the Placement Agent is entitled to reimbursement from the Issuer pursuant to the Placement Agency Agreement shall be paid to the Placement Agent from the funds in the Escrow Account at the time of the distribution of such funds pursuant to this Section 11. The Issuer and the Placement Agent agree that the distribution to the Issuer and the Placement Agent as contemplated by this Section 11 shall be effected as promptly as practicable following the Escrow Agent's receipt of the Escrow Amount and the satisfaction of the closing conditions as set forth in this Agreement, the Placement Agency Agreement and the applicable subscription agreements, and shall not be delayed as a result of the determination or documentation of any expenses reimbursable by the Issuer under the Placement Agency Agreement. The Escrow Agent shall disburse such funds by delivery of a cashier's check or by wire transfer, as jointly instructed by the Issuer and the Placement Agent. The Issuer and the Placement Agent agree that no certificates evidencing securities comprising the shares of Common Shares which were purchased (other than confirmations of sale) shall be issued except simultaneously with the release of the funds from the Escrow Account to the Issuer and the Placement Agent; provided, however, that the Escrow Agent has no duty to verify the foregoing. Funds shall not be released by the Escrow Agent to the Issuer or the Placement Agent unless (i) the Placement Agent acknowledges in writing to the Escrow Agent that either it or the purchasers have received, or the Placement Agent has made arrangements satisfactory to it for it or the purchasers to receive, stock certificates evidencing the securities comprising the shares of Common Shares purchased with the amounts deposited in the Escrow Account and (ii) the Placement Agent acknowledges in writing to the Escrow Agent that each purchaser has entered into a subscription agreement acceptable to the Placement Agent and the Issuer. The Issuer and the Placement Agent shall be obligated to provide the joint written instructions to the Escrow Agent contemplated by this Section 11 in accordance with the applicable provisions of the Placement Agency Agreement, and the Placement Agent shall have no obligation to sign such joint instructions unless the conditions set forth in Section 5 of the Placement Agency Agreement have been satisfied. 12. ESCROW AGENT'S RESPONSIBILITY. The parties agree to provide to the Escrow Agent all information necessary to facilitate the administration of this Agreement, and the Escrow Agent may rely upon any such information. Nothing contained in this Agreement shall constitute the Escrow Agent as trustee for any party hereto or impose on the Escrow Agent any duties or obligations other than those for which there is an express provision herein. Except as provided herein, the Escrow Agent shall have no responsibility or liability for delivery of the Escrow Amount. For all purposes connected herewith, the Escrow Agent shall be entitled to assume that the parties hereto are exclusively entitled to their respective share of the Escrow Amount as and to the extent specified in the joint written instructions contemplated by Section 11 and are fully authorized and empowered, without affecting the rights of any third parties, to appoint the Escrow Agent as the Escrow Agent in accordance with the terms and provisions hereof. The Escrow Agent shall be obligated to render statements of account only to the parties referred to herein, and the Escrow Agent shall not be under any obligation to render any statements of account to any third parties unless the Escrow Agent so consents in writing. The Issuer will not make any reference to California Bank and Trust in connection with the Offering except with respect to its role as Escrow Agent hereunder; and in no event will the Issuer state or imply that Escrow Agent has investigated or endorsed the Offering in any manner whatsoever. 13. LIMITATIONS ON LIABILITY. It is understood that the Escrow Agent shall incur no liability, except for acts of gross negligence or willful misconduct, and be under no obligation to take any steps or actions to assure that any funds are actually received by the Escrow Agent. None of the provisions hereof shall be construed so as to require the Escrow Agent to expend or risk any of its own funds or otherwise incur any liability in the performance of it duties under this Agreement, and it shall be under no obligation to make any payment before all times for 4 returns have expired and except out of the funds received, after deduction of its fees and expenses. The Escrow Agent shall incur no liability if it becomes illegal or impossible to carry out any of the provisions herein. The Escrow Agent shall not be required to take or be bound by notice of default of any person, or to take any action with respect to such default involving any expense or liability, unless written notice of such default is given to the Escrow Agent by the undersigned or any of them, and unless the Escrow Agent is indemnified in a manner satisfactory to it against such expense or liability. The Escrow Agent shall not be liable to any party hereto in acting upon any written notice, request, waiver, consent, receipt or other paper or document believed by the Escrow Agent to be signed by the proper party or parties. The Escrow Agent will be entitled to treat as genuine and as the document it purports to be any letter, paper, telex or other document furnished or caused to be furnished to the Escrow Agent. The Escrow Agent shall have no liability with respect to any good faith action taken or allowed by it hereunder, except for acts of gross negligence or willful misconduct. The Escrow Agent shall not be liable for any error or judgment or for any act done or step taken or omitted by it in good faith or for any mistake of fact or law, except for acts of gross negligence or willful misconduct, or for anything which it may do or refrain from doing in connection herewith, and the Escrow Agent shall have no duties to anyone except those signing this Agreement. The Escrow Agent may consult with legal counsel in the event of any dispute or questions as to the interpretation or construction of this Agreement or the Escrow Agent's duties hereunder. In addition, the Escrow Agent shall incur no liability and shall be fully protected in acting in accordance with the opinion and instructions of counsel, except for acts of gross negligence or willful misconduct. In the event of any disagreement between the undersigned or any person or persons named in this Agreement, and any other person, resulting in adverse claims and demands being made in connection with or for any money involved herein or effected hereby, the Escrow Agent shall be entitled at its option to refuse to comply with any such claims or demands, so long as such disagreement shall continue, and in so doing the Escrow Agent shall not be or become liable for damages or interest to the undersigned or any of them, or to any person named in this Agreement, for its refusal to comply with such conflicting or adverse demands; and the Escrow Agent shall be entitled to continue so to refrain and refuse so to act until (i) the rights of the adverse claimants have been finally adjudicated in a court having jurisdiction over the parties and the money involved herein and affected hereby or by arbitration; or (ii) all differences have been resolved by agreement and the Escrow Agent has been notified thereof in writing by all of the persons interested. 14. RESIGNATION OF THE ESCROW AGENT. The Escrow Agent reserves the right to resign as the Escrow Agent at any time by giving thirty (30) business days written notice thereof to all parties at their last known addresses. Upon notice of resignation by the Escrow Agent, the undersigned agree that the Escrow Agent may deliver the deposited funds, upon payment in full of all fees due the Escrow Agent, to any replacement escrow agent jointly designated by the Issuer and the Placement Agent. If no notice is promptly received from the undersigned and the replacement escrow agent, the Escrow Agent may petition any court of competent jurisdiction for disposition of the assets and the Escrow Agent shall thereby be released from any and all responsibility and liability to the parties hereto. 15. GOVERNING LAW AND CAPTIONS. This Agreement shall be governed by and interpreted under the laws of the State of California. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect the construction or effect of this Agreement. 5 16. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. AMENDMENTS, MODIFICATIONS, ETC. This Agreement may be amended, modified, superseded or canceled only by a written instrument executed by the Issuer and the Placement Agent and consented to in writing by the Escrow Agent. Any of the terms and conditions hereof may be waived only by a written instrument executed by the party waiving compliance therewith. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any terms, of this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or breach of any other term of this Agreement. 18. NOTICES. All notices hereunder shall be made in writing to the parties at the addresses listed below or at such other address as shall be given by mail with postage paid and certified or registered or by facsimile or personal delivery, addressed as follows: PROCOM TECHNOLOGY, INC. 58 Discovery Irvine, California 92618 Attn: Frederick Judd, General Counsel Facsimile: (949) 261-5481 CALIFORNIA BANK AND TRUST 1940 Century Park East Los Angeles, CA 900067 Attn: Facsimile: (310) 407-6166 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED North Tower World Financial Center New York, New York 10281-1209 Attn: Gary Dolan, Esq. Facsimile: (212) 449-3207 101 California Street Suite 1420 San Francisco, California 94111 Attn: Julie Levenson Facsimile: (415) 676-3380 5500 Sears Tower Chicago, Illinois 60606 Attn: Steven Moss Facsimile: (312) 906-6262 6 until such time as either party notifies the other of a change of address. Each notice or other communication which shall be mailed, delivered or transmitted in the manner described above shall be deemed effective (A) if given by mail, three days after such communication is deposited in the mails with postage prepaid, addressed as aforesaid, (B) if given by facsimile, when transmitted to the applicable number so specified in (or pursuant to) this Section 18 provided that appropriate confirmation of receipt is generated by the telefacsimile and a duplicate copy is mailed, postage prepaid, or (C) if given by any other means, when actually delivered to such address. Dated: PROCOM TECHNOLOGY, INC. (Issuer) By: ----------------------------------------- (Signature) CALIFORNIA BANK AND TRUST (Escrow Agent) By: ----------------------------------------- (Signature) MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (Placement Agent) By: ----------------------------------------- (Signature) EX-5.1 5 a68857a1ex5-1.txt EXHIBIT 5.1 1 EXHIBIT 5.1 [O'MELVENY & MYERS LLP LETTERHEAD] May 17, 2001 Procom Technology, Inc. 58 Discovery Irvine, California 92618 RE: REGISTRATION STATEMENT ON FORM S-3 Dear Ladies and Gentlemen: We have examined the Registration Statement on Form S-3 filed by you with the Securities and Exchange Commission ("SEC") on January 26, 2001 (Registration No. 333-54462), together with Amendment No. 1 thereto filed by you with the SEC on May 17, 2001 (collectively, the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of up to 2,000,000 shares of your Common Stock, $.01 par value (the shares comprising such amount being referred to herein as the "Shares"). We understand that the Shares will be offered and sold through Merrill Lynch & Co. acting as placement agent on a best efforts basis as described in the Registration Statement. We have examined originals or copies of those corporate and other records and documents we considered appropriate. In making such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies. On the basis of such examination, our reliance upon the assumptions in this opinion and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that the Shares have been duly authorized by all necessary corporate action on your part, and, upon issuance and delivery against payment therefor in the manner described in the Registration Statement, the Shares will be validly issued, fully paid and non-assessable. The law covered by this opinion is limited to the present federal law of the United States and the present law of the State of California. We express no opinion as to the laws of any other jurisdiction and no opinion regarding the statutes, administrative decisions, rules, regulations or requirements of any county, municipality, subdivision or local authority of any other jurisdiction. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof and any amendments thereto. Respectfully submitted, /s/ O'MELVENY & MYERS LLP --------------------------------- O'MELVENY & MYERS LLP EX-23.1 6 a68857a1ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Procom Technology, Inc.: We consent to the use of our report dated September 22, 2000, except as to note 14, which is as of October 10, 2000, incorporated by reference in Amendment No. 1 to the registration statement on Form S-3 of Procom Technology, Inc., relating to the consolidated balance sheets of Procom Technology, Inc. and subsidiaries as of July 31, 1999 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended, and the related schedule and to the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP Orange County, California May 14, 2001 EX-23.2 7 a68857a1ex23-2.txt EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement on Form S-3 (333-54462) of our report dated October 8, 1998, included in Procom Technology's Form 10-K for the year ended July 31, 2000, and to all references to our Firm included in this registration statement. ARTHUR ANDERSEN LLP Orange County, California May 14, 2001 -----END PRIVACY-ENHANCED MESSAGE-----