-----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, EgOj0in2Ik1cmH2PLDu/ra0uJxrm//R0+winK2m1DkBOAjWijcTQTHXXmHfw3dcP o7JS8p/G5eWW2lDaH6TIIQ== 0000892569-96-002159.txt : 19961031 0000892569-96-002159.hdr.sgml : 19961031 ACCESSION NUMBER: 0000892569-96-002159 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19961030 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROCOM TECHNOLOGY INC CENTRAL INDEX KEY: 0001025711 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330268063 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-15109 FILM NUMBER: 96650469 BUSINESS ADDRESS: STREET 1: 2181 DUPONT DRIVE CITY: IRVINE STATE: CA ZIP: 92715 BUSINESS PHONE: 7148521000 MAIL ADDRESS: STREET 1: 2181 DUPONT DRIVE CITY: IRVINE STATE: CA ZIP: 92715 S-1 1 PROCOM TECHNOLOGY, INC. - FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PROCOM TECHNOLOGY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 3577 33-0268063 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
2181 DUPONT DRIVE, IRVINE, CALIFORNIA 92715 (714) 852-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) ------------------------ FREDERICK JUDD VICE PRESIDENT, FINANCE AND GENERAL COUNSEL PROCOM TECHNOLOGY, INC. 2181 DUPONT DRIVE, IRVINE, CALIFORNIA 92715 (714) 852-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: J. JAY HERRON, ESQ. LAIRD H. SIMONS III, ESQ. KEVIN BAKER, ESQ. EILEEN DUFFY ROBINETT, ESQ. CHRISTOPHER R. DI MAURO, ESQ. MELISSA H. SAYER, ESQ. O'MELVENY & MYERS LLP FENWICK & WEST LLP 610 NEWPORT CENTER DRIVE, SUITE 1700 TWO PALO ALTO SQUARE NEWPORT BEACH, CALIFORNIA 92660 PALO ALTO, CALIFORNIA 94306 (714) 760-9600 (415) 494-0600
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]________________ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------- Common Stock, no par value.................. $38,266,250 $11,596
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated solely for purposes of determining the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED OCTOBER 30, 1996 3,025,000 SHARES [LOGO] COMMON STOCK Of the 3,025,000 shares of Common Stock offered hereby, 2,000,000 shares are being sold by Procom Technology, Inc. (the "Company") and 1,025,000 shares are being sold by the Selling Shareholders. The Company will not receive any proceeds from the sale of the shares by the Selling Shareholders. See "Principal and Selling Shareholders." Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $9.00 and $11.00 per share. See "Underwriting" for a discussion of factors considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "PRCM." THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proceeds to Price to Underwriting Proceeds to Selling Public Discount(1) Company(2) Shareholders - -------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ $ Total(3).......................... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company, estimated at $780,000. (3) Certain Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to 453,750 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discount will total $ and the Proceeds to Selling Shareholders will total $ . See "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of Montgomery Securities on or about , 1996. ------------------------ MONTGOMERY SECURITIES NEEDHAM & COMPANY, INC. , 1996 3 PROCOM TECHNOLOGY INTELLIGENT STORAGE FOR THE ENTERPRISE(TM) [Photographs of various CD-ROM and computer storage peripherals, some of which are displayed indicating connectivity to networks. The photographs bear the following captions: "Procom's family of CD-ROM networking systems providing multi-protocol, mixed topology and up to 30x performance," "Procom's family of hard disk drive upgrade solutions," "Procom's family of notebook hard disk drive upgrade solutions," "Procom's family of digitial linear tape backup solutions," "Procom's family of LANForce Systems providing high performance, fault tolerant RAID solutions" and "Procom Technology -- Intelligent Storage For The Enterprise(TM)"] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 PROSPECTUS SUMMARY The following summary information is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Procom Technology, Inc. ("Procom" or the "Company") designs, manufactures and markets enterprise-wide data storage and information access solutions that are compatible with all major hardware platforms, operating systems and network protocols. The Company has become a leading provider of CD-ROM servers and arrays as a result of its extensive distribution channels as well as the scalability, performance, ease of use and multi-protocol support of its products. The Company provides end users with disk drive upgrades for servers, desktop and notebook computers and also provides high performance, fault tolerant RAID solutions (Redundant Array of Independent Disks) and tape backup subsystems. The Company utilizes computer resellers, value-added resellers ("VARs") and distributors to sell its products to a wide variety of end users, including Fortune 500 corporations, governmental agencies and financial and educational institutions. Recognizing the growing demand for fast and reliable access to large volumes of information increasingly stored on CD-ROM media across enterprise-wide networks, the Company introduced the first of its CD server and array products in early 1994. These products enable a large number of network users to simultaneously access computer data stored on multiple CD-ROMs. The Company has recently introduced its CD FORCE server, which provides plug and play compatibility with most popular operating systems and network topologies and improves functionality by relieving the network operating system from the burden of managing requests for access to information stored on CD-ROMs. The CD FORCE server incorporates Procom's CD FORCE software, which manages network connectivity and access to information contained on CD-ROMs. The Company has continued to improve the capacity and performance of its product offerings, which include the Company's recently introduced Hyper CD-30x server, which is capable of providing access to up to 40 gigabytes of information (63 CDs) with 30x data transfer rates. The Company has experienced rapid growth in sales of its CD servers and arrays to end users such as law and accounting firms, educational and governmental entities, and other companies and organizations that require frequent access to large amounts of information stored on CD-ROMs. The Company first developed its expertise in computer data storage products by providing upgrade storage solutions for desktop computers. Since that time, the Company has expanded its product offerings to provide upgrade and replacement disk drive products for notebook computers and servers, which have become more popular in recent years as client/server computing has proliferated. The Company's disk drive upgrades allow users to utilize their existing hardware for longer periods of time, thereby extending the life of their initial investment. The Company's RAID products provide high performance, fault tolerant storage of over one terabyte of data for large network information databases. The key elements of the Company's strategy include the following: (i) developing additional network storage products incorporating the Company's proprietary storage management software; (ii) accessing end users in key vertical markets by leveraging relationships with computer resellers, VARs and distributors; (iii) expanding relationships with key component suppliers in order to enable the Company to anticipate and respond to technological developments; and (iv) delivering timely storage solutions compatible with all major operating systems and network topologies. The Company's CD servers and arrays can be configured for Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh OS, while supporting different topologies such as Ethernet, FDDI, Fast Ethernet and Token Ring. The Company's high-capacity storage subsystems will support varying RAID levels to meet virtually any network or operating system storage requirements. The Company's major customers include Vanstar Corporation, Entex Corporation, Inacom and Intelligent Electronics, and end users include Microsoft, Ernst & Young, Federal Express, Prudential Insurance and Bank One. 3 5 THE OFFERING Common Stock offered by the Company............. 2,000,000 shares Common Stock offered by the Selling Shareholders.................................. 1,025,000 shares Common Stock to be outstanding after the offering...................................... 11,000,000 shares(1) Use of proceeds................................. Repayment of outstanding debt (approximately $3.5 million at October 25, 1996), approximately $300,000 to acquire capital equipment to increase production capacity and the remainder for general corporate purposes, including working capital. Proposed Nasdaq National Market symbol.......... PRCM
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED --------------------------------------------------- JULY JULY JULY JULY JULY 31, 30, 29, 28, 26, 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales............................................ $42,898 $41,726 $34,502 $44,660 $73,456 Gross profit......................................... 8,869 9,453 7,315 11,802 21,967 Income (loss) before income taxes.................... 860 906 (1,130) 1,137 4,649 Net income (loss).................................... 575 609 (773) 723 2,849 Net income (loss) per share(2)....................... $ 0.06 $ 0.07 $ (0.08) $ 0.08 $ 0.31 Weighted average number of shares(2)................. 9,167 9,167 9,167 9,167 9,167
JULY 26, 1996 -------------------------- ACTUAL AS ADJUSTED(3) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash....................................................................... $ 793 $ 14,128 Working capital............................................................ 4,632 22,152 Total assets............................................................... 21,112 35,747 Line of credit............................................................. 4,185 -- Long-term obligations...................................................... -- -- Total shareholders' equity................................................. 5,136 22,956
- --------------- (1) Based on shares outstanding as of October 25, 1996. Excludes an aggregate of 278,700 shares of Common Stock issuable upon the exercise of stock options outstanding as of October 25, 1996 at a weighted average exercise price of $3.64 per share and an aggregate of 261,300 additional shares of Common Stock reserved for future issuance under the Company's 1995 Stock Option Plan. (2) See Note 1 of Notes to Consolidated Financial Statements for a description of the computation of net income (loss) per share. (3) Adjusted to give effect to the sale of shares offered by the Company hereby at an assumed initial public offering price of $10.00 per share, after deducting the estimated underwriting discount and offering expenses, and the application of the net proceeds therefrom. See "Use of Proceeds" and "Underwriting." ------------------------ The Company was organized as a California corporation in 1987. The Company's executive offices are located at 2181 Dupont Drive, Irvine, California 92715, and its telephone number is (714) 852-1000. ------------------------ Unless otherwise indicated, the information in this Prospectus (i) assumes an initial public offering price of $10.00 per share of Common Stock, (ii) assumes no exercise of the Underwriters' over-allotment option, and (iii) reflects the effect of a 10,000-for-1 stock split, which occurred on September 15, 1995, and a 3-for-1 stock split which will occur on or prior to the effectiveness of the Registration Statement of which this Prospectus forms a part. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." 4 6 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. POTENTIAL FLUCTUATIONS IN FUTURE RESULTS OF OPERATIONS The Company's results of operations have in the past varied significantly and are likely in the future to vary significantly as a result of a number of factors, including the mix of products sold, the volume and timing of orders received during the period, the timing of new product introductions by the Company and its competitors, product line maturation, the impact of price competition on the Company's average selling prices, the availability and pricing of components for the Company's products, changes in distribution channel mix and product returns or price protection charges from customers. Many of these factors are beyond the Company's control. Although the Company has experienced growth in sales in recent periods, there can be no assurance that the Company will experience growth in the future or be profitable on an operating basis in any future period. In addition, due to the short product life cycles that characterize the Company's markets, a significant percentage of the Company's sales each quarter may result from new products or product enhancements introduced in that quarter. Since the Company relies on new products and product enhancements for a significant percentage of sales, failure to continue to develop and introduce new products and product enhancements or failure of these products or product enhancements to achieve market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also has historically capitalized on short-term market opportunities for volume purchases of certain components at favorable prices. For example, in the quarter ended July 26, 1996, the Company capitalized on a one-time opportunity to purchase a significant volume of high capacity disk drive upgrade products at below market prices, which resulted in a price advantage to the Company that enhanced the Company's sales and results of operations for that quarter. There can be no assurance that the Company will be able to capitalize on such opportunities in the future. In addition, the Company's fiscal second quarter sales have historically remained relatively flat due primarily to heavy reseller participation in trade shows that detract from reseller selling efforts, end user budget constraints that restrict end user purchases, and a higher than average number of holidays during that quarter. The volume and timing of orders received during a quarter are difficult to forecast. Customers generally order on an as-needed basis and, accordingly, the Company historically has operated with a relatively small backlog. Notwithstanding the difficulty in forecasting future sales and the relatively small level of backlog at any given time, the Company generally must plan production, order components and undertake its development, sales and marketing activities and other commitments months in advance. Accordingly, any shortfall in sales in a given quarter may disproportionately affect the Company's results of operations due to relatively fixed short-term expenses. Due to the foregoing factors, the Company believes that period-to-period comparisons of its results are not necessarily meaningful and should not be relied upon as indicators of future performance. Further, it is likely that in some future quarter or quarters the Company's net sales or results of operations will be below the expectations of public market analysts and investors. In such event, the price of the Common Stock could be materially adversely affected. Historically, the Company's gross margins have experienced significant volatility. The Company's gross margins vary significantly by product line, and, therefore, the Company's overall gross margin varies with the mix of products sold by the Company. The Company's markets are also characterized by intense competition and declining average unit selling prices over the course of the typical historical six to twelve month life cycle of individual products. In addition, the Company's gross margins may be adversely affected by availability and price increases associated with key products and components from the Company's suppliers, some of which have been in short supply, and inventory obsolescence resulting from older generation products or the unexpected discontinuance of third party components. Finally, the Company's gross margins may vary with the mix of its distribution channels and general economic conditions. Accordingly, the Company's margins may decline in the future from the levels experienced in recent quarters. See "Risk Factors -- Component 5 7 Shortages; Reliance on Sole or Limited Source Suppliers" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL COMPETITION The markets for the Company's products are intensely competitive. In each of its primary product lines, the Company competes with a large number of disk drive manufacturers, computer resellers, VARs and distributors. Some of the Company's vendors also sell competing products to distributors, which then sell these products to the Company's customers. Many of the Company's current and potential competitors have significantly greater market presence, name recognition and financial and technical resources than the Company, and many have longstanding positions and established brand names in their respective markets. In addition, certain of the Company's current and potential competitors possess competitive cost advantages due to a number of factors, including lower taxes and substantially lower costs of labor associated with international operations. Finally, manufacturers of disk drives such as Seagate Technology, Inc., IBM, Quantum Corporation and Western Digital Corporation, and manufacturers of CD-ROM drives, such as Toshiba America Information Systems, Inc. ("Toshiba"), NEC and Plextor Corporation, may in the future become more direct competitors of the Company to the extent that such manufacturers elect to expand into the disk drive upgrade market or the CD server and array market. The Company's primary competitors in the CD server and array market consist of (i) CD array manufacturers such as Microtest Inc., Meridian Data, Inc. and Micro Design, Inc., which also furnish CD-ROM management software with their CD array products, (ii) a number of hardware aggregators, computer resellers and VARs that sell CD server products directly to end users and (iii) various CD server and array manufacturers. The Company's primary competitors in the disk drive upgrade market are (i) computer manufacturers that also market and sell storage upgrades, such as IBM, Compaq Computer Corporation, ("Compaq") and Hewlett-Packard Company ("Hewlett-Packard"), (ii) companies that specialize in reselling replacement or increased capacity storage disk drives, such as Storage Dimensions, Inc. or Ameriquest Technologies Inc. and (iii) various national distributors of third party upgrade drives such as Ingram Micro Inc., Merisel Inc. and Tech Data Corporation. The Company's primary competitors in the RAID product market are (i) computer manufacturers, such as IBM, Compaq and Hewlett-Packard, which generally focus on providing storage upgrades for their products and (ii) companies that sell storage solutions directly to end users, such as EMC and StorageTek. These direct sales competitors historically have focused their efforts on sales of high capacity storage products in the mainframe and minicomputer environments. In addition, the Company competes with many smaller enterprises that provide and sell unique solutions to various computer users. The Company's success depends to a great extent on its ability to continue to develop products that incorporate new and rapidly evolving technologies to provide network users cost-effective data storage and information access solutions. However, to the extent that disk drive storage or information access products become more of a commodity, price competition among both computer manufacturers and suppliers of disk drives and CD-ROM drives may result in the availability of such storage and access at a low cost. These factors could create increased competition for the Company's products, which could cause the Company to experience reduced gross profit margins on its products and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that the principal competitive factors in the Company's markets are product reliability, price/value relationship, product features and performance, brand name recognition, trade periodical reviews, time to market with new features and products, industry relationships, ease of installation and use, the quality of distribution channels, product quality, technical support and customer service. See "Business -- Competition." RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES The market for the Company's products is characterized by frequent new product introductions and rapid product obsolescence. These factors typically result in short product life cycles, historically ranging from six to 6 8 twelve months. For example, the data transfer rate of CD-ROM products has increased rapidly, resulting in the introduction of four, eight, ten and twelve speed CD-ROMs. Similar technological advances have been made with regard to disk drive storage capabilities and other performance standards. Each new product cycle presents new opportunities for current or prospective competitors of the Company to gain market share. The Company must continually monitor industry trends in selecting new technologies and features to incorporate into its products. If the Company is unable to introduce new products successfully on a timely basis, the Company's sales could be adversely affected. Any such failure also could impair the Company's brand name and the Company's ability to command the attention and loyalty of computer resellers, VARs and distributors in future periods. Moreover, because short product life cycles are accompanied by long lead times for many components of the Company's products, the Company may be unable to reduce or increase production in response to unexpected demand. The Company's ability to introduce new products in a timely manner is heavily dependent on its ability to develop or purchase firmware and software drivers for its CD-ROM and disk drive products. While the Company endeavors to work with its component suppliers to plan for the timing of introduction of new components and to develop the associated firmware and software, unforeseen design issues or other factors that delay introduction of these products could adversely affect the Company's ability to ship new products. In addition, third party suppliers may not employ adequate testing and quality assurance procedures, resulting in the receipt by the Company of defective components. This could require the Company to find replacement components or wait for the resolution of the problem, either of which could delay the Company's ability to bring products to market and have a material adverse effect on the Company's business, financial condition and results of operations. The Company's business also will be adversely affected if new disk drives, CD-ROM drives or other components that it selects from among those offered by its various vendors do not perform favorably on a cost or performance basis compared to competing products. In addition, products and technologies developed by competitors may render the Company's products and technologies noncompetitive or obsolete. Finally, advances in network and on-line technology and development of new, higher-capacity storage media such as Digital Video Disc ("DVD") may result in a reduction or replacement of CD-ROM as a data storage and information access medium. If the Company is unable to adapt to these and other technological advances by developing new products, the Company's financial performance would be materially adversely affected. See "Business -- Research and Development." The Company has historically experienced steep declines in sales, prices and gross margins toward the end of the life cycles of its products, the precise timing of which is difficult to predict. Historically, as the Company has planned and implemented new products, it has experienced unexpected reductions in sales and gross margins of older generation products as customers have anticipated new products. These reductions have in the past given and could continue to give rise to charges for obsolete or excess inventory, returns of older generation products by computer resellers, VARs and distributors or substantial price protection charges. See "-- Customer Concentration; Distribution Strategy Risks; Inventory Protection." For example, in fiscal 1994, the Company incurred losses when it discontinued sales of CD-ROM multimedia kits to mass merchants and distributors. From time to time, the Company has experienced and may in the future experience inventory obsolescence resulting from the unexpected discontinuance of third party components, such as disk drives, included in the Company's products. To the extent the Company is unsuccessful in managing product transitions, it may have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON CD SERVERS AND ARRAYS Sales of CD servers and arrays accounted for approximately 31% and 49% of the Company's net sales for fiscal 1995 and fiscal 1996, respectively. The widespread use of CD-ROM as a data storage and information access medium is relatively recent, and there can be no assurance that another technology will not replace CD-ROM as a widely accepted data storage and information access medium, or that there will be widespread acceptance or continuing growth of CD servers and arrays in general, or of the Company's CD servers and arrays in particular. In addition, if on-line services (such as Westlaw and Lexis/Nexis) become more cost-effective and develop user friendly methods of accessing information, they may have an adverse impact on the 7 9 use of CD-ROM as an information storage medium. Furthermore, the successful development and marketing of DVD would enable end users to store significantly more data than currently stored on a CD used with the Company's products. Accordingly, even if the Company were able to adapt its products to incorporate DVD technology, the number of servers and arrays required by end users may decline compared to current levels. Finally, even if the CD server and array market continues to grow, there can be no assurance that the Company will be able to maintain its market share or its gross margins in that market. The Company currently incorporates software with many of its CD servers and arrays, which allows a network to manage effectively direct access to information contained on CD-ROMs by network users. The Company ships CD servers and arrays both with CD-ROM network data access management software from third party vendors and with recently introduced, internally developed CD-ROM network data access management software. The Company's internally developed software is not presently available on all major hardware platforms, and of the Company's CD servers and arrays shipped to date that contain CD-ROM network data access management software, substantially all included third party software. In addition, the Company historically has focused its efforts on hardware development and does not have substantial experience in the development, testing and marketing of CD-ROM network data access management software. Given the high percentage of the Company's sales that are derived from CD servers and arrays, the failure to secure from a third party effective CD-ROM network data access management software, or the failure of the Company to continue the development and marketing of its internally developed software, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Products and Technology." COMPONENT SHORTAGES; RELIANCE ON SOLE OR LIMITED SOURCE SUPPLIERS The Company depends on sole or limited source suppliers for certain key components used in its products, particularly disk and CD-ROM drives. In recent years, these components have been in short supply and frequently on allocation by manufacturers, and the Company's size may place it at a competitive disadvantage during such periods relative to larger competitors. Although the Company maintains ongoing efforts to obtain adequate supplies of components, there can be no assurances that the Company will obtain adequate supplies or obtain such supplies at cost levels that would not adversely affect the Company's gross margins. The Company has no guaranteed supply arrangements with any of its sole or limited source suppliers and customarily purchases sole or limited source components pursuant to purchase orders placed from time to time in the ordinary course of business. Moreover, the Company's suppliers may, from time to time, experience production shortfalls or interruptions that impair the supply of components to the Company. Component shortages are likely to continue, and there can be no assurance that such shortages will not adversely affect the Company's business, financial condition and results of operations. Conversely, in its attempt to counter actual or perceived component shortages, the Company may overpurchase certain components, resulting in excess inventory and reducing the Company's liquidity or, in the event of inventory obsolescence or a decline in the market value of such inventory, causing inventory write-offs that could materially adversely affect the Company's business, financial condition and results of operations. See "-- Rapid Technological Change; Short Product Life Cycles." The Company relies on a small number of suppliers to continue to develop, introduce and manufacture disk drives, CD-ROM drives and other components that incorporate new technologies and features that compete favorably in functionality and price with the offerings of other disk drive and CD-ROM manufacturers, including competitors of the Company. The Company's dependence on these sole or limited source suppliers, and the risks associated with any delay or shortfall in supply, are exacerbated by the short life cycles that characterize the Company's products. Any delay in the introduction by or availability of disk drives or CD-ROM drives from the Company's suppliers or the failure of such suppliers to provide functionality and performance on a cost effective basis could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, it is possible that the technology of the components the Company uses in manufacturing its products will be rendered undesirable or obsolete by the components of other suppliers. The Company would then be forced to establish relationships with new suppliers, which could 8 10 delay or preclude the Company from bringing competitive products to market and have a material adverse effect on the Company's business, financial condition and results of operations. The Company also relies on a network of independent subcontractors to supply certain custom components manufactured to the Company's specifications. This network consists of a number of small firms with limited financial resources. While the Company utilizes several firms to mitigate the risk of business interruption, it is possible that several vendors could simultaneously experience problems with production or financial stability, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." CUSTOMER CONCENTRATION; DISTRIBUTION STRATEGY RISKS; INVENTORY PROTECTION The Company sells its products primarily to a domestic and international network of computer resellers, VARs and distributors, and the Company's success depends on the continued viability and financial stability of its customer base. During the last two fiscal years, the Company has increased its reliance on sales to large hardware aggregators, computer resellers and VARs (including large corporate consultants) while reducing its use of mass merchants. During fiscal 1995 and fiscal 1996, combined net sales to Vanstar Corporation and Intelligent Electronics totalled approximately 17.6% and 18.1%, respectively, of net sales. In addition, as of July 26, 1996, the Company held accounts receivable from Intelligent Electronics and Vanstar totalling approximately $2.5 million. If the Company were to experience difficulty in collecting these accounts receivable, due to the failure of either or both of these customers or otherwise, it could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a loss of either or both of these customers could materially and adversely affect the Company's net sales. The Company must continually develop and maintain relationships with its key computer resellers, VARs and distributors. Due to the rapid changes in the computer industry and the methods by which end users purchase computer products, there can be no assurance that the Company will be successful in developing and maintaining an effective distribution system. The computer distribution and computer retail industries historically have been characterized by rapid change, including periods of widespread financial difficulties and consolidation and the emergence of alternative distribution channels. The loss of, or reduction in sales to, the Company's key customers could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's computer resellers, VARs and distributors generally offer products of several different companies, including products competitive with the Company's products. Accordingly, there is a risk that these computer resellers, VARs and distributors may give higher priority to products of other suppliers and may reduce their efforts to sell the Company's products. Although since fiscal 1994 the Company has relied on computer resellers and VARs as its primary domestic sales channels, the Company recently entered into an agreement with Tech Data Corporation, a computer products distributor, to sell the Company's products nationally. An increased use of distributors to sell the Company's products, whether domestically or through increased international sales (which are generally made through distributors), could adversely affect the Company's gross margins as sales to distributors are typically made at slightly lower average prices than sales to computer resellers and VARs. The Company frequently grants limited rights to customers to return products purchased from the Company in exchange for new purchases and also provides price protection to its customers. The short product life cycles of the Company's products and the difficulty in predicting future sales increase the risk that new product introductions, price reductions by the Company or its competitors or other factors affecting the markets for the Company's products could result in significant product returns. In addition, new product introductions by the Company's suppliers or its competitors, or other market factors, may require the Company to reduce prices in a manner or at a time that gives rise to significant price protection charges. The Company estimates product returns and potential price protection charges based on historical experience and accrues reserves therefor. However, these accruals may prove to be insufficient, and unanticipated future returns and price protection charges could have a material adverse effect on the Company's business, financial condition and results of operations, particularly in light of the rapid product obsolescence that often occurs during product transitions. See "-- Rapid Technological Change; Short Product Life Cycles," "Manage- 9 11 ment's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." INTELLECTUAL PROPERTY RIGHTS The Company relies primarily on a combination of copyright and trade secret protections and confidentiality agreements to establish and protect its intellectual property rights. The Company has no patent protection for its current product lines. There can be no assurance that the Company's measures to protect its intellectual property rights will deter or prevent unauthorized use of the Company's technology. In addition, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company's inability to protect its proprietary rights in the United States or internationally may have a material adverse effect on the Company's business, financial condition and results of operations. Claims by third parties that the Company's current or future products, procedures or processes infringe upon their intellectual property rights may have a material adverse effect on the Company. The Company does not normally perform any formal surveys or studies relating to whether its products or processes infringe upon the intellectual property rights of others, and it would be difficult to establish whether a given product or process infringes upon the intellectual property rights of others. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict. Any future litigation, regardless of outcome, may result in substantial expense to the Company and significant diversion of the efforts of the Company's management and technical personnel. An adverse determination in any such litigation may subject the Company to significant liabilities to third parties, require disputed rights to be licensed from such parties, if licenses to such rights could be obtained, or require the Company to cease using such technology. There can be no assurance that if such licenses were obtainable, they would be obtainable at costs reasonable to the Company. If forced to cease using such technology, there can be no assurance that the Company would be able to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding, changes in patent or copyright laws or failure of the Company to obtain necessary licenses may prevent the Company from manufacturing, using or selling certain of its products or processes, which may have a material adverse effect on the Company's financial condition and results of operations. In May 1995, Compaq made certain infringement and other claims against the Company and obtained an injunction prohibiting the Company's use of a small string of software code contained in certain of the Company's disk drive products. Although the Company has rewritten the infringing code and settled the lawsuit, the lawsuit required substantial management time, significant expenditures for legal fees and costs and a one-time settlement payment and ongoing royalty payments to Compaq for these products. See "Business -- Intellectual Property." MANAGEMENT OF CHANGE In recent years, the Company has expanded the overall size of its business and scope of its operations, including research and development, marketing, technical support and sales and distribution. The Company has recently increased its number of employees from 137 to 175 during fiscal 1996, increased the breadth of its CD server and array product line, enlarged the scope of its international operations and increased its marketing and product development expenditures. The expansion of the Company's business and product lines has required significant investments in infrastructure and systems. Managing this change has presented numerous challenges, including hiring and retaining key employees, integrating or changing management information systems and coordinating suppliers. The Company's future success will depend in large measure on its ability to implement sufficient operating, manufacturing and financial procedures and controls successfully, to improve coordination among different operating functions, to strengthen management information and telecommunications systems and to continue to hire qualified personnel in all areas. There can be no assurance that the Company will manage these activities and implement these additional systems and controls successfully, and any failure to do so could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 10 12 RISKS OF INTERNATIONAL SALES AND OPERATIONS The Company's international sales accounted for approximately 14% and 11% of the Company's net sales for fiscal 1995 and 1996, respectively. During fiscal 1996, the Company added independent sales representatives in Canada, France and Germany, and it plans to add additional foreign sales representatives in the future. The Company's international sales and operations are subject to a number of risks generally associated with international operations, including export regulations, government imposed restrictions on the purchase of technological equipment, import and export duties and restrictions, the logistical difficulties of managing multinational operations, potentially adverse tax consequences and lower gross margins associated with the increased proportion of international sales made to distributors. While all of the Company's sales are denominated in U.S. dollars, fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive to end users in a particular country, leading to a reduction of sales in that country. The Company may also experience competition specific to a given local market. In addition, the Company's business may be adversely affected by seasonal sales declines in Europe, which typically occur during the summer months. Because the Company has operations in different countries, the Company's management must address the difficulty of merging geographically disparate operations as well as differences in regulatory environments, cultures and time zones. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." WARRANTY EXPOSURE The Company's primary warranty efforts consist of accepting defective products from customers and either repairing them or returning the defective component to the original manufacturer for repair or replacement during the applicable warranty period. The Company generally protects itself by extending to its customers a warranty that corresponds to the warranty provided to the Company by its suppliers. However, if a supplier were to fail to meet its warranty obligations, the Company would be forced to assume responsibility for warranties on all components manufactured by that supplier. Such an event could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the continued service of its executive officers and other key management and technical personnel. In particular, the Company relies on the services of its four founders, Messrs. Razmjoo, Alaghband, Aydin and Shahrestany (the "Founders"). The loss of any of these individuals or other management or technical personnel may have a material adverse effect on the Company's operations, including the ability to establish and strengthen strategic relationships, its ability to open new offices successfully, its ability to adapt its products to changes in technology and its ability to attract and retain technical personnel and other employees, the competition for which is intense. The Company maintains employment agreements with each of the Founders, but does not maintain key-person life insurance policies on the lives of these individuals. See "Business -- Employees" and "Management." FUTURE CAPITAL REQUIREMENTS The Company's business plan will require significant amounts of working capital. While the Company has funded its growth historically through working capital loans and internally generated funds, there can be no assurance that the proceeds of this offering, together with available cash, bank lines of credit and cash from operations, will be sufficient to satisfy the Company's anticipated cash requirements. If additional funds are required, the Company's operations may need to be significantly curtailed or the Company could be forced to obtain financing on terms that cause the Company's business, financial condition and results of operations to be adversely affected. The Company may expand its product lines through the acquisition of complementary businesses, products and technologies. However, the Company has no present plans, agreements or commitments to make any such acquisitions. Acquisitions involve numerous risks, including difficulties in the assimilation of 11 13 operations and products, the ability to manage geographically remote units, the diversion of management's attention from other business concerns, the risks of entering markets in which the Company has little or no experience or expertise and the potential loss of key employees of any acquired companies. In addition, acquisitions may involve the expenditure of significant funds. The Company's management has no prior experience in managing acquisitions. There can be no assurance that any acquisition would result in long-term benefits to the Company or that management would be able to manage effectively the acquired business. See "Use of Proceeds," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONCENTRATION OF SHARE OWNERSHIP AND CONTROL OF COMPANY Upon completion of this offering, the Founders of the Company will beneficially own approximately 72.5% of the Company's outstanding Common Stock (68.4% if the Underwriters' over-allotment option is exercised in full). Accordingly, the Founders will, acting together, have sufficient voting power to control the outcome of all corporate matters submitted to the vote of shareholders, including election of most or all directors, proxy contests, mergers, tender offers, open-market purchase programs and other purchases of the Company's Common Stock that could give shareholders of the Company the opportunity to realize a premium over the then prevailing market price for their shares of Common Stock. See "Principal and Selling Shareholders." BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS The Company expects to use a substantial portion of the net proceeds of this offering for general corporate purposes, including capital expenditures and working capital, but has not yet identified specific uses for such proceeds. The Company's management will retain broad discretion as to the allocation of the proceeds of this Offering. The failure of management to apply such funds effectively could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds." ANTI-TAKEOVER PROTECTIONS The Company's Articles of Incorporation provide for authorized but unissued Preferred Stock, the terms of which may be fixed by the Board of Directors, and eliminate cumulative voting and provide for a classified Board of Directors once the Company has 800 shareholders of record on the record date of the first annual meeting of shareholders. The Company's Bylaws establish advance notice requirements for shareholder proposals and director nominations, subject to certain exceptions. These provisions could have the effect of delaying, deterring or preventing a change in control of the Company. See "Description of Capital Stock -- Certain Anti-Takeover Effects." NO PRIOR MARKET; VOLATILITY OF STOCK PRICE The initial public offering price will be determined by negotiations among the Company, the Selling Shareholders and the Representatives of the Underwriters. Prior to this Offering, there has been no public market for the Common Stock, and, although the Company has applied for listing of the Common Stock on the Nasdaq National Market, there can be no assurance that an active public market for the Common Stock will develop or be sustained after this Offering. The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's operating results, general conditions in the data storage and information access markets served by the Company or in the worldwide economy, an outbreak of hostilities, a shortfall in sales or net income compared to securities analysts' expectations, announcements of technological innovations or new data storage and information access products or enhancements by the Company or its competitors, developments in patents or other intellectual property rights and developments in the Company's relationships with its customers, suppliers, computer resellers, VARs and distributors could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In addition, in recent years the stock 12 14 market in general, and the market for shares of technology companies and of small capitalization companies in particular, have experienced extreme price fluctuations, which have often been unrelated or disproportionate to the operating performance of the affected companies. There can be no assurance that the market price of the Company's Common Stock will not experience such fluctuations. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Sales of Common Stock in the public market after this Offering could adversely affect the market price of the Common Stock. Unless purchased by an affiliate of the Company, the 3,025,000 shares of Common Stock to be sold in this Offering will be freely transferable without restriction. All of the Company's existing shareholders, who will hold 7,975,000 shares of Common Stock after this offering, have agreed that they will not, without the consent of Montgomery Securities, sell or otherwise dispose of any equity securities of the Company for a period of 180 days following the effective date of this offering. Upon expiration of the lock-up agreements with Montgomery Securities, substantially all of such shares will be eligible for resale subject to the limitations of Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). In general, under Rule 144 as currently in effect, a person who has beneficially owned shares for at least two years is entitled to sell in "broker's transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed 1% of the number of shares of Common Stock then outstanding (approximately 110,000 shares immediately after this offering) or, if greater, a number based on average weekly trading volume of the Common Stock. Such sales are also subject to certain notice requirements and to the availability of current public information about the Company. The Securities and Exchange Commission has proposed to reduce each of these Rule 144 holding periods by one year. The Founders, who will hold 7,975,000 shares of Common Stock (7,521,250 shares if the Underwriters' over-allotment option is exercised in full) after this Offering, are entitled to certain demand and "piggy back" registration rights with respect to the registration of such shares for offer or sale to the public. In addition, the Company intends to register with the Securities and Exchange Commission a total of 540,000 shares of Common Stock reserved for issuance under the 1995 Stock Option Plan as soon as practicable following the date of this Prospectus, of which approximately 57,000 shares of Common Stock subject to vested options will be eligible for resale upon the expiration of lock-up agreements 180 days following the effective date of this Offering. Any shares subject to lock-up agreements may be released at any time without notice by Montgomery Securities. Sales of substantial amounts of shares in the public market may adversely affect the market price of the Company's Common Stock. See "Shares Eligible For Future Sale." ABSENCE OF DIVIDENDS The Company has never declared or paid dividends on its Common Stock and does not anticipate declaring or paying any cash dividends in the foreseeable future. See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of the Common Stock offered hereby will incur immediate and substantial dilution of $7.91 in the net tangible book value per share of Common Stock. Additional dilution will occur when existing optionholders exercise their options. See "Dilution." 13 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share, after deducting the estimated underwriting discount and offering expenses, are estimated to be approximately $17,820,000. The Company will not receive any portion of the proceeds from the sale of shares of Common Stock by the Selling Shareholders. The Company intends to use a portion of the net proceeds from this Offering to repay all outstanding short-term debt under its line of credit (approximately $3.5 million at October 25, 1996), approximately $300,000 to acquire capital equipment to increase production capacity and the remainder for general corporate purposes, including working capital. The short-term debt which will be repaid bears interest at the lender's prime rate (8.25% at October 25, 1996) plus 1.5%. The initial term of the line of credit expires on November 29, 1996, but automatically renews for successive one year periods unless terminated by either party within a specified period in advance of the automatic renewal date. A portion of the net proceeds also may be used for the acquisition of businesses, products and technologies that are complementary to those of the Company. The Company has no present plans, agreements or commitments to make any acquisitions. While the Company may enter into discussions with acquisition candidates in the future, no assurances can be given that any such acquisitions will ultimately be consummated. Pending such uses, the Company expects to invest the net proceeds in short-term, interest-bearing, investment grade obligations. See "Capitalization." DIVIDEND POLICY The Company has never declared or paid dividends on its Common Stock. The Company's line of credit prohibits the payment of cash dividends on the Common Stock without prior lender approval. The Company currently intends to retain any future earnings for use in its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of July 26, 1996 and as adjusted for the sale of the shares of Common Stock offered by the Company hereby at an assumed offering price of $10.00 per share and the application by the Company of the estimated net proceeds therefrom (after deducting the estimated underwriting discount and offering expenses).
JULY 26, 1996 ---------------------- ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Line of credit......................................................... $4,185 $ -- ====== ====== Shareholders' equity: Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding, actual and as adjusted............... -- -- Common stock, no par value; 65,000,000 shares authorized, 9,000,000 shares issued and outstanding actual; 11,000,000 shares issued and outstanding, as adjusted(1)....................................... 3 17,823 Retained earnings.................................................... 5,133 5,133 ------ ------ Total shareholders' equity........................................ 5,136 22,956 ------ ------ Total capitalization......................................... $5,136 $22,956 ====== ======
- --------------- (1) Excludes 227,700 shares of Common Stock issuable upon exercise of options outstanding as of July 26, 1996 at a weighted average exercise price of $2.68 and an aggregate of 312,300 additional shares reserved for future issuance as of such date under the Company's 1995 Stock Option Plan. See "Management -- Employee Benefit Plans." 15 17 DILUTION As of July 26, 1996, the Company had a net tangible book value of $5,136,000, or $0.57 per share of Common Stock. Net tangible book value per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the number of shares of Common Stock outstanding as of July 26, 1996. After giving effect to the sale by the Company of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price per share of $10.00 and (after deducting the estimated underwriting discount and offering expenses), the Company's net tangible book value as of July 26, 1996 would have been $22,956,000 or $2.09 per share of Common Stock. This represents an immediate increase in net tangible book value of $1.52 per share to existing shareholders and an immediate dilution of $7.91 per share to new investors purchasing shares in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share..................... $10.00 Net tangible book value per share before the Offering............. $0.57 Increase per share attributable to new investors.................. 1.52 ----- Pro forma net tangible book value per share after the Offering...... 2.09 ------ Dilution per share to new investors............................... $ 7.91 ======
The following table sets forth on a pro forma basis, as of July 26, 1996, the relative investments of all existing shareholders and new investors purchasing shares of Common Stock from the Company in the Offering. The calculations are based on an assumed initial public offering price of $10.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing shareholders(1)....... 9,000,000 81.8% $ 3,000 --% $ -- New investors.................. 2,000,000 18.2 20,000,000 100.0 10.00 ----- ----- ------ ----- Total........................ 11,000,000 100.0% $20,003,000 100.0% ===== ===== ====== =====
- --------------- (1) Sales by the Selling Shareholders in the Offering will reduce the number of shares held by existing shareholders to 7,975,000 shares, or 72.5% of the total shares of Common Stock outstanding (7,521,250 shares, or 68.4% of the total shares of Common Stock if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares held by new investors to 3,025,000 shares, or 27.5% of the total shares of Common Stock outstanding (3,478,750 shares, or 31.6% of the total shares of Common Stock if the Underwriters' over-allotment option is exercised in full) after the Offering. The foregoing table excludes an aggregate of 278,700 shares of Common Stock issuable upon the exercise of stock options outstanding as of October 25, 1996 at a weighted average exercise price of $3.64 per share and an aggregate of 261,300 additional shares of Common Stock reserved for future issuance as of such date under the Company's 1995 Stock Option Plan. To the extent that any options of the Company are exercised, there will be further dilution to new investors. See "Management -- Employee Benefit Plans" and "Principal and Selling Shareholders." 16 18 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data of the Company set forth below should be read in conjunction with the Consolidated Financial Statements of the Company, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The Company utilizes a fiscal year ending on the Friday nearest July 31. The selected consolidated financial data as of July 28, 1995 and July 26, 1996 and for the two years in the period ended July 26, 1996 are derived from the consolidated financial statements of the Company audited by Arthur Andersen LLP, independent public accountants, whose report appears elsewhere in the Prospectus. The remaining selected consolidated financial data are derived from the audited consolidated financial statements of the Company not included herein. Historical results are not necessarily indicative of results to be expected in the future.
YEARS ENDED ------------------------------------------------------------- JULY 31, JULY 30, JULY 29, JULY 28, JULY 26, 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................ $ 42,898 $ 41,726 $ 34,502 $ 44,660 $ 73,456 Cost of sales............................ 34,029 32,273 27,187 32,858 51,489 ------- ------- ------- ------- ------- Gross profit........................... 8,869 9,453 7,315 11,802 21,967 Selling, general and administrative expenses............................... 7,045 7,293 6,902 9,362 15,401 Research and development expenses........ 886 1,014 983 1,108 1,635 Loss on closure of German subsidiary..... -- -- 409 -- -- ------- ------- ------- ------- ------- Operating income (loss)................ 938 1,145 (979) 1,332 4,931 Interest expense......................... (91) (195) (151) (195) (282) Other income (expense), net.............. 13 (44) -- -- -- ------- ------- ------- ------- ------- Income (loss) before income taxes...... 860 906 (1,130) 1,137 4,649 Provision (benefit) for income taxes..... 285 297 (357) 414 1,800 ------- ------- ------- ------- ------- Net income (loss)...................... $ 575 $ 609 $ (773) $ 723 $ 2,849 ======= ======= ======= ======= ======= Net income (loss) per share(1)........... $ 0.06 $ 0.07 $ (0.08) $ 0.08 $ 0.31 ======= ======= ======= ======= ======= Weighted average number of shares(1)..... 9,167 9,167 9,167 9,167 9,167 ======= ======= ======= ======= =======
JULY JULY JULY JULY JULY 31, 30, 29, 28, 26, 1992 1993 1994 1995 1996 ------ ------ ------ ------- ------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash...................................... $ 24 $ 57 $ 211 $ 212 $ 793 Working capital........................... 1,285 1,911 1,275 1,868 4,632 Total assets.............................. 8,230 9,072 7,638 11,011 21,112 Line of credit............................ 1,909 2,868 1,679 1,484 4,185 Long-term obligations..................... -- -- -- 34 -- Total shareholders' equity................ 1,729 2,338 1,564 2,287 5,136
- ------------------ (1) See Note 1 of Notes to Consolidated Financial Statements for a description of the computation of net income (loss) per share. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." OVERVIEW The Company was formed in 1987. Its first product was a 5 1/4 inch floppy disk drive for the IBM PS/2 personal computer. At the time, IBM was shipping the PS/2 with only a 3 1/2 inch floppy disk drive, although the software and data of most computer users were still stored on 5 1/4 inch formats. The Company subsequently began producing aftermarket disk drive upgrade products for computer products sold by other manufacturers, and such upgrade products continue to be an important area of focus of the Company's business. In 1990, the Company developed and began selling CD-ROM multimedia kits, consisting of a CD-ROM drive, a sound card, software drivers and various CD-ROM software titles. The Company initially achieved rapid growth in the sales of multimedia kits to mass merchants and national distributors. However, in fiscal 1994, the Company began to experience significant losses on sales of its multimedia kits due to high return rates, high product support costs and rapid price erosion that resulted both in decreased margins on initial sales and in losses on unsold inventory and returned products. Accordingly, in early fiscal 1994, the Company began to phase out sales of multimedia kits, and in fiscal 1995 it discontinued sales of these kits. Sales of multimedia kits declined from 27% of net sales in fiscal 1994 to 4% of net sales in fiscal 1995. Additionally, the Company incurred a one-time charge to operations of $409,000 in fiscal 1994 related to the closure of its German sales office. These factors contributed to the Company's net loss for fiscal 1994. In fiscal 1994, the Company introduced its CD server and array product line while continuing to provide a broad line of disk drive upgrade products. In addition, during fiscal 1994, the Company began utilizing computer resellers and VARs as its primary sales channel instead of mass merchants and national distributors. During fiscal 1995, the Company experienced rapid growth in sales of its CD servers and arrays, and also commenced shipment of its first RAID arrays and fault tolerant, high performance storage servers. Sales of hard disk drive upgrade products, CD servers and arrays, and RAID and tape backup subsystem products represented 70%, 3% and 0% of net sales in fiscal 1994, and 60%, 31% and 5% of net sales in fiscal 1995. During fiscal 1996, sales of CD servers and arrays increased more rapidly than sales of the Company's other product lines. As a result, in fiscal 1996, sales of CD servers and arrays represented 49% of net sales, while sales of hard disk drive upgrade products and RAID and tape backup subsystem products represented 48% and 3% of net sales, respectively. See "Business -- Products and Technology -- Products Under Development." The Company generally records sales upon product shipment. The Company presently maintains agreements with many of its computer resellers, VARs and distributors that allow limited returns (including stock balancing) and price protection privileges. The Company has in the past experienced high return rates. During fiscal 1996, customer returns and price protection charges represented approximately 12% of gross sales. The Company maintains reserves for anticipated returns (including stock balancing) and price protection privileges. Under a product evaluation program established by the Company, computer resellers, VARs, distributors and end users generally are able to purchase products on a trial basis and return the products within a specified period if they are not satisfied. Evaluation units are not recorded as sales until the customer has issued a purchase order. Historically, the Company's gross margins have experienced significant volatility. The Company's gross margins vary significantly by product line, and, therefore, the Company's overall gross margin varies with the mix of products sold by the Company. For example, low capacity disk drive subsystems generally result in lower gross margins than CD servers and arrays. As sales of CD servers and arrays have become a larger percentage of the Company's total sales, the Company has experienced a corresponding increase in its overall gross margins. From fiscal 1994 to fiscal 1996, sales of CD servers and arrays grew from approximately 3% to 49% of net sales, contributing to an improvement in the Company's gross margin from approximately 21.2% to 29.9%. The Company's markets are also characterized by intense competition and declining average unit 18 20 selling prices as products mature over the course of a historically typical six to twelve month life cycle of individual products. In addition, the Company's gross margins may be adversely affected by availability and price increases associated with key products and components from the Company's suppliers, some of which have been in short supply, and inventory obsolescence resulting from older generation products or the unexpected discontinuance of third party components. Finally, the Company's margins vary with the mix of its distribution channels and with general economic conditions. For any of the foregoing reasons, the Company's overall margin could decline in the future from the levels experienced in recent quarters. See "Risk Factors -- Potential Fluctuations in Future Operating Result," "-- Component Shortages; Reliance on Sole or Limited Source Suppliers" and "-- Rapid Technological Change; Short Product Life Cycles." RESULTS OF OPERATIONS The following table sets forth the Company's statement of operations data as a percentage of net sales for the periods indicated.
YEARS ENDED ---------------------------------- JULY 29, JULY 28, JULY 26, 1994 1995 1996 -------- -------- -------- Net sales........................................................ 100.0% 100.0% 100.0% Cost of sales.................................................... 78.8 73.6 70.1 ----- ----- ----- Gross profit................................................... 21.2 26.4 29.9 Selling, general and administrative expenses..................... 20.0 20.9 21.0 Research and development expenses................................ 2.8 2.5 2.2 Loss on closure of German subsidiary............................. 1.2 -- -- ----- ----- ----- Operating income (loss)........................................ (2.8) 3.0 6.7 Interest expense................................................. 0.4 0.4 0.4 ----- ----- ----- Income (loss) before income taxes.............................. (3.2) 2.6 6.3 Provision (benefit) for income taxes............................. (1.0) 1.0 2.5 ----- ----- ----- Net income (loss).............................................. (2.2)% 1.6% 3.9% ===== ===== =====
Net Sales The following table sets forth the net sales and percentages of net sales represented by each of the Company's product lines.
YEARS ENDED ------------------------------- JULY JULY JULY 29, 28, 26, 1994 1995 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) NET SALES DATA: CD servers and arrays......................................... $ 1,108 $14,060 $35,985 Disk drive upgrade products................................... 24,082 26,644 35,432 RAID and tape backup subsystem products....................... -- 2,185 2,039 Multimedia kits............................................... 9,312 1,771 -- ------ ------ ------ Total............................................... $34,502 $44,660 $73,456 ====== ====== ====== PERCENTAGE OF NET SALES DATA: CD servers and arrays......................................... 3% 31% 49% Disk drive upgrade products................................... 70 60 48 RAID and tape backup system products.......................... -- 5 3 Multimedia kits............................................... 27 4 -- ------ ------ ------ Total............................................... 100% 100% 100% ====== ====== ======
19 21 Net sales increased 29.4% from $34.5 million in fiscal 1994 to $44.7 million in fiscal 1995 and increased an additional 64.5% to $73.5 million in fiscal 1996. Net sales increased from fiscal 1994 to fiscal 1995 primarily as a result of increased sales of the Company's CD servers and arrays and, to a lesser extent, increased sales of its disk drive upgrade products and initial sales of its RAID products, which were partially offset by decreased sales of its CD-ROM multimedia kits that were discontinued in fiscal 1995. Net sales increased from fiscal 1995 to fiscal 1996 primarily as a result of increased sales of CD servers and arrays (including sales of higher performance CD servers) and, to a lesser extent, increased sales of hard disk drive upgrade products. International sales, primarily to European customers and secondarily to Middle Eastern, Latin American and Pacific Rim customers, were $6.5 million, $6.2 million and $8.4 million, and accounted for approximately 19%, 14% and 11% of net sales for fiscal 1994, 1995 and 1996, respectively. International sales remained essentially constant for fiscal 1995 compared to fiscal 1994 as increased sales of hard disk drive upgrade products were offset by decreased sales of CD-ROM multimedia kits. International sales increased by 35.6% from fiscal 1995 to fiscal 1996 primarily as a result of increased sales of CD-ROM servers and arrays. See "Risk Factors -- Risk of International Sales and Operations." Gross Profit The Company's gross profit totalled $7.3 million, $11.8 million and $22.0 million during fiscal 1994, 1995 and 1996, respectively. The Company's gross margin increased from 21.2% in fiscal 1994 to 26.4% in fiscal 1995, due primarily to a shift in product mix toward higher margin CD servers and arrays and a decrease in the losses associated with the discontinuance of sales of the Company's CD-ROM multi-media kits. During fiscal 1996, gross margin further increased to approximately 29.9% due primarily to a continuing shift in product mix toward higher margin CD servers and arrays as well as an increase in gross margins for the Company's CD servers and arrays, and to a lesser extent from an increase in gross margins on the Company's hard disk drive upgrade and RAID products. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 35.6% from $6.9 million in fiscal 1994 to $9.4 million in fiscal 1995 and further increased 64.5% to $15.4 million in fiscal 1996. These expenses represented 20.0%, 20.9% and 21.0% of net sales in fiscal 1994, 1995 and 1996, respectively. The increase from fiscal 1994 to fiscal 1995 was due primarily to an increase in various marketing and advertising programs to promote sales of the Company's CD servers and arrays and RAID subsystems in vertical niche markets, as well as increases in staffing to support the Company's growth. The increase from fiscal 1995 to fiscal 1996 was due primarily to increased marketing expenses associated with advertising, direct mail and channel telemarketing, as well as increases in sales commissions and general and administrative staffing necessary to support the Company's growth. Selling, general and administrative expenses for fiscal 1995 and 1996 included $0.9 million and $2.9 million, respectively, for bonuses for executive officers. The Company anticipates that the dollar amount of its selling, general and administrative expenses will increase as the Company continues to expand its efforts to penetrate certain sales channels and regions and continues to strengthen management information and telecommunications systems. Research and Development Expenses Research and development expenses, consisting primarily of personnel expenses, increased 12.7% from $1.0 million in fiscal 1994 to $1.1 million in fiscal 1995 and further increased 47.6% to $1.6 million in fiscal 1996. These expenses represented 2.8%, 2.5% and 2.2% of net sales in fiscal 1994, 1995 and 1996, respectively. The slight dollar increase from fiscal 1994 to fiscal 1995 resulted primarily from the Company's enhanced efforts to develop its CD server and array product lines and RAID subsystems. This increase was largely offset by the Company's discontinuation of its development efforts for its CD-ROM multimedia kit business. The dollar increase from fiscal 1995 to fiscal 1996 was due primarily to the Company's expanded efforts to develop new CD servers and RAID products and to develop CD FORCE, a CD-ROM network server incorporating Procom's proprietary software data access management system. The Company anticipates that the dollar amount of its research and development expenses will increase, and also may increase as a percentage of net 20 22 sales, with the addition of dedicated engineering resources to develop new product categories to insure that the Company's products are compatible with a wide range of hardware platforms and network topologies and to further develop MESA, the Company's proprietary client/server management storage architecture. In addition, the Company intends to continue to update software drivers to ensure that the Company's CD servers and arrays function with a variety of hardware platforms and network operating systems. To date, all of the Company's software development costs have been expensed as incurred, as the impact of capitalizing software costs under Financial Accounting Standard No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" would have been immaterial to the Company's financial statements. Loss on Closure of German Subsidiary The Company incurred a one-time charge to operations of $409,000 related to the closure of its German sales office during fiscal 1994. The Company formed its German subsidiary in fiscal 1993 to support its increasing European sales and marketing efforts primarily related to sales of CD-ROM multimedia kits. However, the Company closed its German office in April 1994 due to the subsidiary's lack of profitability resulting from higher average general and administrative costs, slower realization of sales than anticipated and a lower gross margin product mix. During fiscal 1995, the Company completed the liquidation of the subsidiary's assets. Interest Expense The Company maintains a working capital line of credit to support its accounts receivable and inventory levels. Interest expense increased from $151,000 in fiscal 1994 to $195,000 in fiscal 1995 as the Company's sales, and resulting accounts receivable and inventory levels, increased. Interest expense further increased to $282,000 for fiscal 1996 as the Company utilized its available credit lines to support further increases in accounts receivables and inventory levels. Income Taxes The Company's effective tax rates were (31.6)%, 36.4% and 38.7% for fiscal 1994, 1995 and 1996, respectively. In fiscal 1994, the Company utilized net operating losses to reduce its state income tax rate below the statutory level. For fiscal 1995 and 1996, the Company's effective tax rate approximated federal and state statutory rates, with moderate reductions due to the Company's use of a foreign sales corporation ("FSC"). For fiscal 1994 and 1995, the Company received benefits from the research and experimentation credit, while the fiscal 1996 benefit was significantly reduced due to legislation which temporarily denied the credit. See Note 4 of Notes to Consolidated Financial Statements. The Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," on July 28, 1994. The cumulative effect of the adoption as of July 28, 1994 was immaterial and, as a result, the Company did not restate any prior financial statements. 21 23 QUARTERLY INFORMATION The following tables set forth certain unaudited financial information in dollars and as a percentage of net sales for the eight quarters of fiscal 1995 and 1996. The Company believes that all necessary adjustments, consisting only of normal recurring accruals, have been included in the amounts stated below to present fairly the selected quarterly information when read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere herein. The operating results for any quarter are not necessarily indicative of results for any subsequent period or for the entire fiscal year. The Company operates under thirteen week quarters that end on the Friday closest to the calendar quarter end. As a result, a fiscal quarter may not end on the same day as the calendar quarter end.
QUARTERS ENDED --------------------------------------------------------------------------------------------------- OCTOBER 28, JANUARY 27, APRIL 28, JULY 28, OCTOBER 27, JANUARY 26, APRIL 26, JULY 26, 1994 1995 1995 1995 1995 1996 1996 1996 ----------- ----------- --------- -------- ----------- ----------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............... $ 9,048 $10,040 $12,121 $ 13,451 $15,275 $15,801 $17,775 $ 24,605 Cost of sales........... 6,701 7,213 9,100 9,844 11,133 10,948 12,263 17,145 ------ ------- ------- ------- ------- ------- ------- ------- Gross profit.......... 2,347 2,827 3,021 3,607 4,142 4,853 5,512 7,460 ------ ------- ------- ------- ------- ------- ------- ------- Selling, general and administrative........ 1,851 2,255 2,350 2,906 2,875 3,333 3,829 5,364 Research and development........... 210 226 325 347 292 386 459 498 ------ ------- ------- ------- ------- ------- ------- ------- Operating income...... 286 346 346 354 975 1,134 1,224 1,598 Interest expense........ 40 58 56 41 60 61 51 110 ------ ------- ------- ------- ------- ------- ------- ------- Income before income taxes............... 246 288 290 313 915 1,073 1,173 1,488 Provision for income taxes................. 91 105 104 114 356 418 457 569 ------ ------- ------- ------- ------- ------- ------- ------- Net income............ $ 155 $ 183 $ 186 $ 199 $ 559 $ 655 $ 716 $ 919 ====== ======= ======= ======= ======= ======= ======= ======= Net income per share.... $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.06 $ 0.07 $ 0.08 $ 0.10 ====== ======= ======= ======= ======= ======= ======= ======= Weighted average number of shares(1).......... 9,167 9,167 9,167 9,167 9,167 9,167 9,167 9,167 ====== ======= ======= ======= ======= ======= ======= =======
- ------------------ (1) See Note 1 of Notes to Consolidated Financial Statements for a description of the computation of net income (loss) per share. The following table sets forth certain unaudited quarterly financial information of the Company for the eight quarters of fiscal 1995 and 1996 expressed as a percentage of net sales.
QUARTERS ENDED --------------------------------------------------------------------------------------------------- OCTOBER 28, JANUARY 27, APRIL 28, JULY 28, OCTOBER 27, JANUARY 26, APRIL 26, JULY 26, 1994 1995 1995 1995 1995 1996 1996 1996 ----------- ----------- --------- -------- ----------- ----------- --------- -------- Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............ 74.1 71.8 75.1 73.2 72.9 69.3 69.0 69.7 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit........... 25.9 28.2 24.9 26.8 27.1 30.7 31.0 30.3 ----- ----- ----- ----- ----- ----- ----- ----- Selling, general and administrative......... 20.4 22.5 19.4 21.6 18.8 21.1 21.5 21.8 Research and development............ 2.3 2.3 2.7 2.6 1.9 2.4 2.6 2.0 ----- ----- ----- ----- ----- ----- ----- ----- Operating income....... 3.2 3.4 2.8 2.6 6.4 7.2 6.9 6.5 Interest expense......... 0.5 0.6 0.4 0.3 0.4 0.4 0.3 0.5 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes................ 2.7 2.8 2.4 2.3 6.0 6.8 6.6 6.0 Provision for income taxes.................. 1.0 1.0 0.9 0.8 2.3 2.6 2.6 2.3 ----- ----- ----- ----- ----- ----- ----- ----- Net income............... 1.7% 1.8% 1.5% 1.5% 3.7% 4.2% 4.0% 3.7% ===== ===== ===== ===== ===== ===== ===== =====
The Company's net sales have increased every quarter for the eight quarters of fiscal 1995 and 1996. The increased sales have resulted primarily from increased shipments of CD servers and arrays and higher capacity 22 24 disk drive upgrade products. Sales of CD servers and arrays as a percentage of the Company's net sales increased from 32% during the first fiscal quarter of fiscal 1995 to 42% in the fourth quarter of fiscal 1996. In addition to seasonal factors that generally contribute to a relatively flat second fiscal quarter, the Company believes that its net sales for the second quarter of fiscal 1996 were adversely impacted by inclement weather and the federal government shutdown, which restricted federal purchasing due to budgetary uncertainty and the absence of federal purchasing decision-makers. The 38.4% increase in net sales for the fourth quarter of fiscal 1996 over the third quarter of fiscal 1996 was due primarily to increased sales of CD servers and arrays, combined with a significant increase in sales of high capacity storage upgrade products as the Company capitalized on unique market opportunities. Gross margin ranged from 24.9% for the third quarter of fiscal 1995 to 31.0% for the third quarter of fiscal 1996. Fluctuations in gross margin resulted from variations in revenue mix from sales of higher margin CD servers and arrays and RAID products, and sales of lower margin medium capacity disk drive storage products. Certain other factors which contribute to decreases in the Company's gross margins include the lower margins generated by sales of products near the end of their life cycles and increased international sales, which generally involve slightly lower average unit sales prices as a result of the increased use of distributors rather than computer resellers or VARs. Selling, general and administrative expenses ranged from 18.8% of net sales in the first quarter of fiscal 1996 to 22.5% of net sales in the second quarter of fiscal 1995. While selling, general and administrative expenses have generally increased, fluctuations in these expenses as a percentage of net sales have resulted primarily from varying levels of net sales and seasonal variations in marketing, advertising and trade show expenditures. Research and development expenses ranged from 1.9% of net sales in the first quarter of fiscal 1996 to 2.7% of net sales in the third quarter of fiscal 1995. Research and development expense levels fluctuated quarterly depending primarily on the size of the Company's engineering staff, as well as the number and nature of projects under development during any given quarter. The Company's results of operations have in the past varied significantly and are likely in the future to vary significantly as a result of a number of factors, including the mix of products sold, the volume and timing of orders received during the period, the timing of new product introductions by the Company and its competitors, product line maturation, the impact of price competition on the Company's average selling prices, the availability and pricing of components for the Company's products, changes in distribution channel mix and product returns or price protection charges from customers. Many of these factors are beyond the Company's control. Although the Company has experienced growth in sales in recent periods, there can be no assurance that the Company will experience growth in the future or be profitable on an operating basis in any future period. In addition, due to the short product life cycles that characterize the Company's markets, a significant percentage of the Company's sales each quarter may result from new products or product enhancements introduced in that quarter. Since the Company relies on new products and product enhancements for a significant percentage of sales, failure to continue to develop and introduce new products and product enhancements or failure of these products or product enhancements to achieve market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also has historically capitalized on short-term market opportunities for volume purchases of certain components at favorable prices. For example, in the quarter ended July 26, 1996, the Company capitalized on a one-time opportunity to purchase a significant volume of high capacity disk drive upgrade products at below market prices, which resulted in a price advantage to the Company that enhanced the Company's sales and results of operations for that quarter. There can be no assurance that the Company will be able to capitalize on such opportunities in the future. In addition, the Company's fiscal second quarter sales have historically remained relatively flat due primarily to heavy reseller participation in trade shows that detract from reseller selling efforts, end user budget constraints that restrict end user purchases, and a higher than average number of holidays during that quarter. LIQUIDITY AND CAPITAL RESOURCES The Company was founded with minimal capital and has never raised additional equity funds. For the past three fiscal years, the Company has satisfied its operating cash requirements principally through net 23 25 income, supplemented by periodic borrowings of funds under its working capital line of credit and increases in accounts payable and accrued expenses. Net cash provided by operating activities was $1.4 million and $0.4 million in fiscal 1994 and fiscal 1995, respectively, and net cash used in operating activities was $1.7 million in fiscal 1996. In fiscal 1994, net cash provided by operating activities was provided primarily by a decrease in accounts receivable and an increase in accounts payable, partially offset by the Company's net loss for the year. In fiscal 1995, net cash provided by operating activities resulted primarily from an increase in accounts payable and accrued expenses, together with the Company's net income, offset in part by increases in inventories and accounts receivable. In fiscal 1996, net cash provided by operating activities resulted primarily from increases in inventories and accounts receivable, offset in part by the Company's net income and increases in accounts payable and accrued expenses. During fiscal 1994 and 1995, the Company used $1.2 million and $0.2 million, respectively, to repay net borrowings under its line of credit, and, during fiscal 1996, the Company borrowed $2.7 million, net of repayments, to finance operations and purchase $0.4 million of property and equipment. In November 1994, the Company instituted a revolving line of credit with Finova Capital ("Finova"). The facility was amended in November 1995 to provide the Company with up to $6.0 million in working capital, based upon the Company's accounts receivable and inventory levels. Finova also makes available to the Company various flooring commitments pursuant to which the Company may finance the purchase of up to $7.0 million in inventory from certain of the Company's vendors who have credit arrangements with Finova. As of July 26, 1996, there was approximately $4.2 million outstanding under the credit facility, and $4.5 million outstanding under the flooring arrangements. The agreement governing the credit facility requires the Company to maintain certain financial covenants, minimum levels of tangible net worth and minimum levels of liquidity. As of July 26, 1996, the Company was in material compliance with the covenants of the Finova line of credit. The line is secured by substantially all of the assets of the Company. The initial term of the line of credit expires on November 29, 1996, but automatically renews for successive one year periods unless terminated by either party within a specified period in advance of the automatic renewal date. See Note 5 of Notes to Consolidated Financial Statements. As of July 26, 1996, the Company had cash balances of $0.8 million and $1.8 million of availability under its line of credit. The Company believes that the cash proceeds from this offering, together with existing cash balances and available credit under its existing line of credit, will be sufficient to meet anticipated cash requirements for at least the next twelve months. In the event the Company's plans require more capital than is presently anticipated, the Company's remaining cash balances may be consumed and additional sources of liquidity such as debt or equity financings may be required to meet working capital needs. There can be no assurance that additional capital beyond the amounts currently forecasted by the Company will not be required nor that any such required additional capital will be available on reasonable terms, if at all, at such time or times as required by the Company. RECENT ACCOUNTING PRONOUNCEMENTS During March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss should be recognized under the statement. The Company's adoption of the statement will be effective for fiscal 1997. The Company has studied the implications of the statement, and based on its initial evaluation, does not expect it to have a material impact on the Company's financial condition and results of operations. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans under the statement. The Company is currently following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company plans to adopt SFAS No. 123 during fiscal 1997 utilizing the disclosure alternative under the statement. 24 26 BUSINESS This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." Procom designs, manufactures and markets enterprise-wide data storage and information access solutions that are compatible with all major hardware platforms, network protocols and operating systems. The Company believes it is currently a leader in the market for CD-ROM servers and arrays due to its extensive distribution channels as well as the scalability, performance, ease of use and multi-protocol support of its products. The Company provides end users with disk drive upgrades for servers, desktops and notebook computers and also provides high performance, fault tolerant RAID solutions and tape backup subsystems. The Company utilizes computer resellers, VARs and distributors to sell its products to a wide variety of end users, including Fortune 500 corporations, governmental agencies, and financial and educational institutions. BACKGROUND In recent years, there has been a significant migration to client/server and network computing. Today's networks are much larger and more complex than early networks, often consisting of multiple servers (application servers, file servers, database servers and communications servers) and hundreds or even thousands of desktop clients manufactured by a number of different vendors. These servers and clients may utilize a number of different operating systems, including Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh OS. The distributed nature of these networks, together with the increased use of computers throughout organizations to create and store files, has resulted in an increase in the amount and dispersion of critical data across the clients and servers on these networks. As the size of networks and the amount of information used and stored on those networks have increased, access to such data has become increasingly important to end users. Users increasingly rely on the information resident on networks and PCs, such as customer databases, inventory records, sales tracking reports and research reference materials, for the effective accomplishment of daily business activities. As a result, end users must have real-time access to secure and reliable network data, regardless of the location of such data, and the supporting operating system. These factors have made it complicated to access information stored on networks. The increase in the size of networks has been accompanied by concurrent increases in the size and complexity of computer data and files. Application software developers continue to introduce software packages that increasingly incorporate features which require large amounts of storage, such as graphics, video and sound. For example, a minute of uncompressed full motion video and sound could require 1,800 megabytes of storage. Similarly, the size and complexity of images stored and manipulated using document imaging systems have intensified network storage requirements. Further, the increasing popularity of the Internet as a means of communication and a medium by which to access and distribute information has contributed to the demand for increased storage, as users download a wide variety of complex data from the Internet. Organizations evaluating alternatives for additional storage capacity must consider a number of factors, including total cost of ownership, capacity, access time, security, reliability and the ability to integrate such additional storage into an existing network. The cost of ownership includes not only the initial cost of a storage system but also the expenses associated with the ongoing administration of the network. Administrative costs associated with network data storage have increased as networks have grown more complex and systems administrators have been required to monitor storage systems that support multiple operating systems and multiple applications across numerous clients. In response to increased demand for cost-effective storage of different types of information, a variety of storage media have been developed, including hard disk, magnetic tape and CD-ROM. Hard disk storage is a popular means of storing and accessing large amounts of information that is continually changing. Hard disk storage provides rapid access time, but is a relatively expensive storage medium and is easily erased. Magnetic 25 27 tape is the least expensive storage medium, but has the slowest access times. Magnetic tape is therefore ideal for backing up large amounts of information that is only expected to be accessed infrequently. CD-ROM technology emerged in the early 1980s as a cost-effective method by which to store and distribute large amounts of information. A single CD can store approximately 650 megabytes of information, the same amount which could be contained on over 100,000 pages of paper. In addition, CD-ROMs offer data reliability and security, as they cannot be altered or erased, are not susceptible to data loss when computer systems fail and have a life expectancy of 50 to 100 years. Since CD-ROMs cannot be erased or written over, however, they are not suitable for storage situations in which information must be continually updated and altered. However, for organizations that require periodic distribution of written material, such as law reference books, parts lists, catalogues or manuals, CD-ROMs are much more cost-effective and practical than paper-based documents. The proliferation of network computing and the rapid increase in CD-ROMs as a means of information distribution and storage have fueled demand for CD-ROM systems that provide network wide access. RAID storage systems have developed in response to demand for increased data storage, performance, security, reliability, fault tolerance and availability, as well as for constant access. RAID is a method for allocating data across several hard disk drives and allowing a server microprocessor to access those drives simultaneously, thus increasing system storage and input/output performance. In addition, lost data on any drive can be recreated using special RAID algorithms, thus ensuring the immediate availability of RAID protected data even in the event of a disk drive failure. The increase in the importance and volume of stored, complex data has increased demand for secure and reliable methods of storage that allow for efficient and cost-effective protection and management of such data. These factors have also increased demand for total storage solutions that can quickly and efficiently provide access to large volumes of data resident on a variety of clients and servers running different operating environments, as well as data generated by a wide range of applications. In addition, users are increasingly demanding solutions comprised of not only hardware for cost-effective storage of and access to large amounts of secure and reliable information, but also software that manages information flow and reduces the high costs of network storage administration. PROCOM SOLUTION The Company provides a wide range of products designed to address the data storage and information access requirements of client/server computing environments. The Company's CD servers and arrays, disk drive upgrades, and RAID and tape backup subsystems are easy to install and use and have a relatively low overall cost of ownership. Procom's CD servers and arrays address the expanding use of CD-ROM as a distribution medium by providing clients with simultaneous access to up to 63 CD-ROMs at 30x speed. The Company's disk drive upgrades allow users to utilize their existing hardware for longer periods of time, thereby extending the life of their initial investment. The Company's RAID and tape backup subsystems provide high performance, fault tolerant storage of over a terabyte of data for large network information databases. The Company's recently introduced CD FORCE CD-ROM network server incorporates an embedded operating system that centralizes data access management services, thereby reducing administrative costs. This embedded operating system is based on the Company's managed enterprise storage architecture ("MESA"). MESA's operating system software allows for non-intrusive plug and play compatibility with most popular network operating systems, allowing products incorporating the MESA architecture to be installed by simply connecting one cable to the network. The central processing unit contained in each MESA-equipped server allows the server to manage and process data without burdening the network server. See "-- Products and Technology -- Products Under Development." The core elements of the Company's solution include: Broad Product Line. The Company supplies a wide range of products with a variety of prices, storage capacities, access times, storage media, hardware/software combinations and levels of redundancy. The 26 28 Company's products are designed to meet a broad spectrum of end user data storage and information access needs and range from disk drive storage upgrade products to the Company's recently introduced Hyper CD-30x module, a CD-ROM and hard disk combination, which the Company believes has the fastest CD-ROM access time and data transfer rates available. The Company's broad range of products allows its computer reseller and VAR customers to utilize Procom as a single source to satisfy the storage requirements of a wide range of end users, thereby reducing the need for multiple vendors. Modular and Scalable Design. The Company's products are designed to address the evolving data storage and information access requirements of enterprise-wide computing environments. Procom's products are modular and can be linked together to accommodate a customer's expanding data storage and information access requirements. Ease of Installation and Use. The Company's data storage and information access solutions have been designed for ease of installation, configuration and use in a variety of client/server networks. Many of the Company's CD servers and arrays can be added to computer networks by simply attaching them as nodes to existing network cabling. The Company's recently introduced CD FORCE server contains a graphical user interface that facilitates end user access to information contained on CD-ROMs. Reduced Cost of Ownership. Procom incorporates a number of features into its products that reduce the costs associated with both the installation of its products and the down-time of networks and storage systems. The Company's products include numerous fault tolerant features, such as redundant and hot-swappable power supplies and fans and hot-swappable disk and CD-ROM drives that allow users to repair a damaged drive without interrupting the operation of the network. The Company's CD-ROM and RAID products include features that reduce administrative costs for network administrators by providing remote management and notification of actual or potential system or component failures, and its RAID products also provide automatic reconstruction of data and easy adjustment of RAID levels. In addition, the operating system software incorporated into the Company's MESA architecture is designed to further reduce administrative costs by centralizing network data storage management. Multi-platform, Multi-protocol Support. Procom's products are compatible with a wide range of client networks and operating systems, including Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh OS. In addition, the Company's products support multiple network topologies such as Ethernet, FDDI, Fast Ethernet and Token Ring. This compatibility allows customers to implement the Company's storage solutions in a broad range of enterprise-wide computing environments. BUSINESS STRATEGY The Company's objective is to provide products that fulfill customers' evolving needs for data storage and information access products across all major computers and operating systems. The key elements of the Company's strategy to achieve this objective are as follows: Develop Additional Network Storage Products. The Company is focused on developing server products that will enable networks to provide and manage additional storage capacity more efficiently. These products will share many of the design characteristics of the Company's current CD FORCE network server, integrating a high performance central processing unit, network interface card and Procom's proprietary embedded operating system software, and will be designed to allow users on the network to store and access information more quickly. The Company plans to develop additional storage management software and to introduce additional servers that will utilize a variety of storage media, including hard disks (with RAID functionality) and magnetic tape, which can be attached directly to and will be compatible with a wide variety of network environments. Enhance Reseller Relationships. The Company focuses its marketing efforts on developing an awareness of the Company's data storage and information access solutions with various computer resellers, VARs and distributors of its products. These relationships provide the Company with indirect access to and improved visibility among large corporations and other institutional end users. The computer resellers, VARs and 27 29 distributors also function as a sales force for the Company, allowing the Company to reach a large number of end users without incurring the significant expenditures associated with a direct sales force, and provide ongoing service for the Company's storage systems. The Company intends to sell a broader range of its products and services to these existing customers. Target Vertical Markets. The Company promotes higher levels of sales of its CD servers and arrays through its channel partners by targeting a portion of its marketing efforts to specific end users that require enterprise-wide access to information published on CD-ROM, such as law and accounting firms, educational organizations, medical service providers and governmental agencies. The Company employs a similar strategy with regard to the sale of its high capacity RAID solutions by targeting its marketing efforts to end users with large information storage and access requirements, such as companies that have recently migrated from mainframe computer systems to personal computer networks, video-on-demand providers and companies developing electronic imaging applications. The Company intends to continue to target these vertical markets in the future. Expand Strategic Relationships. The Company seeks to expand its relationships with the primary suppliers of components of its products, including drive manufacturers such as Seagate Technology, Inc. and Toshiba and network software operating system developers such as Novell, Inc. and Microsoft Corporation. These relationships provide the Company with early access to information regarding future product releases and technological developments that allow the Company to anticipate and respond to market opportunities. The Company also collaborates with manufacturers regarding the design of many components that the Company ultimately incorporates into its data storage and information access products. In addition, the Company maintains relationships with content providers, such as legal publishers and video suppliers. These relationships provide the Company with opportunities to receive free publicity and promotion within niche end user markets when content providers utilize Procom data storage and information access systems in conjunction with the display of their own products at trade shows and other marketing events. Finally, the Company also maintains informal relationships with certain end users of its products that enable the Company to learn of and respond to changing end user needs. The Company intends to expand its relationships with suppliers and manufacturers, content providers and end users in the future. Deliver Timely Solutions. The Company believes that its focus on cost-effective data storage and information access allows it to remain a technology leader. The Company has focused on responding quickly to and capitalizing on demands for specialized data storage and information access products. The Company anticipates that additional market opportunities will arise as demand for data storage and information access products continues to increase, and the Company intends to maintain an organizational structure that will allow it to quickly respond to these opportunities if they develop. PRODUCTS AND TECHNOLOGY The Company's principal product lines are CD servers and arrays, disk drive upgrade products and RAID and tape backup subsystems. These product lines accounted for approximately 31%, 60% and 5%, respectively, of the Company's net sales in fiscal 1995, and approximately 49%, 48% and 3%, respectively, of the Company's net sales in fiscal 1996. Many of the Company's products are offered in a variety of storage capacities and performance levels and, as a result, are sold at varying prices. See "Risk Factors -- Dependence on CD Servers and Arrays." CD Servers and Arrays The Company's CD servers and arrays provide an efficient method by which to store and share large amounts of information across a network. The Company's CD servers and arrays are available in a variety of plug and play configurations, from four to 63 CD drives, and can be configured with either 4x or 8x CD-ROM drives. In addition, the Company has recently introduced its Hyper CD-30x module, a CD-ROM and hard disk combination, which allows 30x data transfer speeds and is based on proprietary technology licensed to the Company. Several CD arrays also are available as servers, configured at the Company's factory with specified hardware and software. The Company provides each CD server and array with optional software drivers for 28 30 Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1, and Macintosh OS. Many of the Company's CD servers and arrays contain the Company's built-in "Smart SCSI CD" board, which maps up to seven CD drives to a single SCSI ID, thereby allowing additional CD servers and arrays to be added to a network. The Company's recently released CD FORCE Server incorporates the Company's MESA architecture and is designed to (i) provide plug and play compatibility with most popular network operating systems, (ii) function without burdening the network server and (iii) provide cross/multi-platform compatibility. The Company's internally developed CD-ROM network data access management software is not presently available on all major hardware platforms, and of the Company's CD servers and arrays shipped to date that contain network data management software, substantially all included third-party software. See "Risk Factors -- Dependence on CD Servers and Arrays." In addition, by working with CD manufacturers and component suppliers, the Company has developed special enclosures to provide security for the CDs and prevent their loss, theft or damage. Certain information with respect to the Company's primary CD servers and arrays is set forth below:
- --------------------------------------------------------------------------------------------- APPROXIMATE PRODUCT LINE KEY FEATURES RETAIL PRICE - --------------------------------------------------------------------------------------------- CDT Array - Allows up to 13GB of information to be distributed $3,900-$21,300 over a network via 7, 14 or 21 CD-ROMs. - Requires no hardware installation. - Ethernet or Token Ring network connectivity. - --------------------------------------------------------------------------------------------- CDT Server - Allows up to 13GB of information to be distributed $12,000-$25,500 over a network via 14 or 21 CD-ROMs. - Requires no hardware installation. - In addition to Ethernet and Token Ring connectivity, CDT Servers support most popular network connectivity. - Includes CD-ROM management software for most popular network platforms. - Includes embedded Pentium-based server to improve overall performance. - --------------------------------------------------------------------------------------------- CDRAX - Allows up to 40GB of information on CD-ROM to be $75,000 distributed over a network. - Provides simultaneous access to up to 63 CD-ROMs. - Requires no hardware installation. - In addition to Ethernet and Token Ring connectivity, CDRAX supports other popular network connectivity. - Contains hot swappable CD-ROM drives and redundant power supplies and fans. - Includes CD-ROM management software for most popular network platforms. - Includes embedded Pentium-based server to improve overall performance. - ---------------------------------------------------------------------------------------------
29 31 The Company has recently introduced the following products:
- --------------------------------------------------------------------------------------------- APPROXIMATE RETAIL PRODUCT LINE KEY FEATURES PRICE - --------------------------------------------------------------------------------------------- Hyper CD-30x Module - Provides access time as low as 10.5 ms and $13,300-$77,000 data transfer rate of 4,500KB/sec. - Includes intelligent SCSI adapter designed to migrate CD-ROM images onto the embedded FAST-SCSI hard drive, providing 30x performance. - Supports most operating systems. - Allows up to 41GB of information to be distributed over a network via 12, 18 and 63 CD-ROMs. - --------------------------------------------------------------------------------------------- CD FORCE 14, 21 and 63 - Enables cross-platform CD-ROM access by $9,700-$72,500 embedding Procom's proprietary storage management software within its CD Servers. - Provides direct connect features to heterogeneous networking environments. - Operates independently of the network operating system. - Includes scalable architecture and multi-protocol access. - Allows up to 41GB of information to be distributed over a network via 12, 18 and 63 CD-ROMs. - Provides advanced security and metering options. - Includes embedded Pentium-based server to improve overall performance. - Supports Ethernet, Fast Ethernet, FDDI and Token Ring connectivity. - Available in 4x, 8x and 30x configurations. - ---------------------------------------------------------------------------------------------
The Company also produces CD-ROM publishing and recording packages as part of its strategy to capitalize on the use of CD-ROM as a popular information storage medium for a number of industries. Procom's internal and external CD-Recorders are designed to meet the archiving needs of desktop computer users. Disk Drive Upgrades The Company remains committed to supplying products that enhance the performance and capacity of notebook and desktop computers, as well as network servers. The addition of a single high-capacity hard disk drive subsystem to a network server adds several gigabytes of storage capacity and improves overall speed and performance. A complete installation kit is included with each hard disk drive for easy integration. Several hard disk drives can be combined to enable data to be spanned, striped or mirrored in a variety of configurations. Due to the increase in the popularity of notebook computers, sales of the Company's ATOM notebook upgrade drive kits have increased to 14% of net sales in fiscal 1996 from 9% in fiscal 1995. 30 32 Certain information with respect to the Company's hard disk drive storage upgrade products is set forth below:
- ----------------------------------------------------------------------------------------------- APPROXIMATE PRODUCT LINE KEY FEATURES RETAIL PRICE - ----------------------------------------------------------------------------------------------- ATOM - Includes internal 2.5 inch IDE hard drives. $350-$1,100 - Ranges in capacity from 540MB to 2.1GB. - Equipped with all necessary components required for installation. - Compatible with most popular notebook computers. - ----------------------------------------------------------------------------------------------- SI - High-performance internal FAST SCSI hard drives. $250-$2,850 - Ranges in capacity from 540MB to 9GB. - Equipped with all necessary components required for installation. - Compatible with most desktop computers, workstations and servers. - ----------------------------------------------------------------------------------------------- MD - High-performance external FAST SCSI hard drives. $380-$5,890 - Ranges in capacity from 540MB to 18GB. - Equipped with all necessary components required for installation. - Compatible with most workstations and servers. - ----------------------------------------------------------------------------------------------- PR-IDE - Includes Internal 3.5 inch IDE hard drives with software. $250-$550 - Ranges in capacity from 540MB to 2.5GB. - Equipped with all necessary components required for installation. - Compatible with most desktop computers and workstations. - -----------------------------------------------------------------------------------------------
The Company also offers CD-ROM drives for stand-alone desktop applications and a variety of other storage peripheral products. RAID and Tape Backup Subsystems The Company's RAID products present a solution to the storage and input/output ("I/O") speed, capacity and reliability challenges presented by network computing. RAID is a method of distributing data in stripes across several hard disk drives, allowing the microprocessor to access those drives simultaneously, thus increasing storage system I/O performance. RAID solutions generally reduce bottlenecks that occur in non-RAID environments when multiple users access data simultaneously. In addition, RAID configurations can provide a high degree of fault tolerance because they continuously calculate and store a unique parity, using logic to accompany each data stripe. If any drive fails, the remaining drives in the system may use the parity value to reconstruct the data on the failed drive, thus ensuring the immediate availability of RAID protected data even in the event of a disk drive failure. RAID is available in several levels that differ in the ways they allocate data for storage and achieve fault tolerance. End users of RAID products select the appropriate RAID level depending on overall cost and performance for their particular requirements. Often, the user's actual application will dictate the appropriate level of data access, fault tolerance and redundancy desired. For example, applications such as on-line processing of financial transactions require instantaneous access to multiple disks, while multimedia or video- on-demand applications generally require single-user access, but at a significantly higher data transfer rate. The Company offers RAID products for all commonly used RAID levels for most hardware platforms and network environments. In addition, the Company also designs and sells tape backup storage solutions for a variety of computing environments to provide an additional level of protection for mission-critical data. 31 33 Certain information with respect to the Company's high capacity fault tolerant RAID and tape storage systems is set forth below:
- ---------------------------------------------------------------------------------------------- APPROXIMATE PRODUCT KEY FEATURES RETAIL PRICE - ---------------------------------------------------------------------------------------------- LANForce - Provides storage capacities up to 56GB. $11,800-$22,700 - Includes redundant components to reduce system failures. - Operating system independent. - Hardware-based RAID solution frees host computer from RAID management tasks. - Supports varying levels of RAID. - Offers optional cache memory to increase I/O performance. - ---------------------------------------------------------------------------------------------- RAID Rax - Provides all LANForce features. $70,000-$145,000 - Provides storage capacity from 50GB to over 1 terabyte. - Available in rack-mounted configuration that allows flexibility for expansion as storage needs increase. - Accommodates both 3.5 inch and 5.25 inch drive shuttles concurrently. - Accepts multiple host inputs. - ---------------------------------------------------------------------------------------------- DLT Tape Drive - Digital linear tape backup up to 280GB. $8,500-$16,900 - Provides cost-effective method of unattended backup. - Compatible with most major backup software. - ----------------------------------------------------------------------------------------------
Products Under Development The Company's product development priorities are aimed at meeting the growing market demand for complete storage solutions that are capable of addressing the evolving needs and challenges associated with distributed network computing. Current product development efforts focus on developing and integrating the Company's own proprietary software as a value-added component of the Company's complete storage solutions. The Company is continuing to enhance MESA, to address the growing complexity of network data storage management that has resulted from increases in heterogeneous network computing environments and the amount and complexity of data. The MESA client/server storage management architecture incorporates an embedded operating system designed to centralize data storage management services, and thereby reduce administrative costs associated with data storage management. MESA's operating system software furnishes it with non-intrusive plug and play compatibility with most popular network operating systems, allowing products incorporating the MESA architecture to be installed by simply connecting one cable to the network. The multi-platform support provided by MESA enables client workstations to use their own operating systems and still benefit from the functionality of MESA without any additional software. The central processing unit contained in each MESA-equipped server is designed to allow the server to manage and process data without burdening the network server. MESA is being designed to provide a cost-effective storage management solution that supports heterogenous client/server computing environments, is scalable to support networks and allows clients using multiple operating systems to access simultaneously a single storage system. MESA-equipped products enable systems administrators to manage CD storage systems and are being designed to manage other storage systems either locally or remotely and provide administrators with the ability to monitor and restrict access by end users within the network. The Company's recently released CD FORCE server incorporates the Company's MESA architecture and is designed to centralize data management storage services for information contained on CD-ROM. See "-- CD Servers and Arrays." No assurances can be given, however, that the Company will be successful in any of its product development efforts or that, even if 32 34 successfully developed, the Company's products will achieve timely market acceptance. See "Risk Factors -- Rapid Technological Change; Short Product Life Cycles." CUSTOMERS AND APPLICATIONS The Company sells its products principally to computer resellers, VARs and distributors, which in turn sell to end users of the Company's products. During fiscal 1995 and 1996, combined sales to Vanstar Corporation and Intelligent Electronics totalled approximately 17.6% and 18.1%, respectively, of net sales. The loss of either or both of these customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Customer Concentration; Distribution Strategy Risks." End users of the Company's products include Fortune 500 corporations, government agencies and financial and educational institutions. The following table lists certain end users of the Company's products. INDUSTRIAL GOVERNMENT LEGAL AND ACCOUNTING Arco Executive Office of the Cravath Swaine & Moore Chevron USA President Weil Gotschal Manges Exxon US Department of Defense Ernst & Young Mitsubishi Los Angeles City Attorney Price Waterhouse Lockheed Los Angeles County Sheriff Clark Hill PLC Gilette U.S. Public Defender Veterans Administration EDUCATION TELECOMMUNICATIONS TECHNOLOGY George Washington AT&T EDS University MCI Honeywell Harvard University Pacific Bell IBM UCLA US West Microsoft UC Davis Law School Southwestern Bell Wang Sybase ENTERTAINMENT FINANCIAL SERVICES 20th Century Fox Bank One Walt Disney Pictures Prudential (Buena Vista Studios) Union Bank Warner Communications
33 35 SALES AND MARKETING The Company's strategy is to deploy a comprehensive sales, marketing and support infrastructure to meet the data storage and access requirements of users of complex client/server networks, both in the U.S. and internationally. The Company uses multiple distribution channels to reach end user customers. In the United States, the Company has agreements with and sells its products through domestic computer aggregators such as Intelligent Electronics Inc. and Inacom Corporation, as well as smaller independent VARs and computer resellers. The Company also sells its products to computer resellers that function as corporate computer consultants to large corporations, educational institutions and governmental agencies, and maintains sales agreements with many of these consultants. These corporate computer consultants include AmeriData, Inc., Electronic Data Systems Corporation, Entex Information Services, Vanstar Corporation and others. Often these entities, and many of the Company's other customers, consult with end users of the Company's products in business and government, and then incorporate the Company's products into larger overall enterprise solutions. The Company recently reached an agreement with Tech Data Corporation, a computer products distributor, to sell the Company's products nationally. Outside the United States, the Company's products are sold through approximately 40 major distributors in a number of countries throughout the world. See "Risk Factors -- Customer Concentration; Distribution Strategy Risks; Inventory Protection." The Company has agreements with many of its computer resellers, VARs and distributors relating to purchases of the Company's products. These agreements do not provide the Company with any guaranteed levels of purchases. The Company frequently grants limited rights to customers to return products purchased from the Company in exchange for new purchases and also provides price protection to its customers. The short product life cycles of the Company's products and the difficulty in predicting future sales increase the risk that new product introductions, price reductions by the Company or its competitors or other factors affecting the personal computer and upgrade storage industries could result in significant product returns. In addition, new product introductions by the Company's suppliers or its competitors or other market factors may require the Company to reduce prices in a manner or at a time that gives rise to significant price protection charges. The Company estimates returns and potential price protection charges based on historical experience and accrues reserves therefor. However, these accruals may prove insufficient, and future returns and price protection charges may have a material adverse effect on the Company's business, financial condition and results of operations, particularly in light of the rapid product obsolescence that often occurs during product transitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historically, the Company enjoyed a relatively short sales cycle due to the low cost of its disk drive upgrade products. The typical sales cycle, from the time an end user contacted a reseller to the shipment by the Company of the desired product, often took less than one week. However, as the Company's product mix has shifted to increasingly complex and higher priced data storage and information access solutions, the Company's sales cycle has lengthened significantly. Because Procom's CD servers and arrays and RAID storage and access systems often represent a significant expenditure for end users, these users frequently require the approval of several individuals within their organization before placing purchase orders. In addition, the complexity of the Company's storage and RAID storage access solutions often require the Company to demonstrate its products for end users, further lengthening the sales cycle. In response to increasing demand from end users, the Company has instituted an evaluation program that provides for a specified period in which end users may install and evaluate the Company's products. Evaluation units are not booked as revenue until the Company receives a purchase order at the end of such trial period. During fiscal 1996, approximately 52% of evaluation units were purchased at the end of their trial period. The Company maintains a sales and sales support staff that at July 26, 1996 consisted of 49 people, substantially all of whom were located at the Company's principal offices in Irvine, California. The Company's sales are made to computer resellers, VARs and distributors through telemarketing efforts by sales representatives. The Company has recently hired its first U.S. field sales representative and is considering the implementation of a field sales force in various cities throughout the U.S. In addition, the Company has recently added independent sales representatives in Canada, France and Germany. The field sales representatives provide, among other things, regional technical support for customers, perform product demonstrations and, where desirable, accompany computer resellers and VARs on sales calls with end users. The Company 34 36 intends to expand the number of its international sales representatives. The Company also intends to add additional international distributors in targeted countries and is developing joint marketing relationships with certain distributors. For fiscal 1995 and 1996, international sales represented approximately 14% and 11%, respectively, of the Company's net sales. See "Risk Factors -- Risks of International Sales and Operations." The Company's marketing group, as of July 26, 1996, consisted of 13 persons engaged in a number of activities designed to help the Company achieve better market recognition and ultimately increased sales. This group's responsibilities include (i) advertising in magazines targeted to specific markets, (ii) conducting various promotional programs with the Company's computer resellers, VARs and distributors, including cooperative advertising arrangements and special programs where employees of the Company's computer resellers, VARs and distributors can earn cash awards for their efforts in recommending or selling the Company's products to end users, (iii) coordinating the Company's participation in various trade shows, including COMDEX and specific vertical applications shows such as LegalTech and (iv) cooperating with publishers and authors of industry magazines in the testing and review of the Company's products since market acceptance of each new generation of products is influenced significantly by reviews in leading computer industry magazines and related awards. CUSTOMER SERVICE AND SUPPORT The Company employs engineers and technicians who work closely with the Company's sales personnel to assist computer resellers, VARs and distributors and end users with pre- and post-sales support matters, as well as to provide customers with technical support, education, training and consulting services. The Company's customer service and technical support staff at July 26, 1996 consisted of approximately seven people located in Irvine, California. Customer service personnel provide customer service through software driver updates, upgrade programs and warranty service. Technical support personnel assist end users and distributors by telephone, facsimile and on-line services, including 24-hour bulletin board services and World Wide Web sites, in the installation, configuration and use of the Company's products. The Company also relies on its computer resellers, VARs and distributors to provide technical support and service. In November 1995, the Company signed an agreement with Siemens Nixdorf Information Systems, a national provider of computer technical services ("Siemens"), to provide on-site installation and service to end users of its high capacity CD servers and arrays. By contracting with Siemens, which has many offices located throughout the U.S., the Company believes it should be able to offer a rapid response to end user technical problems throughout the country. The Company expects that its return rates resulting from technical problems will decrease as Siemens field representatives demonstrate effective installation and service methods at customer sites. The Company offers warranties on its products ranging from one to five years. The Company's primary warranty efforts consist of accepting defective products from customers and either repairing them or returning the defective component to the original manufacturer for repair or replacement during the applicable warranty period. The Company generally protects itself by extending to its customers a warranty that corresponds to the warranty provided to the Company by its suppliers. However, if a supplier were to fail to meet its warranty obligations, the Company would be forced to assume responsibility for warranties on all components manufactured by that supplier. Such an event could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Warranty Exposure." RESEARCH AND DEVELOPMENT The Company believes that continued investment in research and development is critical to the Company's ability to continue to introduce, on a timely basis and at competitive prices, new and enhanced products incorporating the latest technology and addressing emerging market needs. The Company's research and development staff consisted of 33 employees as of July 26, 1996, which includes software and hardware engineers and software quality assurance technicians. Research and development expenses, primarily consisting of personnel expenses, were $1.0 million, $1.1 million and $1.6 million in fiscal 1994, 1995 and 1996, respectively, constituting 2.8%, 2.5% and 2.2% of net sales, respectively. The Company anticipates that the dollar amount of its research and development expenses will increase and that such expenses also may increase as a percentage of net sales with the addition of dedicated engineering resources and personnel to develop new 35 37 product categories, to ensure that the Company's products are compatible with a wide range of hardware platforms and network topologies, and to develop additional software associated with the Company's MESA architecture, allowing the Company to develop servers that support not only CD-ROM, but also hard disk drive and magnetic tape storage media. The Company's hardware and software engineers are engaged in ongoing development of new storage subsystems that offer increasing storage capacity and compatibility with an expanding base of computer networks and operating systems. See "-- Products and Technology -- Products Under Development." There can be no assurance that the Company's development efforts will be successful, or that the Company will be able to introduce competitive new products in a timely manner. The market for the Company's products is characterized by frequent new product introductions and rapid product obsolescence. These factors typically result in short product life cycles, historically ranging from six to twelve months. For example, the data transfer rate of CD-ROM products has increased rapidly, resulting in the introduction of four, eight, ten and twelve speed CD-ROMs. Similar technological advances have been made with regard to disk drive storage capabilities and other performance standards. Each new product cycle presents new opportunities for current or prospective competitors of the Company to gain market share. The Company must continually monitor industry trends in selecting new technologies and features to incorporate into its products. If the Company is unable to successfully introduce new products on a timely basis, the Company's sales could be adversely affected. Any such failure also could impair the Company's brand name and the Company's ability to command the attention and loyalty of computer resellers, VARs and distributors in future periods. Moreover, because short product life cycles are accompanied by long lead times for many components of the Company's products, the Company may be unable to reduce or increase production in response to unexpected demand. The Company's ability to introduce new products in a timely manner is heavily dependent on its ability to develop or purchase firmware and software drivers for its CD-ROM and disk drive products to interface effectively with host networks and operating systems. While the Company endeavors to work with its component suppliers to plan for the timing of introduction of new components and to develop the associated firmware and software, unforeseen design issues or other factors that delay introduction of these products could adversely affect the Company's ability to ship new products. In addition, third party suppliers may not employ the same testing and quality assurance procedures as the Company, resulting in the receipt by the Company of defective components. This could require the Company to find replacement components or wait for the resolution of the problem, either of which could delay the Company's ability to bring products to market and have a material adverse effect on the Company's business, financial condition and results of operations. The Company's business also will be adversely affected if new disk, CD-ROM drives or other components that it selects from among those offered by its various vendors do not perform favorably on a cost or performance basis compared to competing products. In addition, products and technologies developed by competitors may render the Company's products and technologies noncompetitive or obsolete. Finally, advances in network and on-line technology and development of new, higher-capacity storage media such as DVD may result in a reduction or replacement of CD-ROM as a data storage and information access medium. If the Company is unable to adapt to these and other technological advances by developing new products, the Company's financial performance would be adversely affected. See "Risk Factors -- Substantial Competition" and "-- Rapid Technological Change; Short Product Life Cycles." MANUFACTURING The Company's primary manufacturing activities, located at the Company's headquarters in Irvine, California, consist of testing, assembling and integrating components to form data storage and information access subsystems. The Company has historically operated without a material backlog. The Company generally purchases the major components of such subsystems (hard disk drives, CD-ROM drives or tape drives) based on historical requirements and forecasted needs to provide it with two to three weeks of inventory. Some of the Company's products require printed circuit boards, the assembly of which the Company often subcontracts to third party vendors. The Company's CD servers and arrays generally require a special housing of either metal or plastic, and the Company contracts with third party vendors for the manufacture of those housing units. The Company performs quality assurance testing on most of its products 36 38 and subjects third-party supplied components to testing and evaluation before including such components in the Company's product offerings. The Company packages the assembled hard disk drives, CD-ROM drives and tape backup drives with software, manuals and additional hardware components, which it generally purchases from third party suppliers. The Company relies on a network of independent subcontractors to supply certain custom components manufactured to the Company's specifications. This network consists of a number of small firms with limited financial resources. While the Company utilizes several firms to mitigate the risk of business interruption, it is possible that several vendors could simultaneously experience problems with production or financial stability, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company depends on sole or limited source suppliers for certain key components used in its products, particularly disk and CD-ROM drives. In recent years, these components have been in short supply and frequently on allocation by manufacturers, and the Company's size may place it at a competitive disadvantage during such periods relative to larger competitors. Although the Company maintains ongoing efforts to obtain adequate supplies of components, there can be no assurances that the Company will obtain adequate supplies or obtain such supplies at cost levels that would not adversely affect the Company's gross margins. The Company has no guaranteed supply arrangements with any of its sole or limited source suppliers and customarily purchases sole or limited source components pursuant to purchase orders placed from time to time in the ordinary course of business. Moreover, the Company's suppliers may, from time to time, experience production shortfalls or interruptions that impair the supply of components to the Company. Component shortages are likely to continue, and there can be no assurance that such shortages will not adversely affect the Company's business, financial condition and results of operations. Conversely, in its attempt to counter actual or perceived component shortages, the Company may overpurchase certain components, resulting in excess inventory and reducing the Company's liquidity or, in the event of inventory obsolescence or a decline in the market value of such inventory, causing inventory write-offs that could materially adversely affect the Company's business, financial condition and results of operations. The Company relies on a small number of suppliers to continue to develop, introduce and manufacture disk drives, CD-ROM drives and other components that incorporate new technologies and features that compete favorably in functionality and price with the offerings of other disk drive and CD-ROM manufacturers, including competitors of the Company. The Company's dependence on these sole or limited source suppliers, and the risks associated with any delay or shortfall in supply, are exacerbated by the short life cycles that characterize the Company's products. Any delay in the introduction by or availability of disk drives or CD-ROM drives from the Company's suppliers or the failure of such suppliers to provide functionality and performance on a cost effective basis could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, it is possible that the technology of the components the Company uses in manufacturing its products will be rendered undesirable or obsolete by the components of other suppliers. The Company would then be forced to establish relationships with new suppliers, which could delay or preclude the Company from bringing competitive products to market and have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Component Shortages; Reliance on Sole or Limited Source Suppliers." COMPETITION The markets for the Company's products are intensely competitive. In each of its primary product lines, the Company competes with a large number of disk drive manufacturers, computer resellers, VARs and distributors. Some of the Company's vendors also sell competing products to distributors, which then sell these products to the Company's customers. Many of the Company's current and potential competitors have significantly greater market presence, name recognition and financial and technical resources than the Company, and many have longstanding positions and established brand names in their respective markets. In addition, certain of the Company's current and potential competitors possess competitive cost advantages due to a number of factors, including lower taxes and substantially lower costs of labor associated with international operations. Finally, manufacturers of disk drives such as Seagate Technology Inc., IBM, Quantum Corporation and Western Digital Corporation, and manufacturers of CD-ROM drives, such as 37 39 Toshiba, NEC Corporation and Plextor Corporation, may in the future become more direct competitors of the Company to the extent that such manufacturers elect to expand into the disk drive upgrade market or the CD server and array market. The Company's primary competitors in the CD server and array market consist of (i) CD array manufacturers such as Microtest, Inc., Meridian Data, Inc. and Micro Design, Inc., which also furnish CD-ROM management software with their CD array products, (ii) a number of hardware aggregators, computer resellers and VARs that sell CD server products directly to end users, and (iii) various CD server and array manufacturers. The Company believes that it competes effectively in the CD server and array market by maintaining relationships with computer resellers and VARs that possess key relationships with decision makers at end users, while at the same time developing brand name identity through end user marketing and advertisements. The Company's primary competitors in the disk drive upgrade market are (i) computer manufacturers that also market and sell storage upgrades, such as IBM, Compaq and Hewlett-Packard, (ii) companies that specialize in reselling replacement or increased capacity storage disk drives, such as Storage Dimensions, Inc. or Ameriquest Technologies, Inc., and (iii) various national distributors of third party upgrade drives such as Ingram Micro, Inc., Merisel, Inc. and Tech Data Corporation. The Company believes it competes effectively against each of these three classes of competitors in the disk drive upgrade market by offering a broad range of reasonably priced storage upgrade products to its computer resellers, VARs and distributors throughout the U.S. and worldwide. The Company's primary competitors in the RAID product market are (i) computer manufacturers, such as IBM, Compaq and Hewlett-Packard, which generally focus on providing storage upgrades for their products and (iii) companies that sell storage solutions directly to end users, such as EMC Corporation and StorageTek. These direct sales competitors historically have focused their efforts on sales of high capacity storage products in the mainframe and minicomputer environments. In addition, the Company competes with many smaller enterprises that provide and sell unique solutions to various computer users. The Company believes that its relationships with computer resellers, VARs and distributors provide it with a competitive advantage over those manufacturers that have in the past sold high capacity storage systems directly to end users. The Company's success depends to a great extent on its ability to continue to develop products that incorporate new and rapidly evolving technologies to provide network users cost-effective data storage and information access solutions. However, to the extent that disk drive storage or information access products become more of a commodity, price competition among both computer manufacturers and suppliers of disk drives and CD-ROM drives may result in the availability of such storage and access at a low cost. These factors could create increased competition for the Company's products which could cause the Company to experience reduced gross profit margins on its products and could have a material adverse effect on the Company's business, financial condition and result of operations. The Company believes that the principal competitive factors in the Company's markets are product reliability, price/value relationship, product features and performance, brand name recognition, trade periodical reviews, time to market with new features and products, industry relationships, ease of installation and use, the quality of distribution channels, product quality, technical support and customer service. The Company believes that its brand name recognition allows the Company to remain competitive in the network storage solutions aftermarket and the CD server and array markets, and that the Company generally competes effectively with respect to the other competitive factors enumerated above. See "Risk Factors -- Substantial Competition" and "-- Rapid Technological Change; Short Product Life Cycles." INTELLECTUAL PROPERTY The Company relies primarily on a combination of copyright and trade secret protections and confidentiality agreements to establish and protect its intellectual property rights. The Company has no patent protection for its current product line. There can be no assurance that the Company's measures to protect its intellectual property rights will deter or prevent unauthorized use of the Company's technology. In addition, 38 40 the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company's inability to protect its proprietary rights in the United States or internationally may have a material adverse effect on the Company's business, financial condition and results of operations. Claims by third parties that the Company's current or future products, procedures or processes infringe upon their intellectual property rights may have a material adverse effect on the Company. The Company does not normally perform any formal surveys or studies relating to whether its products or processes infringe upon the intellectual property rights of others, and it would be difficult to establish whether a given product or process infringes upon the intellectual property rights of others. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict. Any future litigation, regardless of outcome, may result in substantial expense to the Company and significant diversion of the efforts of the Company's management and technical personnel. An adverse determination in any such litigation may subject the Company to significant liabilities to third parties, require disputed rights to be licensed from such parties, if licenses to such rights could be obtained, or require the Company to cease using such technology. There can be no assurance that if such licenses were obtainable, they would be obtainable at costs reasonable to the Company. If forced to cease using such technology, there can be no assurance that the Company would be able to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding, changes in patent or copyright laws or failure of the Company to obtain necessary licenses may prevent the Company from manufacturing, using or selling certain of its products or processes, which may have a material adverse effect on the Company's financial condition and results of operations. In May 1995, Compaq made certain infringement and other claims against the Company and obtained an injunction prohibiting the Company's use of a small string of software code contained in certain of the Company's disk drive products. Although the Company has rewritten the infringing code and settled the lawsuit, the lawsuit required substantial management time, significant expenditures for legal fees and costs and a one-time settlement payment and ongoing royalty payments to Compaq for these products. See "Risk Factors -- Intellectual Property Rights." EMPLOYEES As of July 26, 1996, the Company had 175 full-time employees, 52 of whom were engaged in manufacturing (including testing, quality assurance and materials functions), 33 in development engineering, 62 in sales and marketing, 7 in customer service and technical support, and 21 in finance and administration. The Company's employees are not represented by any collective bargaining agreements, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. The Company's success depends to a significant extent upon the continued service of its executive officers and other key management and technical personnel. See "Risk Factors -- Dependence on Key Personnel." FACILITIES The Company leases approximately 81,000 square feet of space in Irvine, California for its corporate offices and operations. The property is leased by the Company under a lease expiring in July 1998. The Company has an option to extend the lease for one additional year. The Company believes that its existing facilities will be adequate to meet its facilities requirements through July 1998. 39 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company as of October 25, 1996 were as follows:
NAME AGE POSITION - ------------------ --- ---------------------------------------------------------------- Alex Razmjoo 34 Chairman of the Board, President and Chief Executive Officer Frank Alaghband 33 Executive Vice President, Operations, and Director Alex Aydin 34 Executive Vice President, Finance and Administration, and Director Nick Shahrestany 33 Executive Vice President, Marketing and Information Technology and Director Frederick Judd 38 Vice President, Finance and General Counsel Richard W. Ormond 44 Vice President, Marketing and Corporate Relations Sam Inman(1)(2) 45 Director Sam Yau(1)(2) 47 Director
- --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. All directors hold office until the next annual meeting of shareholders or until their successors have been elected and qualified. Officers serve at the discretion of the Board of Directors (the "Board") and are appointed annually, subject to the terms of their employment agreements. There are no family relationships between the executive officers or directors of the Company. Mr. Razmjoo is one of the Company founders and has served as its Chairman of the Board, President and Chief Executive Officer since 1987. From 1984 to 1987, Mr. Razmjoo served as Director of Engineering of CMS Enhancements, Inc. He received a B.S. degree in Electrical Engineering in 1984 from the University of California, Irvine. Mr. Alaghband is one of the Company founders and has served as its Executive Vice President, Operations and as a director since 1987. From 1984 to 1987, Mr. Alaghband served as a Systems Engineer in the Computer Systems Division of McDonnell Douglas. He received a B.S. degree in Electrical Engineering in 1984 from the University of California, Irvine. Mr. Aydin is one of the Company's founders and has served as the Company's Executive Vice President, Finance and Administration and as a director since 1987. From December 1984 to August 1987, Mr. Aydin served as a Product Development Engineer for Toshiba America, Inc. He received dual B.S. degrees in Electrical Engineering and Biological Sciences in 1984 from the University of California, Irvine and a M.S. degree in Biomedical Engineering in 1985 from California State University, Long Beach. Mr. Shahrestany is one of the Company founders and has served as its Executive Vice President, Marketing and Information Technology and as a director since 1987. From 1985 to 1987, Mr. Shahrestany served as Regional Sales Manager of CMS Enhancements, Inc. He received a B.S. degree in Biological Sciences with a minor in Electrical Engineering in 1984 from the University of California, Irvine. Mr. Judd has served as the Company's Vice President, Finance and General Counsel since joining the Company in November 1993. Mr. Judd was General Counsel for CMS Enhancements, Inc. from February 1992 to November 1993. From April 1987 to February 1992, Mr. Judd served as the Chief Financial Officer and Treasurer of CMS Enhancements, Inc. Mr. Judd received a B.S. degree in Accounting in 1980 from Arizona State University and a J.D. degree in April 1985 from Brigham Young University. Mr. Judd is a certified public accountant and is licensed to practice law in California and Arizona. Mr. Ormond has served as the Company's Vice President, Sales and Marketing since October 1996. Mr. Ormond was a principal of Regis McKenna, Incorporated, a management consulting company, from 40 42 October 1990 to October 1996. He received a B.A. in 1974 from the University of Notre Dame, and an M.B.A. in 1977 from the University of Southern California. Mr. Inman has served as a director since October 1996. Mr. Inman has been the Chief Executive Officer of Centura Software Corp. since January 1996. Mr. Inman served as President and Chief Operating Officer of Centura Software Corp. from April 1995 until January 1996. Immediately prior to joining Centura Software Corp., Mr. Inman served as an independent consultant to a number of high technology companies from 1994 until April 1995. Mr. Inman served as President and Chief Operating Officer of Ingram Micro Inc., a worldwide distributor of microcomputer products, from 1993 to 1994. Prior to assuming this position, Mr. Inman served as President of IBM's Personal Computer Company for the Americas from July 1992 to September 1993, President of IBM's National Distribution Division from March 1991 to July 1992, Director for IBM's Enterprise Systems Marketing Division from November 1988 to March 1991, and prior to this he served in various other positions within IBM. Mr. Inman received a B.S. degree in Mathematics from Purdue University. Mr. Yau has served as a director since October 1996. Mr. Yau has been a director and the President and Chief Executive Officer of National Education Corporation, a provider of proprietary educational programs, since May 1995. From May 1993 to November 1994, Mr. Yau was the Chief Operating Officer of Advacare, Inc., a medical management company. From May 1987 to May 1993, Mr. Yau was the Senior Vice President of Finance and Administration of Archive Corporation, now part of Seagate Technologies Inc., a computer storage company. He is a director of Steck Vaughn Publishing Corporation and Milcom International Inc. Mr. Yau received a B.S. degree in Economics from the University of Hong Kong and an M.B.A. from the University of Chicago. BOARD COMMITTEES The Board formed a Compensation Committee and an Audit Committee in October 1996. Each committee is comprised of Messrs. Yau and Inman, the outside directors of the Company. Prior to such date, there were no committees of the Board. The Compensation Committee makes recommendations to the Board concerning salaries and incentive compensation for the Company's officers and employees and administers the Company's 1995 Stock Option Plan. The Audit Committee reviews the results and scope of the audit and other accounting-related services and evaluates the Company's internal audit and control functions. DIRECTOR COMPENSATION Directors who are not compensated as employees of or consultants to the Company receive a $6,000 annual retainer fee and a fee of $2,000 per board meeting and $500 for any committee meeting that does not occur on the same day as a Board meeting, and reimbursement of expenses incurred in attending Board meetings. In October 1996, Messrs. Yau and Inman were granted stock options under the 1995 Stock Option Plan to purchase 9,000 shares of the Company's Common Stock with an exercise price equal to $8.33 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board consists of Messrs. Yau and Inman. No member of the Compensation Committee or executive officer of the Company has a relationship that constitutes an interlocking relationship with executive officers or directors of another entity. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Articles of Incorporation that limit the liability of its directors for monetary damages arising from a breach of their fiduciary duties as directors to the fullest extent permitted by the California Corporations Code. The Company's Bylaws provide that the Company must indemnify its directors and officers to the fullest extent permitted by the California Corporations Code. The Company also has entered into indemnification agreements with its executive officers and directors and has obtained officer and director liability insurance with respect to certain liabilities. See "Description of Capital Stock -- Limitation of Liability of Directors and Indemnification of Directors and Officers." 41 43 EXECUTIVE COMPENSATION The following table shows the compensation paid by the Company during fiscal 1996 to each of the Company's executive officers (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ --------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#) COMPENSATION($)(2) - ------------------------------- -------- -------- ------------------ ------------ ------------------ Alex Razmjoo................... $191,250 $737,500 $5,101 -- $7,470 Chairman, President and CEO Frank Alaghband................ 191,250 737,500 9,959 -- 7,470 EVP-Operations Alex Aydin..................... 191,250 712,500 4,217 -- 7,470 EVP-Finance & Admin Nick Shahrestany............... 191,250 717,500 6,580 -- 8,160 EVP-Marketing Frederick Judd................. 84,000 42,927 -- 9,600 -- VP-Finance & General Counsel
- --------------- (1) Reimbursement of various personal expenses included in the executive officer's taxable income and, in the case of Mr. Alaghband, the portion of certain car lease payments considered as personal. (2) Represents life insurance premiums paid by the Company. The Company granted no stock options and no stock options were exercised through the end of fiscal 1995. The following table summarizes option grants during fiscal 1996 to each of the Named Executive Officers: OPTION GRANTS IN FISCAL 1996
POTENTIAL INDIVIDUAL GRANTS REALIZABLE VALUE AT ---------------------------------------------------------------- ASSUMED ANNUAL PERCENT OF RATES OF STOCK NUMBER OF TOTAL OPTIONS PRICE APPRECIATION SECURITIES GRANTED FOR OPTION TERM(2) UNDERLYING OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------- NAME GRANTED(#) FISCAL 1996(%) PRICE ($/SH) DATE 5% 10% - ----------------------- ------------------ --------------- ------------ ---------- -------- -------- Alex Razmjoo........... -- -- -- -- -- -- Frank Alaghband........ -- -- -- -- -- -- Alex Aydin............. -- -- -- -- -- -- Nick Shahrestany....... -- -- -- -- -- -- Frederick Judd......... 9,600(1) 4.2% $ 2.50 9/15/05 $132,384 $225,024
- --------------- (1) The option vests in 25% installments on each anniversary of the date of grant. In November 1993, Mr. Judd was also granted an option by Mr. Aydin to purchase 90,000 shares of the Company's Common Stock owned by Mr. Aydin. The exercise price of the option is $0.35 per share, which was the estimated fair market value of the Company's Common Stock on the date of grant. (2) This column shows the hypothetical gains or "option spreads" of the options granted based on both the fair market value of the Common Stock for financial reporting purposes and assumed annual compound stock appreciation rates of 5% and 10% over the full 10-year term of the options. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of future Common Stock prices. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the option or the sale of the underlying shares. The actual gains, if any, on the exercises of stock options will depend on the future performance of the Common Stock, the option holder's continued employment through the option period, and the date on which the options are exercised. 42 44 The following table summarizes the value of options held at July 26, 1996 by the Named Executive Officers. There were no options exercised by the Named Executive Officers during the fiscal year ended July 26, 1996. YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT JULY 26, 1996 (#) JULY 26, 1996 ($)(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------- ----------- ------------- ----------- ------------- Alex Razmjoo..................................... -- -- -- -- Frank Alaghband.................................. -- -- -- -- Alex Aydin....................................... -- -- -- -- Nick Shahrestany................................. -- -- -- -- Frederick Judd................................... -- 9,600 -- $25,632
- --------------- (1) The amounts set forth represent the difference between the estimated fair market value of $5.17 per share as of July 26, 1996 and the exercise price of the options, multiplied by the applicable number of shares underlying the options. EMPLOYEE BENEFIT PLANS 1995 Stock Option Plan In September 1995, the Board adopted and the Company's shareholders approved the 1995 Stock Option Plan, as amended (the "1995 Plan"), and reserved 540,000 shares of Common Stock for issuance thereunder. The 1995 Plan provides for the grant to employees of the Company of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for the grant to employees, directors, vendors and consultants of the Company of nonstatutory stock options. As of October 25, 1996, options to purchase an aggregate of 278,700 shares were outstanding under the 1995 Plan (49,614 of which were vested), and an aggregate of 261,300 additional shares remained available for additional grants. The 1995 Plan may be administered by the Board or a committee approved by the Board in a manner that complies with Rule 16b-3 promulgated under the Securities Act. Currently, the 1995 Plan is administered by the Compensation Committee of the Board, which determines the terms of options granted thereunder, including the exercise price, number of shares subject to the option and vesting schedule. Options and rights granted under the 1995 Plan are not transferable other than by will or the laws of descent or distribution, and each option or right is exercisable during the lifetime of the recipient only by such person. Options that are outstanding under the 1995 Plan will remain outstanding until they are exercised or they expire in accordance with these terms. The exercise price of all incentive stock options granted under the 1995 Plan must be at least equal to the fair market value of a share of Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of the option must not exceed five years. The term of all other options granted under the 1995 Plan may not exceed ten years. In the event the shareholders of the Company approve certain mergers or consolidations, or the sale of substantially all of the business assets of the Company or certain persons other than beneficial owners of greater than 5% of the then outstanding voting power become the beneficial owner of more than 50% of the voting power of the Company, unless prior to such event the Board determines that there shall be either no acceleration of limited acceleration of awards, each option outstanding under the 1995 Plan will become immediately exercisable. 43 45 401(k) Plan Effective August 1992, the Company adopted a tax deferred savings plan (the "401(k) Plan") that covers all full-time employees over the age of 21 with more than one year of service. An employee may contribute to the 401(k) Plan from 1% to 15% of his or her pretax compensation not to exceed in any given year the maximum amount allowable under Internal Revenue Service regulations. At the discretion of the Board, the Company may elect to match up to 100% of an employee's contributions to the 401(k) Plan. The Company is not obligated to make matching contributions, but has done so in the past on a discretionary basis. The rates of pre-tax contributions may be reduced with respect to highly compensated employees, as defined in the Code, so that the 401(k) Plan will comply with Section 401(k) of the Code. Pre-tax contributions are allocated to each employee's individual account, which is invested in selected investment alternatives according to the direction of the employee. An employee's pre-tax contributions are fully vested and nonforfeitable at all times, while employer contributions to an employee's account vest over a four-year period. An employee may also borrow from his or her account. All vested benefits are generally distributed to employees upon termination of employment. See Note 8 of Notes to Consolidated Financial Statements. EMPLOYMENT AGREEMENTS The Company has employment agreements with Messrs. Razmjoo, Alaghband, Aydin and Shahrestany. Each employment agreement has a three-year term with an automatic renewal provision which provides that the agreement will perpetually maintain a three-year term unless terminated. Pursuant to the agreements, each officer receives an annual salary of not less than $225,000, subject to annual increases of not less than the annual increase in the consumer price index. Each officer is also entitled to receive an annual bonus based on the Company's performance, awarded at the discretion of the Board. Each officer is entitled to receive a monthly automobile allowance of $750 and reimbursement of business expenses. The Company is required to maintain a life insurance policy of $1 million for the benefit of each officer, and each officer is entitled to participate in the other benefit programs of the Company available to its executive officers. Each officer is entitled to an annual tax preparation allowance of $1,000. If the Company terminates an officer's employment without Cause (as defined in the employment agreement) or the officer terminates his employment for Good Reason (as defined in the employment agreement), the Company is obligated to provide certain benefits to the terminated officer, including paying the officer 35 months base salary, subject to Internal Revenue Code restrictions. On November 15, 1993, Mr. Judd joined the Company as Vice President, Finance and General Counsel. Pursuant to the Company's employment agreement with Mr. Judd, Mr. Judd's base salary is $84,000, and Mr. Judd can qualify for performance-based bonuses of up to $32,000 per year which may be adjusted in the future. 44 46 CERTAIN TRANSACTIONS The Company made product sales totaling $411,000 and $398,000 to an entity owned by a relative of Mr. Razmjoo during fiscal 1994 and 1995, respectively. At July 29, 1994, the Company had accounts receivable from this related party of $323,000. As a result of an Executive Order issued in May 1995 related to transactions with Iranian companies, the Company determined that amounts owed by this entity might not be collectible in the near future and, accordingly, during fiscal 1995, wrote off the outstanding balances owed to the Company by this entity of approximately $251,000. As a result, at July 28, 1995, the Company had no account receivable from this entity. In fiscal 1995, the Company purchased $38,000 of CD-ROM software products and $128,000 of software programming services from, and made cash advances totalling $159,000 to, Softbit, Inc., an entity that is 90 percent owned by the Founders and of which each of the Founders is a director and officer. At July 28, 1994 and July 28, 1995, the Company had a net receivable of $80,000 and $181,000, respectively, from this entity. During fiscal 1996, the Company made cash advances of approximately $93,000 to the entity, sold products valued at approximately $2,000 to the entity and incurred expenses of approximately $25,000 on behalf of the entity. At July 26, 1996, the Company had a net receivable of $301,000 from the entity, and due to the financial position of the entity, the Company determined that the receivable was uncollectible and wrote off the entire amount. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals for certain liabilities to which they may be subject as a result of their affiliation with the Company, to the fullest extent allowed by law. The Company has adopted a policy that transactions between the Company and its officers, directors or other affiliates which involve more than $60,000 annually shall be submitted to the Audit Committee for approval. 45 47 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of October 25, 1996, and as adjusted to give effect to the sale of shares offered hereby, (i) by each person who is known by the Company to own beneficially 5% or more of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers, (iv) all directors and executive officers as a group and (v) each Selling Shareholder. Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING NUMBER OF OFFERING(1) ----------------------- SHARES ----------------------- BENEFICIAL OWNER NUMBER PERCENT(2) BEING OFFERED(1) NUMBER PERCENT(2) - ----------------------------------- --------- ---------- ---------------- --------- ---------- Alex Razmjoo(3)(4)(5).............. 2,250,000 25% 250,000 2,000,000 18.2% 2181 Dupont Irvine, California 92715 Frank Alaghband(3)(4)(5)........... 2,250,000 25% 250,000 2,000,000 18.2% 2181 Dupont Irvine, California 92715 Alex Aydin(3)(4)(5)(6)............. 2,250,000 25% 250,000 1,975,000(6) 18.0% 2181 Dupont Irvine, California 92715 Nick Shahrestany(3)(4)(5).......... 2,250,000 25% 250,000 2,000,000 18.2% 2181 Dupont Irvine, California 92715 Frederick Judd(4)(5)(7)(8)......... 92,400 1% 25,000 67,400 * Samuel Inman(3).................... -- -- -- -- -- Samuel Yau(3)...................... -- -- -- -- -- All directors and executive 9,002,400 100% 1,025,000 7,977,400 72.5% officers as a group (8 persons)(8)......................
- --------------- * Less than one percent. (1) Assumes no exercise of the Underwriters' over-allotment option. If the Underwriters' over-allotment option is exercised in full, Mr. Aydin will sell an additional 113,430 shares of Common Stock and each of Messrs. Razmjoo, Alaghband and Shahrestany will sell an additional 113,440 shares of Common Stock. (2) Percentage calculation is based upon 9,000,000 shares outstanding as of October 25, 1996 (or 11,000,000 shares following the Offering, based on the proposed issuance of 2,000,000 shares by the Company in the Offering). (3) A director of the Company. (4) An officer of the Company. (5) Includes shares given to various family members, the voting rights of which were retained by the donor. (6) Reflects the number of shares being sold by Mr. Aydin in the Offering and the sale of 25,000 shares by Mr. Judd in the Offering, which shares he acquired upon partial exercise of the option described in footnote (7) below. In addition, the number of shares owned after the Offering reflects 65,000 shares of Common Stock owned by Mr. Aydin that remain subject to the option. (7) Represents an option granted to Mr. Judd by Mr. Aydin to acquire 90,000 shares of Common Stock owned by Mr. Aydin, which option is presently exercisable in full. (8) Includes 2,400 shares of Common Stock subject to vested options. 46 48 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this Offering, the authorized capital stock of the Company will consist of 65,000,000 shares of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par value. COMMON STOCK Holders of Common Stock are entitled to receive such dividends as may from time to time be declared by the Board out of funds legally available therefor. Holders of Common Stock are entitled to one vote per share on all matters on which they are entitled to vote other than the election of directors, in which event, until the Company becomes a listed corporation as defined below, any holder may demand cumulative voting. See "-- Certain Anti-Takeover Effects -- Classified Board of Directors" and "-- No Cumulative Voting." Holders of Common Stock have no preemptive, conversion, redemption or sinking funds rights. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company and the liquidation preference of any outstanding Preferred Stock. The outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company hereby when issued will be, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to any series of Preferred Stock that the Company may issue in the future. PREFERRED STOCK The Board is authorized to provide for the issuance of Preferred Stock in one or more series and to fix the designations, preferences, powers and relative, participating, optional and other rights, qualifications, limitations and restrictions thereof, including the dividend rate, conversion rights, voting rights, redemption price and liquidation preference, and to fix the number of shares to be included in any such series. Any Preferred Stock so issued may rank senior to the Common Stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding-up, or both. In addition, any such shares of Preferred Stock may have class or series voting rights. Issuances of Preferred Stock, while providing the Company with flexibility in connection with general corporate purposes, may, among other things, have an adverse effect on the rights of holders of Common Stock, may have the effect of delaying, deterring or preventing a change in control of the Company without further action by the shareholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock, and may adversely affect the market price and the voting and other rights of the holders of Common Stock. At present, the Company has no plans to issue any shares of Preferred Stock. REGISTRATION RIGHTS After this Offering, the Founders will be entitled, upon expiration of the lockup agreements with the Underwriters, to certain rights with respect to the registration of their shares under the Securities Act. Under the terms of the Registration Rights Agreement to which each Founder is a party, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of others, the Founders, as the holders of 7,975,000 (assuming the consummation of this Offering and no exercise of the Underwriters' over-allotment option) shares of Common Stock, are entitled, subject to certain limitations and exceptions, to notice of such registration and are entitled to include shares of their Common Stock therein. In addition, at any time after the first anniversary of the Company's initial public offering and the Company becomes eligible to file registration statements on Form S-3 under the Securities Act, each Founder may, no more often than once during any 12-month period, request that the Company file a registration statement on Form S-3 with respect to shares of his Common Stock, and the Company is required to use its best efforts to effect such registration, subject to certain conditions and limitations. In general, all fees, costs and expenses of such registration will be borne by the Founders. 47 49 LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND OFFICERS The California General Corporation Law (the "Law") provides that California corporations may include provisions in their articles of incorporation relieving directors of monetary liability for breach of their fiduciary duties as directors, except for the liability of a director resulting from (i) any transaction from which the director derives an improper personal benefit, (ii) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (iii) acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iv) acts or omissions constituting an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (v) acts or omissions showing a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, (vi) any improper transaction between a director and the Company in which the director has a material financial interest or (vii) the making of an illegal distribution to shareholders or an illegal loan or guaranty. In addition, the Company may not indemnify directors and officers in circumstances in which indemnification is expressly prohibited by Section 317 of the Law. The Company's Articles of Incorporation provide that the Company's directors are not liable to the Company or its shareholders for monetary damages for breach of their fiduciary duties to the fullest extent permitted by California law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Bylaws of the Company (the "Bylaws") provide that the Company will indemnify its directors and officers to the fullest extent permitted by California law, including circumstances in which indemnification is otherwise discretionary under California law, subject to certain limitations for actions initiated by the director or officer, settlements not approved by the Company, losses covered by the directors' and officers' liability insurance policy maintained by the Company and judgments for an accounting of profits pursuant to Section 16(b) of the Securities Exchange Act of 1934 and similar laws. The inclusion of the above provisions in the Company's Articles of Incorporation and Bylaws may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its shareholders. This provision does not affect a director's responsibilities under certain other laws such as the federal securities laws or state or federal environmental laws. At present, there is no litigation or proceeding pending involving a director of the Company pursuant to which indemnification is being sought, nor is the Company aware of any threatened litigation that might result in claims for indemnification by any director. The Company has entered into indemnification agreements with its directors and executive officers that require the Company to indemnify such directors and officers to the fullest extent permitted by applicable provisions of law provided that any settlement of a third party action against a director or officer is approved by the Company, and subject to limitations for actions initiated by the director or officer, penalties paid by insurance and violations of Section 16(b) of the Securities Exchange Act of 1934, as amended, and similar laws. The agreements contain provisions that are broader in some respects than the specific indemnification provisions contained in the California Corporations Code. The indemnification agreements may require the Company, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as directors or executive officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance, if available on reasonable terms. The Company has obtained directors' and officers' liability insurance with respect to liabilities arising out of certain matters, including matters arising under the Securities Act. The Company believes the foregoing provisions are necessary to attract and retain qualified persons as directors and executive officers. 48 50 CERTAIN ANTI-TAKEOVER EFFECTS The provisions of the Articles of Incorporation and the Company's Bylaws summarized in the succeeding paragraphs may be deemed to have anti-takeover effects and may delay, deter or prevent a tender offer or takeover attempt that a shareholder might consider to be in such shareholder's best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. Classified Board of Directors. The Articles of Incorporation and Bylaws provide that when the Company becomes a "listed corporation" as defined below, as long as the size of the Board is at least six but less than nine directors, the Board will be divided into two classes of directors with each class serving staggered two-year terms and, if the number of directors is increased to nine or more, the Board will be divided into three classes serving staggered three-year terms. The Company will be deemed a "listed corporation" on the record date of the first annual meeting of shareholders at which the Company has at least 800 shareholders, as calculated in accordance with the California Corporations Code. The classification of the Board may discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the directors, as a classified Board generally makes it more difficult for shareholders to replace a majority of the directors. No Cumulative Voting. The Articles of Incorporation and Bylaws provide that, when the Company becomes a "listed corporation," cumulative voting will be eliminated. Without cumulative voting, which entitles a holder of Common Stock to cast a number of votes for each share held by such holder equal to the number of directors to be elected, the holders of a majority of the shares present or represented at an annual meeting of shareholders will be able to elect all of the directors to be elected at that meeting. Consequently, the elimination of cumulative voting may make a change in control of the Company more difficult by denying minority shareholders representation on the Board. Advance Notice Requirements for Shareholder Proposals and Director Nominations. The Bylaws establish advance notice procedures with regard to shareholder proposals and the nomination, other than by or at the direction of the Board or a committee thereof, of candidates for election as directors. The Company may, subject to compliance with Securities and Exchange Commission rules and regulations regarding proxy solicitation, reject a shareholder proposal or nomination that is not made in accordance with such procedures. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer Corporation. LISTING Application has been made to have the Company's Common Stock approved for quotation on the Nasdaq National Market under the trading symbol "PRCM." 49 51 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. Upon the closing of this Offering, the Company will have outstanding 11,000,000 shares of Common Stock. Of these shares, the 3,025,000 shares sold in this Offering will be freely tradeable without restriction under the Securities Act, unless purchased by "affiliates" of the Company. The remaining 7,975,000 shares of Common Stock held by existing shareholders will be "restricted" shares under the Securities Act (the "Restricted Shares"). Upon the expiration of lock-up agreements between each shareholder and the Underwriters, which will occur 180 days after the effective date of this Prospectus (the "Effective Date"), all 7,975,000 Restricted Shares will become eligible for sale, subject to the volume limitations described below. At October 25, 1996, an aggregate of 278,700 shares of Common Stock are subject to outstanding options. A total of 49,614 shares subject to options are vested as of the date of this Prospectus and an aggregate of 261,300 additional shares are reserved for future issuance pursuant to the Company's 1995 Stock Option Plan. The Company plans to file Registration Statement on Form S-8 to register the shares of Common Stock issuable pursuant to the 1995 Stock Option Plan. Approximately 57,000 shares of Common Stock subject to vested options will be eligible for resale upon the expiration of lock-up agreements 180 days following the Effective Date. Accordingly, shares of Common Stock issued under the 1995 Stock Option Plan will be available for sale in the public market upon vesting of such shares, subject to certain volume limitations under Rule 144 with respect to affiliates. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of: (i) 1% of the number of shares of Common Stock then outstanding (approximately 110,000 shares immediately after this Offering) or (ii) the average weekly trading volume of the Company's Common Stock in the Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations and requirements described above. The Securities and Exchange Commission has recently proposed to reduce the Rule 144 holding periods. If enacted, such modification could have an impact on the timing of when shares of Common Stock become eligible for resale. All of the Company's shareholders have agreed with Montgomery Securities that until 180 days after the effective date of this Prospectus they will not sell, offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of Common Stock, any options or grants to purchase shares of Common Stock, or any securities convertible or exchangeable for shares of Common Stock owned directly by such holders or with respect to which they have power of disposition. The Company has also agreed not to sell, offer to sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or any rights to acquire Common Stock for a period of 180 days after the Effective Date without the prior written consent of Montgomery Securities, subject to certain limited exceptions including grants of options and sales of shares under 1995 Stock Option Plan. The lock-up agreements with Montgomery Securities may be released at any time as to all or any portion of the shares subject to such agreements at the sole discretion of Montgomery Securities. 50 52 UNDERWRITING The underwriters named below (the "Underwriters"), represented by Montgomery Securities and Needham & Company, Inc. (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company and the Selling Shareholders the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such shares, if any are purchased.
NUMBER OF UNDERWRITER SHARES ----------- --------- Montgomery Securities........................................ Needham & Company, Inc....................................... --------- Total.............................................. 3,025,000 =========
The Representatives have advised the Company that the Underwriters initially propose to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Selling Shareholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 453,750 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this Offering. All holders of Common Stock prior to this Offering have agreed, subject to certain limited exceptions, not to sell or offer to sell or otherwise dispose of the shares of Common Stock currently held by them, any options to purchase any shares of Common Stock or any securities convertible into or exchangeable for any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Montgomery Securities. Montgomery Securities may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. In addition, the Company has agreed that for a period of 180 days after the date of this Prospectus it will not, without the consent of Montgomery Securities, issue offer, sell, grant options to purchase or otherwise dispose of any equity securities or securities convertible into or exchangeable for equity securities, except under the 1995 Stock Option Plan. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters and their controlling persons against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Representatives have advised the Company that the Underwriters will not confirm sales to any accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price has been determined through negotiations among the Company, the Selling Shareholders and the Representatives. Among the factors considered in such negotiations were the history of, and prospects for, the Company and the industry in which it competes, an assessment of the Company management, its past and present operations and financial performance, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the 51 53 Offering, the market prices of and demand for publicly traded common stocks of comparable companies in recent periods and other factors deemed relevant. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company and any Selling Shareholders by O'Melveny & Myers LLP, Newport Beach, California. Certain legal matters will be passed upon for the Underwriters by Fenwick & West LLP, Palo Alto, California. EXPERTS The consolidated balance sheets as of July 28, 1995 and July 26, 1996 and the consolidated statements of operations and retained earnings and cash flows for each of the two years in the period ended July 26, 1996 included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been included herein in reliance on the report of Arthur Andersen LLP ("Arthur Andersen"), independent accountants, given on the authority of that firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS Effective July 24, 1995, Arthur Andersen was engaged as the principal independent accountants for the Company to replace the Company's prior accounting firm, which was dismissed effective the same date. The decision to change independent accountants was approved by the Board. In connection with the audit of fiscal 1994, there were no disagreements with the prior accounting firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of the firm would have caused the firm to make reference to the matter in its report. The audit report of the prior accounting firm on the consolidated financial statements of the Company as of and for the year ended July 29, 1994 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During fiscal 1994 and through July 24, 1995, there were no reportable events. During the two fiscal years and the subsequent interim period preceding the engagement of Arthur Andersen, the Company had not consulted with Arthur Andersen on items that were or should have been subject to SAS 50 or concerned the subject matter of a disagreement or reportable event with the prior accounting firm. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, exhibits and schedule thereto, "Registration Statement"), of which this Prospectus forms a part, covering the Common Stock to be sold pursuant to the Offering. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information, exhibits and undertakings and the schedule contained in the Registration Statement. Such additional information, exhibits, undertakings and schedule can be inspected at and obtained from the Commission at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at certain regional offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 13th Floor, 7 World Trade Center, New York, New York, 10048. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. For additional information with respect to the Company, the Common Stock and related matters and documents, reference is made to the Registration Statement and the exhibits thereto. Statements contained herein concerning any such document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. 52 54 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.............................................. F-2 Consolidated Financial Statements(1): Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Operations................................................. F-4 Consolidated Statement of Shareholders' Equity........................................ F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
- ------------------ (1) The financial statements of the Company for the year ended July 29, 1994 were audited by an accounting firm whose report on such financial statements has not been and will not be included herein. The accounting firm was dismissed by the Company in July 1995, and the accounting firm has informed the Company that the firm has adopted a policy against consenting to the inclusion in a registration statement of its report pertaining to a privately held company that is no longer a client of the firm at the time of the filing of the registration statement. As disclosed in the prospectus, the decision to change independent accountants was approved by the Company's Board of Directors, and there were no disagreements with the firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of the firm would have caused the firm to make reference to the matter in its report. The firm's report did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles, and during the period of the firm's retention, there were no reportable events. In addition, during the two fiscal years and the subsequent interim period preceding the engagement of Arthur Andersen, the Company had not consulted with Arthur Andersen on items that were or should have been subject to SAS 50 or concerned the subject matter of a disagreement or reportable event with the former accounting firm. Arthur Andersen is in the process of re-auditing the 1994 financial statements and expects to complete promptly the audit. The Company will not circulate preliminary prospectuses until the audit has been completed by Arthur Andersen and an amendment to the Registration Statement has been filed to include Arthur Andersen's report in the preliminary prospectus. F-1 55 After the stock split discussed in Note 11 to Procom Technology, Inc's consolidated financial statements is effected, we expect to be in a position to render the following report. ARTHUR ANDERSEN LLP Orange County, California September 17, 1996 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Procom Technology, Inc.: We have audited the accompanying consolidated balance sheets of Procom Technology, Inc. (a California corporation) and subsidiary (the "Company") as of July 28, 1995 and July 26, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended July 26, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Procom Technology, Inc. and subsidiary as of July 28, 1995 and July 26, 1996, and the results of their operations and their cash flows for each of the two years in the period ended July 26, 1996 in conformity with generally accepted accounting principles. Orange County, California September 17, 1996 (except with respect to the matter discussed in Note 11, as to which the date is , 1996) F-2 56 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
JULY 28, JULY 26, 1995 1996 ----------- ----------- Current assets: Cash............................................................ $ 212,000 $ 793,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $179,000 and $373,000, respectively......... 5,507,000 9,234,000 Inventories, net................................................ 4,296,000 9,760,000 Deferred income taxes........................................... 359,000 605,000 Prepaid expenses................................................ 166,000 204,000 Other current assets............................................ 18,000 12,000 ----------- ----------- Total current assets.................................... 10,558,000 20,608,000 Property and equipment, net....................................... 239,000 476,000 Other assets...................................................... 214,000 28,000 ----------- ----------- Total assets............................................ $11,011,000 $21,112,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit.................................................. $ 1,484,000 $ 4,185,000 Accounts payable................................................ 5,530,000 8,254,000 Accrued expenses and other current liabilities.................. 513,000 801,000 Accrued compensation............................................ 1,085,000 2,266,000 Capital lease obligations....................................... 8,000 34,000 Income taxes payable............................................ 70,000 436,000 ----------- ----------- Total current liabilities............................... 8,690,000 15,976,000 Capital lease obligations, less current portion................... 34,000 -- ----------- ----------- Total liabilities....................................... 8,724,000 15,976,000 ----------- ----------- Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 10,000,000 shares authorized, no shares issued and outstanding............................. -- -- Common stock, no par value; 65,000,000 shares authorized, 9,000,000 shares issued and outstanding...................... 3,000 3,000 Retained earnings............................................... 2,284,000 5,133,000 ----------- ----------- Total shareholders' equity.............................. 2,287,000 5,136,000 ----------- ----------- Total liabilities and shareholders' equity........................ $11,011,000 $21,112,000 =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 57 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED ------------------------------------------- JULY 29, JULY 28, JULY 26, 1994 1995 1996 ----------- ----------- ----------- Net sales........................................... $34,502,000 $44,660,000 $73,456,000 Cost of sales....................................... 27,187,000 32,858,000 51,489,000 ----------- ----------- ----------- Gross profit................................... 7,315,000 11,802,000 21,967,000 Selling, general and administrative expenses........ 6,902,000 9,362,000 15,401,000 Research and development expenses................... 983,000 1,108,000 1,635,000 Loss on closure of German subsidiary................ 409,000 -- -- ----------- ----------- ----------- Operating income (loss)........................ (979,000) 1,332,000 4,931,000 Interest expense.................................... 151,000 195,000 282,000 ----------- ----------- ----------- Income (loss) before income taxes................. (1,130,000) 1,137,000 4,649,000 Provision (benefit) for income taxes................ (357,000) 414,000 1,800,000 ----------- ----------- ----------- Net income (loss).............................. $ (773,000) $ 723,000 $ 2,849,000 =========== =========== =========== Net income (loss) per share......................... $ (0.08) $ 0.08 $ 0.31 =========== =========== =========== Weighted average number of shares................... 9,166,725 9,166,725 9,166,725 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 58 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK -------------------- RETAINED SHARES AMOUNT EARNINGS TOTAL --------- ------ ---------- ---------- Balance at July 30, 1993...................... 9,000,000 $3,000 $2,334,000 $2,337,000 Net loss.................................... -- -- (773,000) (773,000) --------- ------ ---------- ---------- Balance at July 29, 1994...................... 9,000,000 3,000 1,561,000 1,564,000 Net income.................................. -- -- 723,000 723,000 --------- ------ ---------- ---------- Balance at July 28, 1995...................... 9,000,000 3,000 2,284,000 2,287,000 Net income.................................. -- -- 2,849,000 2,849,000 --------- ------ ---------- ---------- Balance at July 26, 1996...................... 9,000,000 $3,000 $5,133,000 $5,136,000 ========= ====== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 59 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED ------------------------------------------ JULY 29, JULY 28, JULY 26, 1994 1995 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss).................................. $ (773,000) $ 723,000 $ 2,849,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................. 220,000 235,000 194,000 Changes in assets and liabilities: Accounts receivable........................ 1,535,000 (1,457,000) (3,727,000) Inventories................................ 334,000 (2,048,000) (5,464,000) Deferred income taxes...................... (67,000) (18,000) (246,000) Prepaid expenses........................... (2,000) (128,000) (38,000) Income tax refund receivable............... (274,000) 274,000 -- Other current assets....................... (93,000) 129,000 6,000 Other assets............................... 7,000 (180,000) 186,000 Accounts payable........................... 596,000 1,616,000 2,724,000 Accrued expenses........................... (15,000) 1,175,000 1,469,000 Income taxes payable....................... (24,000) 70,000 366,000 ----------- ----------- ----------- Net cash provided by (used in) operating activities................ 1,444,000 391,000 (1,681,000) ----------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment................. (71,000) (179,000) (431,000) ----------- ----------- ----------- Cash flows from financing activities: Principal payments for capital lease obligations... (29,000) (16,000) (8,000) Borrowings on line of credit....................... 34,919,000 43,771,000 64,825,000 Payments made on line of credit.................... (36,108,000) (43,966,000) (62,124,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities................ (1,218,000) (211,000) 2,693,000 ----------- ----------- ----------- Increase in cash................................ 155,000 1,000 581,000 Cash at beginning of year............................ 56,000 211,000 212,000 ----------- ----------- ----------- Cash at end of year.................................. $ 211,000 $ 212,000 $ 793,000 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest........................................ $ 161,000 $ 170,000 $ 248,000 Income taxes.................................... 3,000 360,000 1,472,000
The accompanying notes are an integral part of these consolidated financial statements. F-6 60 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Procom Technology, Inc. (the "Company") was incorporated in California in 1987. The Company designs, manufactures and markets enterprise-wide data storage and information access solutions that are compatible with all major hardware platforms, network protocols and operating systems. Principles of Consolidation The consolidated financial statements include the accounts of Procom Technology, Inc. and its wholly-owned subsidiary, Procom Technology FSC, a foreign sales corporation. All significant intercompany transactions have been eliminated in consolidation. Fiscal Year The Company's fiscal year ends on the Friday of, or nearest to, July 31. Fiscal 1994, 1995 and 1996 each had 52 weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable The allowance for doubtful accounts and sales returns includes management's estimate of the amount expected to be lost on specific accounts and for losses on other as yet unidentified accounts included in accounts receivable. In estimating the potential losses and returns on specific accounts, management relies on in-house prepared analyses and review of other available information. In estimating the allowance component for unidentified losses and returns, management relies on historical experience. The amounts the Company will ultimately realize could differ materially in the near term from the amounts assumed in arriving at the allowance for doubtful accounts and sales returns in the accompanying financial statements. Inventories Inventories are valued at the lower of cost (on a first-in, first-out (FIFO) basis) or market. Allowances for obsolete inventory are based on management's estimate of the amount considered obsolete based on specific reviews of inventory items. In estimating the allowance, management relies on its knowledge of the industry (including technological and design changes) as well as its current inventory levels. The amounts the Company will ultimately realize could differ materially in the near term from amounts estimated by management. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the respective estimated useful lives of the assets, which range from three to seven years. Leasehold improvements and assets under capital leases are amortized using the straight-line method over the lesser of the lease term or the estimated useful life of the assets. Expenditures for major renewals and betterments are capitalized, while minor replacements, maintenance and repairs that do not extend the assets' lives are charged to operations as incurred. Upon sale or disposition, F-7 61 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the cost and related accumulated depreciation are removed from the Company's accounts and any gain or loss is included in the statement of operations. Income Taxes The Company reports certain expenses differently for financial and tax reporting purposes and, accordingly, provides for the related deferred income taxes. Income taxes are accounted for under the liability method in accordance with Statement of Financial Accounting Standards No. 109. Revenue Recognition The Company recognizes revenue from product sales upon shipment. The Company has established a program that, under specified conditions, enables distributors and resellers to return products to the Company for credit against additional purchases or, in the event the Company reduces its selling prices, to receive credits for the reduction in selling price. The amount of potential product returns, including returns under the Company's warranty program, and credits for selling price reductions are estimated and provided for in the period of the sale. Research and Development Costs Costs and expenses that can be clearly identified as research and development, including software development costs, are charged to research and development expenses as incurred. Concentration of Credit Risk Three customers accounted for approximately 30% and 36% of the Company's total accounts receivable on July 28, 1995 and July 26, 1996, respectively, and one customer accounted for approximately 14% and 9% of the Company's net sales for fiscal 1995 and 1996, respectively. The loss of any one of the Company's significant customers could have an adverse effect on the Company's business. Export sales as a percentage of net sales amounted to 19%, 14% and 11% for fiscal years 1994, 1995 and 1996, respectively. Impact of Recent Accounting Pronouncements Effective in fiscal 1997, the Company will be required to adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of" and SFAS No. 123, "Accounting for Stock Based Compensation." The Company plans to adopt SFAS No. 123 during fiscal 1997 utilizing the disclosure alternative under the Statement. The impact of the adoption of these pronouncements is not expected to be material to the Company's financial position or results of operations. Net income (loss) per share Net income (loss) per share has been computed using the weighted average number of shares of common stock outstanding during the periods. Pursuant to the requirements of the Securities and Exchange Commission, options granted under the Company's stock option plan (see Note 10) at prices below the expected initial public offering price have been included in the Company's net income (loss) per share calculation as if they had been outstanding for all periods presented (using the treasury stock method and utilizing an initial public offering price of $10 per share). F-8 62 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVENTORIES A summary of inventories is as follows:
JULY 28, JULY 26, 1995 1996 ---------- ---------- Raw materials....................................... $2,988,000 $6,960,000 Work-in-process..................................... 383,000 496,000 Finished goods...................................... 925,000 2,304,000 ---------- ---------- $4,296,000 $9,760,000 ========== ==========
3. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
JULY 28, JULY 26, 1995 1996 ---------- ----------- Computer equipment................................. $ 381,000 $ 552,000 Furniture and fixtures............................. 401,000 466,000 Office equipment................................... 302,000 490,000 Vehicles........................................... 82,000 82,000 Leasehold improvements............................. 71,000 77,000 ---------- ----------- 1,237,000 1,667,000 Less accumulated depreciation...................... (998,000) (1,191,000) ---------- ----------- Total.................................... $ 239,000 $ 476,000 ========== ===========
Depreciation and amortization expense for fiscal 1994, 1995 and 1996 totaled $220,000, $235,000 and $194,000, respectively. 4. INCOME TAXES The components of the provision (benefit) for income taxes for fiscal 1994, 1995 and 1996 are summarized as follows:
1994 1995 1996 --------- -------- ---------- Current: Federal................................ $(308,000) $379,000 $1,612,000 State.................................. 18,000 53,000 434,000 --------- -------- ---------- (290,000) 432,000 2,046,000 --------- -------- ---------- Deferred: Federal................................ (46,000) (15,000) (223,000) State.................................. (21,000) (3,000) (23,000) --------- -------- ---------- (67,000) (18,000) (246,000) --------- -------- ---------- Provision (benefit) for income taxes..... $(357,000) $414,000 $1,800,000 ========= ======== ==========
F-9 63 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Components of the Company's deferred income tax provision are presented below:
FISCAL YEAR --------------------- 1995 1996 -------- -------- State tax payments..................................... $ (7,000) $137,000 Depreciation........................................... 35,000 (3,000) Inventory reserves..................................... 18,000 36,000 Reserves for bad debts and returns..................... (41,000) 102,000 Other.................................................. 13,000 (26,000) -------- -------- Deferred income tax provision.......................... $ 18,000 $246,000 ======== ========
The following table reconciles the federal statutory income tax rate to the effective tax rate of the provision (benefit) for income taxes.
FISCAL YEAR ------------------------- 1994 1995 1996 ----- ---- ----- Federal statutory income tax rate................... (34.0)% 34.0% 34.0% State income taxes, net of federal benefit.......... (6.3) 6.3 6.1 Foreign sales benefit............................... -- (3.4) (1.1) Research and development tax credit................. (0.5) (2.0) (0.6) Unused prior year loss carryforwards and assessments....................................... 7.8 -- -- Other............................................... 1.4 1.5 0.3 ----- ---- ---- Effective tax rate................................ (31.6)% 36.4% 38.7% ===== ==== ====
Deferred tax assets are summarized below:
JULY 28, JULY 26, 1995 1996 -------- -------- Deferred tax assets: State tax payments................................... $ 34,000 $171,000 Depreciation......................................... 71,000 68,000 Inventory reserves................................... 85,000 121,000 Reserves for bad debts and returns................... 99,000 201,000 Other................................................ 70,000 44,000 -------- -------- Deferred income taxes............................. $359,000 $605,000 ======== ========
5. LINE OF CREDIT The Company has established a revolving line of credit with an institutional lender. The line is based on a percentage of the Company's eligible accounts receivable and inventory, up to a maximum of $6,000,000. The line of credit accrues certain commitment fees, unused facility fees, and interest on outstanding amounts at the lender's prime rate (8.25% at July 26, 1996) plus 1.5%. The initial term of the line of credit expires on November 29, 1996, but automatically renews for successive one year periods unless terminated by either party within a specified period in advance of the automatic renewal date. The line also provides that the Company may purchase up to $7,000,000 of products from various manufacturers pursuant to a flooring agreement. The combined line of credit contains restrictive covenants that, among other provisions, require compliance with certain financial covenants, including the maintenance of working capital of at least $500,000. F-10 64 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The combined line of credit is collateralized by all the assets of the Company and is guaranteed by the shareholders of the Company. At July 28, 1995 and July 26, 1996, the Company owed $1,484,000 and $4,185,000 under the line of credit and $2,875,000 and $4,464,000, which is included in accounts payable, under the flooring agreements, respectively (see Note 6). 6. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases a facility under a noncancellable operating lease that expires in fiscal 1998. The facility lease contains an option to extend the lease under the same terms for four months. Future minimum lease payments at July 26, 1996, under these leases were as follows:
CAPITAL OPERATING LEASE LEASE ------- -------- Fiscal year ending: 1997............................................ $35,000 $450,000 1998............................................ -- 412,500 ------- -------- Total minimum lease payments.................... 35,000 $862,500 ======== Less, amounts representing interest............. 1,000 ------- Present value of future minimum capital lease obligations................................... $34,000 =======
Rent expense was $395,000, $425,000 and $398,000 for fiscal 1994, 1995 and 1996, respectively. Flooring Agreements As is customary in the computer reseller industry, the Company is contingently liable at July 26, 1996 under the terms of repurchase agreements with several financial institutions providing inventory financing for dealers of the Company's products. The contingent liability under these agreements approximates the amount financed, reduced by the resale value of any products that may be repurchased, and the risk of loss is spread over several dealers and financial institutions. Losses under these agreements have been immaterial in the past. Litigation The Company is involved solely in routine litigation arising in the ordinary course of its business. While the outcome of litigation cannot be predicted with certainty, the Company believes that none of the pending litigation will have a material adverse effect on the Company's financial position or results of operations. Employment Agreements The Company has employment agreements with the Company's President and three Executive Vice Presidents. Each agreement is for a three year term with an automatic renewal provision which provides that the agreement will perpetually maintain a three-year term unless terminated. Each agreement contains severance provisions that require the payment of 35 months of base salary in the event of the termination of the covered executives. Should all four executives be terminated, the aggregate commitment arising under the severance provisions would be approximately $2.6 million and, in addition, the Company is obligated to pay a pro rata portion of the bonus the executive would have received for the year in which he is terminated. F-11 65 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. RELATED PARTY TRANSACTIONS The Company made product sales totaling $411,000 and $398,000 to an entity owned by a relative of one of the Company's stockholders during fiscal 1994 and 1995, respectively. At July 29, 1994, the Company had accounts receivable from this related party of $323,000. As a result of an Executive Order issued in May 1995 related to transactions with Iranian companies, the Company determined that amounts owed by this entity might not be collectible in the near future and, accordingly, during fiscal 1995, wrote off the outstanding balances owed the Company by this entity of approximately $251,000. There were no transactions with this entity in fiscal 1996. At July 28, 1995, the Company had a net receivable of $181,000, from an entity 90 percent of which is owned by the Company's four shareholders. During fiscal 1996, the Company made cash advances of approximately $93,000 to the entity. In addition, during fiscal 1996, the Company sold products valued at approximately $2,000 to the entity, and incurred other expenses of approximately $25,000 on behalf of the entity. At July 26, 1996, the Company had a net receivable of $301,000 from the entity, and due to the financial position of the entity, the Company determined that the receivable was uncollectible and wrote off the entire amount. 8. RETIREMENT PLAN The Company has a defined contribution plan covering substantially all full-time employees with more than one year of service. Each participant can elect to contribute up to 15% of his or her annual compensation. While employer contributions to the plan are discretionary, during fiscal 1994, 1995 and 1996, the Company elected to make matching contributions equivalent to between 38% and 50% of the first 4% of the employee's contribution. Total expense for fiscal 1994, 1995 and 1996 was $16,000, $21,000 and $47,000, respectively. 9. LOSS ON CLOSURE OF GERMAN SUBSIDIARY During fiscal 1993, the Company formed a subsidiary in West Germany. During fiscal 1994, the Company made cash advances, and shipped products, to the German subsidiary totaling $550,000. Due to a lack of profitability, management decided to terminate this operation in April 1994. The Company has recorded the loss on closure of this subsidiary in its consolidated financial statements at July 29, 1994. During fiscal 1995, the Company completed the liquidation of the German subsidiary's assets. 10. STOCK SPLIT AND STOCK OPTION PLAN In September 1995, the shareholders of the Company approved a stock split, whereby each shareholder was issued 10,000 shares of common stock for each share held. See Note 11. During November 1993, options to purchase 90,000 shares of common stock at the estimated fair market value on the date of grant were granted by a principal shareholder to an officer of the Company in connection with the officer's employment. In addition, during fiscal 1996, the Company instituted the 1995 Stock Option Plan (the "1995 Plan") for its key employees and reserved 540,000 shares for grant under the 1995 Plan. Pursuant to the terms of the 1995 Plan, options to purchase the Company's common stock may be granted with exercise prices equal to the fair market value of the stock on the date of grant. Options granted vest over a period of four years. F-12 66 PROCOM TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth options authorized, granted and outstanding during fiscal 1996 under the 1995 Plan:
AUTHORIZED OUTSTANDING AVERAGE FOR GRANT OPTIONS PRICE ---------- ----------- ----------- Balances, July 28, 1995............. -- -- Institution of the 1995 Plan...... 540,000 -- Options granted................... (235,050) 235,050 $2.50-$4.50 Options cancelled................. 7,350 (7,350) $2.50 ------- ------ Balances, July 26, 1996............. 312,300 227,700 $2.50-$4.50 ======= ======
11. SUBSEQUENT EVENT Subsequent to the stock split described in Note 10, on , 1996, the shareholders of the Company approved a stock split, whereby each shareholder was issued three shares of common stock for each common share held. All share and per share amounts have been restated to give retroactive effect to this stock split as well as the stock split described in Note 10. F-13 67 [PHOTOGRAPH OF CD-ROM AND GRAPHIC DISPLAYING NETWORK CONNECTIVITY BEARING THE FOLLOWING CAPTIONS: "CD FORCE - THE POWER TO SEAMLESSLY NETWORK CDS(TM)," "ENTERPRISE WIDE CD-ROM NETWORKING SOFTWARE," "UNIX -- NOVELL NETWARE -- IBM OS/2 WARP -- WINDOWS NT -- WINDOWS 95 -- WINDOWS 3.1 -- MACINTOSH OS," "MESA(TM) -- MANAGED ENTERPRISE STORAGE ARCHITECTURE(TM)" AND "PROCOM TECHNOLOGY -- INTELLIGENT STORAGE FOR THE ENTERPRISE(TM)."] 68 - ------------------------------------------------------------ - ------------------------------------------------------------ No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this Prospectus in connection with the offer made in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, the Underwriters or the Selling Shareholders. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy any of the securities offered hereby by anyone in any jurisdiction in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that the affairs of the Company since the date hereof or the information herein is correct as of any time subsequent to the date of this Prospectus. --------------------------------- TABLE OF CONTENTS ---------------------------------
PAGE ----- Prospectus Summary........................ 3 Risk Factors.............................. 5 Use of Proceeds........................... 14 Dividend Policy........................... 14 Capitalization............................ 15 Dilution.................................. 16 Selected Consolidated Financial Information............................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 18 Business.................................. 25 Management................................ 40 Certain Transactions...................... 45 Principal and Selling Shareholders........ 46 Description of Capital Stock.............. 47 Shares Eligible for Future Sale........... 50 Underwriting.............................. 51 Legal Matters............................. 52 Experts................................... 52 Change in Accountants..................... 52 Additional Information.................... 52 Index to Consolidated Financial Statements.............................. F-1
------------------------ Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ 3,025,000 SHARES [LOGO] COMMON STOCK ------------------------ PROSPECTUS ------------------------ MONTGOMERY SECURITIES NEEDHAM & COMPANY, INC. , 1996 - ------------------------------------------------------------ - ------------------------------------------------------------ 69 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses, other than underwriting discounts and commissions, payable in connection with the issuance and distribution of the Common Stock being registered, all of which will be paid by the Company. All amounts are estimates except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee. Securities and Exchange Commission registration fee.............. $ 11,596 NASD filing fee.................................................. 4,327 Nasdaq National Market listing fee............................... 45,000 Accounting fees and expenses..................................... 120,000 Legal fees and expenses.......................................... 250,000 Blue Sky qualification fees and expenses......................... 7,000 Printing and engraving expenses.................................. 100,000 Transfer agent and registrar fees................................ 3,000 D&O Insurance.................................................... 200,000 Road Show expenses............................................... 30,000 Miscellaneous.................................................... 9,077 -------- Total.................................................. $780,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The California General Corporation Law provides that California corporations may include provisions in their articles of incorporation relieving directors of monetary liability for breach of their fiduciary duties as directors, except for the liability of a director resulting from (i) any transaction from which the director derives an improper personal benefit, (ii) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (iii) acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iv) acts or omissions constituting an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (v) acts or omissions showing a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, (vi) any improper transaction between a director and the Company in which the director has a material financial interest (Section 310) or (vii) the making of an illegal distribution to shareholders or an illegal loan or guaranty (Section 316). The Company's Articles of Incorporation provide that the Company's directors are not liable to the Company or its shareholders for monetary damages for breach of their fiduciary duties to the fullest extent permitted by California law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Bylaws of the Company (the "Bylaws") provide that the Company will indemnify its directors and officers to the fullest extent permitted by California law, including circumstances in which indemnification is otherwise discretionary under California law, subject to certain limitations for actions initiated by the director or officer, settlements not approved by the Company, losses covered by the directors' and officers' liability insurance policy maintained by the Company and judgments for an accounting of profits pursuant to Section 16(b) of the Securities Exchange Act of 1934 and similar laws. In addition, the Company may not indemnify directors and officers in circumstances in which indemnification is expressly prohibited by Section 317 of the Law. The Company has entered into indemnification agreements with certain of its directors and officers that require the Company to indemnify such directors and officers to the fullest extent permitted by applicable provisions of law, provided that any settlement of a third party action against a director or officer is approved II-1 70 by the Company, and subject to limitations for actions initiated by the director or officer, penalties paid by insurance and violations of Section 16(b) of the Securities Exchange Act of 1934, as amended, and similar laws. The agreements contain provisions that are broader in some respects than the specific indemnification provisions contained in the California Corporations Code. The indemnification agreements may require the Company, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as directors or executive officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance, if available on reasonable terms. The Company has obtained directors' and officers' liability insurance with respect to liabilities arising out of certain matters, including matters arising under the Securities Act. The inclusion of the above provisions in the Company's Articles of Incorporation and Bylaws may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its shareholders. This provision does not affect a director's responsibilities under certain other laws such as the federal securities laws or state or federal environmental laws. At present, there is no litigation or proceeding pending involving a director of the Company pursuant to which indemnification is being sought, nor is the Company aware of any threatened litigation that might result in claims for indemnification by any director. The Form of Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Company and its directors and officers for certain liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of transactions by the Company during the last three years preceding the date hereof involving sales of the Company's securities that were not registered under the Act: From time to time during the three years preceding the date hereof, the Registrant issued stock options to purchase a total of shares of Common Stock pursuant to the Registrant's 1995 Stock Option Plan (the "1995 Plan") to officers and employees of the Registrant. During the period referred to above, no options granted pursuant to 1995 Plan were exercised. Exemption from the registration provisions of the Act is claimed with respect to the grant of options referred to above, on the basis that the grant of options did not involve a "sale" of securities and, therefore, registration thereof was not required. II-2 71 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement 3.1 Articles of Incorporation of the Company, as amended 3.2 Amended and Restated Articles of Incorporation of the Company to be effective on or prior to the effectiveness of the Registration Statement 3.3 Bylaws of the Company, as amended 3.4 Amended and Restated Bylaws of the Company to be effective on or prior to the effectiveness of the Registration Statement 5.1* Opinion of O'Melveny & Myers 10.1 Form of Indemnity Agreement between the Company and each of its executive officers and directors 10.2 Procom Technology, Inc. 1995 Stock Option Plan 10.3 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Alex Razmjoo 10.4 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Frank Alaghband 10.5 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Alex Aydin 10.6 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Nick Shahrestany 10.7 Form of Registration Rights Agreement 10.8 Lease, dated February 10, 1992, between 2181 Dupont Associates and the Company, as amended 11.1 Statement re: Computation of Earnings Per Share 16.1* Letter re Change in Certifying Accountant 21.1 List of Subsidiaries 23.1 Consent of Arthur Andersen LLP 23.3* Consent of O'Melveny & Myers (included in Exhibit 5.1) 27.1 Financial Data Schedule
- --------------- * To be filed by amendment (b) FINANCIAL STATEMENT SCHEDULE AND REPORT OF INDEPENDENT AUDITOR. Report of Arthur Andersen LLP Set forth below is the financial statement schedule included as part of the Registration Statement: Schedule II All other schedules are omitted because they are not required, are not applicable, or the information is included in the Consolidated Financial Statements or notes thereto. II-3 72 ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in 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, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For purposes 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-4 73 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, County of Orange, State of California, on the 30th day of October, 1996. PROCOM TECHNOLOGY, INC. By: /s/ Alex Razmjoo -------------------------------------- Alex Razmjoo Chairman, 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, President and Chief October 30, 1996 - --------------------------------- Executive Officer (Principal Executive Alex Razmjoo Officer) /s/ Alex Aydin Executive Vice President, Finance and October 30, 1996 - --------------------------------- Administration (Principal Financial Alex Aydin Officer) /s/ Frederick Judd Vice President, Finance and General October 30, 1996 - --------------------------------- Counsel (Principal Accounting Officer) Frederick Judd /s/ Frank Alaghband Director October 30, 1996 - --------------------------------- Frank Alaghband /s/ Nick Shahrestany Director October 30, 1996 - --------------------------------- Nick Shahrestany Director October , 1996 - --------------------------------- Samuel Inman Director October , 1996 - --------------------------------- Samuel Yau
II-5 74 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Procom Technology, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Procom Technology, Inc. and subsidiary as of, and for the years ended, July 28, 1995 and July 26, 1996, which financial statements are included in this registration statement, and have issued our report thereon dated September 17, 1996. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 16(b) herein is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. The information in the schedule pertaining to the years ended July 28, 1995 and July 26, 1996 has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Orange County, California September 17, 1996 II-6 75 SCHEDULE II PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
COL. C ------------------------ COL. B ADDITIONS COL. E ------------ ------------------------ --------- COL. A BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE - ------------------------------------------- BEGINNING OF COSTS AND OTHER ----------- AT END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ------------------------------------------- ------------ ---------- ---------- ----------- --------- Year ended July 28, 1995: Allowance for doubtful accounts and sales returns................................ $260,000 $1,714,000 -- $(1,795,000) $ 179,000 Allowance for excess and obsolete inventory.............................. $ 80,000 $ 467,000 -- $ (477,000) $ 70,000 Year ended July 26, 1996: Allowance for doubtful accounts and sales returns................................ $179,000 $2,678,000 -- $(2,484,000) $ 373,000 Allowance for excess and obsolete inventory.............................. $ 70,000 $ 284,000 -- $ (199,000) $ 155,000
II-7 76 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBER NUMBER DESCRIPTION PAGE - ------- -------------------------------------------------------------------------- ------------ 1.1* Form of Underwriting Agreement............................................ 3.1 Articles of Incorporation of the Company, as amended...................... 3.2 Amended and Restated Articles of Incorporation of the Company to be effective on or prior to the effectiveness of the Registration Statement................................................................. 3.3 Bylaws of the Company, as amended......................................... 3.4 Amended and Restated Bylaws of the Company to be effective on or prior to the effectiveness of the Registration Statement........................... 5.1* Opinion of O'Melveny & Myers.............................................. 10.1 Form of Indemnity Agreement between the Company and each of its executive officers and directors.................................................... 10.2 Procom Technology, Inc. 1995 Stock Option Plan............................ 10.3 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Alex Razmjoo............................ 10.4 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Frank Alaghband......................... 10.5 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Alex Aydin.............................. 10.6 Amended and Restated Executive Employment Agreement, dated as of October 28, 1996, between the Company and Nick Shahrestany........................ 10.7 Form of Registration Rights Agreement..................................... 10.8 Lease, dated February 10, 1992, between 2181 Dupont Associates and the Company, as amended....................................................... 11.1 Statement re: Computation of Earnings Per Share........................... 16.1* Letter re Change in Certifying Accountant................................. 21.1 List of Subsidiaries...................................................... 23.1 Consent of Arthur Andersen LLP............................................ 23.3* Consent of O'Melveny & Myers (included in Exhibit 5.1).................... 27.1 Financial Data Schedule...................................................
- --------------- * To be filed by amendment EX-3.1 2 ARTICLES OF INCORPORATION, AS AMENDED 1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF PROCOM TECHNOLOGY, INC. I. The name of this corporation is: PROCOM TECHNOLOGY, INC. II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. III. The name and address in the State of California of the corporation's initial agent for the service of process is: Steven R. Young, 4000 MacArthur Boulevard, Suite 7500, Newport Beach, California 92660. IV. The corporation is authorized to issue only one class of shares of stock and the total number of shares which the corporation is authorized to issue is One Thousand (1,000). Dated this 10th day of August, 1987. /s/ STEVEN R. YOUNG ------------------------ Steven R. Young Incorporator I hereby declare that I am the person whom executed the foregoing Articles of Incorporation, which execution is my act and deed. /s/ STEVEN R. YOUNG ------------------------ Steven R. Young Incorporator 2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF PROCOM TECHNOLOGY, INC. Alireza Razmjookhah and Frank Alaghband certify that: 1. They are the duly elected and acting President and Secretary, respectively, of Procom Technology, Inc., a California corporation. 2. Article IV of the Articles of Incorporation of this corporation is hereby amended to read as follows: "This corporation is authorized to issue only one class of shares of stock, designated 'Common Stock', and the number of shares of Common Stock authorized to be issued is 10,000,000, having a par value of $.001 per share. Upon the amendment of this Article IV to read as hereinabove set forth, each outstanding share of Common Stock shall thereby be split up and converted into 10,000 shares of Common Stock." 3. The foregoing amendment of the Articles of Incorporation has been duly approved by the Board of Directors of this corporation in accordance with Section 902 of the Corporations Code. 4. The foregoing amendment of the Articles of Incorporation has been duly approved by the required vote of the shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of Common Stock of the corporation is 300. The number of shares voting in favor of the amendment equaled or exceed the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated: September 18, 1995. /s/ Alireza Razmjookhah ---------------------------------- Alireza Razmjookhah, President /s/ Frank Alaghband ---------------------------------- Frank Alaghband, Secretary -1- A 468287 ENDORSED FILED In the office of the Secretary of State of the State of California NOV 8 1995 /s/ Bill Jones BILL JONES, Secretary of State EX-3.2 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.2 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PROCOM TECHNOLOGY, INC. Alex Razm'joo and Frank Alaghband hereby certify that: 1. They are the President and Secretary, respectively, of Procom Technology, Inc., a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated in their entirety to read as follows: "NAME ONE: The name of the corporation is: Procom Technology, Inc. PURPOSE TWO: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. AUTHORIZED SHARES THREE: The corporation shall have authority to issue seventy-five million (75,000,000) shares of stock, consisting of sixty-five million (65,000,000) shares of common stock, no par value per share (the "Common Stock"), and ten million (10,000,000) shares of preferred stock, no par value per share (the "Preferred Stock"). The Board of Directors is authorized to fix by resolution the designations, powers, preferences and relative, participating, optional or other special rights (including voting rights, if any, and conversion rights, if any), and qualifications, limitations or restrictions thereof, of any such series of Preferred Stock, and the number of shares constituting any such series, or all or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of such shares then outstanding. Except as 2 otherwise provided (i) by law, (ii) by these Articles of Incorporation as amended from time to time, or (iii) by resolutions of the Board of Directors fixing the powers and preferences of any class or series of shares as to which the Board of Directors has been expressly vested with authority to fix the powers and preferences, (a) the Common Stock shall possess the full voting power of the Corporation and (b) the number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote. Upon the filing in the Office of the Secretary of State of California of these Amended and Restated Articles of Incorporation, each issued and outstanding share of Common Stock shall thereby and thereupon be reclassified as and changed into three shares of Common Stock. Each holder of Common Stock shall be entitled to receive such number of shares of Common Stock resulting from such stock split. NO CUMULATIVE VOTING FOUR: No holder of any class of stock of the corporation shall be entitled to cumulate votes at any election of directors of this corporation. This provision shall become effective only when this corporation becomes a listed corporation within the meaning of Section 301.5 of the California General Corporation Law. ELECTION AND TERM OF DIRECTORS FIVE: This provision shall become effective only when this corporation becomes a listed corporation within the meaning of Section 301.5 of the General Corporation Law of California. In the event that the authorized number of directors shall be fixed with at least six (6) but less than nine (9) directors, the Board of Directors shall be divided into two classes, designated Class I and Class II, effective as of the first annual meeting following the date that this corporation becomes a listed corporation within the meaning of Section 301.5 of the General Corporation Law of California (the "Initial Annual Meeting"). Each class shall consist of one-half of the directors or as close an approximation as possible. The initial term of office of the directors of Class I shall expire at the annual meeting to be held during the fiscal year following the Initial Annual Meeting, and the initial term of office of the directors of Class II shall expire at the annual meeting to be held during the second fiscal year following the Initial Annual Meeting. At each annual meeting, commencing with the first annual meeting following the Initial Annual Meeting, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the second annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. 2 3 In the event that the authorized number of directors shall be fixed at nine (9) or more, the Board of Directors shall be divided into three classes, designated Class I, Class II and Class III, effective as of the first annual meeting coinciding with or following the division into three classes (the "Effective Date"). Each class shall consist of one-third of the directors or as close an approximation as possible. The initial term of office of the directors of Class I shall expire at the annual meeting to be held during the first fiscal year following the Effective Date, the initial term of office of the directors of Class II shall expire at the annual meeting to be held during second fiscal year following the Effective Date and the initial term of office of the directors of Class III shall expire at the annual meeting to be held during the third fiscal year following the Effective Date. At each annual meeting, commencing with the first annual meeting following the Effective Date, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the third annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. Notwithstanding the rule that the classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board of Directors shall designate one or more directorships whose terms then expire as directorships of another class in order more nearly to achieve equality of number of directors among the classes. This provision only may be amended or repealed by the approval of the Board of Directors and the outstanding shares (as defined in Section 152 of the General Corporation Law of California) voting as a single class, notwithstanding Section 903 of the General Corporation Law of California. DIRECTOR LIABILITY SIX: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. INDEMNIFICATION OF AGENTS SEVEN: The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the General Corporation Law of California) to the fullest extent 3 4 permissible under California law, in excess of that indemnification otherwise permitted by Section 317 of the General Corporation Law of California." 3. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the Board of Directors of this corporation. 4. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the required vote of the shareholders of this corporation in accordance with Sections 902 and 903 of the General Corporation Law of California. The total number of outstanding shares of each class and series entitled to vote with respect to the foregoing amendment and restatement of articles of incorporation was 3,000,000 shares of Common Stock. There are no shares outstanding of Preferred Stock of this corporation of any class or series. The number of shares voting in favor of the foregoing amendment and restatement equaled or exceeded the vote required. The percentage vote required was a majority of the outstanding shares of Common Stock and Preferred Stock voting together as a single class. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATED: October ___, 1996 _________________ Alex Razmjoo President _________________ Frank Alaghband Secretary 4 EX-3.3 4 BYLAWS OF THE COMPANY, AS AMENDED 1 EXHIBIT 3.3 BYLAWS OF PROCOM TECHNOLOGY, INC. a California corporation ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The board of directors may fix the location of the principal executive office of the corporation at any place within or outside the State of California. Subject to the foregoing sentence, the principal executive office of the corporation shall be 3100 Airway Drive, Suite 128, Costa Mesa, California 92626. Section 2. OTHER OFFICES. The board of directors may at any time establish, or may designate an officer of the corporation to establish, branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, Shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. ANNUAL MEETING. The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. At each annual meeting, directors shall be elected, and any other proper business may be transacted. Section 3. SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be 2 delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an amendment of the Articles of Incorporation, pursuant to Section 902 of that Code, (ii) a reorganization of the corporation, pursuant to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of that code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal. Section 5. MANNER OF GIVING NOTICES AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first class mail or telegraphic or other written communication to either that 2 3 shareholder's business address or to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where the corporation's office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to the shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, such notice and all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the secretary, assistant secretary, or any transfer agent of the corporation giving the notice or, in the case of a special shareholders' meeting, by any person entitled to give notice thereof pursuant to Section 3 of this Article II, and shall be filed and maintained in the minute book of the corporation. Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business, the shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall act a new record date. Notice of any such 3 4 adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 8. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 11 of this Article II, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). The shareholders' vote may be by voice vote or by ballots provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholders' approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by California General Corporation Law of by the Articles of Incorporation. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of shareholders' shares) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to Cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, to distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transaction of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each 4 5 person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that, if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section of this Article II, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approval shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote thereon were present and voted. In the case of election of directors, such consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directory provided, however, that a director may be elected at any time to fill a vacancy on the board of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give promptly notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 5 of this Article II. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the 5 6 corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 11. RECORD DATE FOR SHAREHOLDER NOTICE VOTING, AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the book" of the corporation after the record date, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholder shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the date on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 12. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation or made available for inspection by the shareholders at any shareholders' meeting. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to 6 7 that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy in counted: provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Corporations Code of California. Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders, the board of directors may appoint any persons other than nominees for officiate act an inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one (1) or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close, (f) Determine the result, and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. 7 8 ARTICLE III DIRECTORS Section 1. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) Select and remove all officers, agents, and employees of the corporation: prescribe any powers and duties for them that are consistent with law, with the articles of incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service. (b) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings. (c) Adopt, make and use a corporate seal; prescribe the forms of certificates of stock, and alter the form of the seal and certificates. (d) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, and services actually rendered, debts or securities cancelled, or tangible or intangible property actually received. (e) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities. Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be THREE (3) until changed by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. 8 9 Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 4. VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the Shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted or a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary, or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 5. PLACE OF MEETINGS AND MEETING BY TELEPHONE. Regular meetings or the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at 9 10 the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. Section 6. ANNUAL MEETING. Immediately following each annual meeting of the shareholders, the board of director shall hold a regular meeting for the purpose or organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required, Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of directors may be held without notice and without call at such time as fixed by the board of directors. Section 8. SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first class mail or telegram, charges prepaid, addressed to each director at the director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting, in case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the (or a) business office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 9. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 11 of this Article III. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the corporations Code of California (as to approval of contracts or transactions in which a director has a direct or indirect material financial 10 11 interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) of that Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 10. WAIVER OF NOTICE. The transaction of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approval shall be filed with the corporation (24) hours, in which came notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment. Section 11. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment. Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Section 14. FEES AND COMPENSATION OF DIRECTORS, Directors and members of the committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. 11 12 ARTICLE IV COMMITTEES Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) The approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; (b) The filling of vacancies on the board of directors or in any committee; (c) The fixing of compensation of the directors for serving on the board or on any committees; (d) The amendment or repeal of bylaws of the adoption of new bylaws; (e) The amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) The appointment of any other committees of the board of directors or the members of these committees. Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 5 (place of meetings and meeting by telephone), 6 & 7 (meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee: special meetings of committees may also be called by resolution of the board of directors, and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all 12 13 meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the corporation shall be a president, treasurer and secretary. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person. Section 2. ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. Section 3. SUBORDINATE OFFICERS. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office of such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors from time to time determine. Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting of the board, or except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 13 14 Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. If there is no president, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws. Section 8. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors, or, it not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, and the president, or the chairman of the board. Section 9. SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of the directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, an determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number of classes of shares held by each, the number and date of certificates issued for the same, and the 14 15 number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given and shall keep the seal of the corporation, if one be adopted, in save custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 10. CHIEF FINANCIAL OFFICER (TREASURER). The chief financial officer (treasurer) shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer (treasurer) shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS The corporation shall have the authority to, and hereby does, to the maximum extent permitted by the California General Corporation Law, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the corporation. For purposes of this Section, an "agent" of the corporation includes any person who is or was a director, officer, employee, or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, or was a director, officer, employee, or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 15 16 ARTICLE VII RECORDS AND REPORTS Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of the date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the demand an the date which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of 16 17 proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept either in written form or any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable related to the holder of a certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may by made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the board of directors from issuing annual or other periodic reports to the shareholders of the corporation as they consider appropriate. Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each Quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for a three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and balance sheet of the corporation as of the end of that period, the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. 17 18 The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation ox the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall, within 90 days after filing the original articles and annually thereafter, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of directors, the names and complete business or residence addresses of all incumbent directors, the names and complete business or residence addresses of the chief executive officer, secretary, and chief financial officer, the street address of the principal business activity of the corporation, together with the designation of the agent of the corporation for the purpose of service of process, all in compliance with section 1502 of the Corporations Code of California. ARTICLE VIII GENERAL CORPORATE MATTERS Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record on the date so flied are entitled to receive the dividend, distribution or allotment of rights to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (6Oth) day before the date of that action, whichever is later. 18 19 Section 2. CHECKS, DRAFTS, EVIDENCES OR INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 3. CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board of the president or vice president and by the-chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue. Section 5. LOST CERTIFICATE. Except as provided in this Section 5, no new certificate for shares shall be issued to replace an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction 19 20 of the certificate or the issuance of the replacement certificate. Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of director" or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section 1 of this Article IX, to adopt, amend, or repeal bylaws, bylaws may be adopted, amended or repealed by the board of directors, provided, however, that the board of directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors within the limits specified in the articles of incorporation or in Section 2 of Article III of these bylaws. 20 21 CERTIFICATE OF SECRETARY The undersigned certifies: (l) That the undersigned is the duly elected and acting secretary of PROCOM TECHNOLOGY INC., a California corporation; and (2) That the foregoing bylaws constitute the bylaws of said corporation as duly adopted by unanimous written consent in lieu of the first meeting of the Board of Directors on the 9th day of February, 1988. IN WITNESS WHEREOF, I have hereunto subscribed my name this 9th day of February, 1988. /s/ FARROKH ALAGHBAND ------------------------ FARROKH ALAGHBAND, Secretary 21 22 FIRST AMENDMENT TO THE BYLAWS OF PROCOM TECHNOLOGY, INC. Section 2 of Article III is hereby amended to read as follows: Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be FOUR (4) until changed by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. All other provisions of the Bylaws remain in full force and effect. CERTIFICATE OF THE SECRETARY OF PROCOM TECHNOLOGY, INC. I certify that I am the duly elected and acting Secretary of said corporation and that the foregoing amendment to the Bylaws was duly adopted by the Board of Directors of the corporation by unanimous written consent on January 5, 1989. /s/ FRANK ALAGHBAND --------------------------------- Frank Alaghband, Secretary 22 EX-3.4 5 AMENDED & RESTATED BYLAWS OF THE COMPANY 1 EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS PROCOM TECHNOLOGY, INC. a California Corporation ARTICLE I Offices Section 1. Principal Executive Office. The principal executive office of the corporation is hereby fixed and located at 2181 Dupont Drive, Irvine, California 92715. The Board of Directors is hereby granted full power and authority to change the principal executive office from one location to another. Any such change shall be noted on the Bylaws by the secretary, opposite this section, or this section may be amended to state the new location. Section 2. Other Offices. Other business offices may at any time be established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II Meetings of Shareholders Section 1. Place of Meetings. All annual or other meetings of shareholders shall be held at the principal executive office of the corporation, or at any other place within or without the State of California which may be designated by the Board of Directors. Section 2. Annual Meetings. The annual meetings of shareholders shall be held on such dates and at such times as shall be designated by the Board of Directors and stated in the notice of the meeting given to each shareholder as provided below. At such meetings, directors shall be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted which is within the powers of the shareholders. Written notice of each annual meeting shall be given to each shareholder entitled to vote, either personally or by mail or other means of written communication, charges prepaid, addressed to such shareholder at its address appearing on the books of the corporation or given to the corporation for the purpose of notice. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report 2 to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If a shareholder gives no address, notice shall be deemed to have been given if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is situated, or if published at least once in some newspaper of general circulation in the county in which the principal executive office is located. All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally of deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the secretary, assistant secretary or any transfer agent of the corporation, shall be prima facie evidence of the giving of the notice. Such notices shall specify: (a) the place, the date, and the hour of such meeting; (b) those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders at the meeting; (c) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election; (d) the general nature of a proposal, if any, to take action with respect to approval of (i) a contract or other transaction with an interested director, (ii) amendment of the Articles of Incorporation, (iii) a reorganization of the corporation as defined in Section 181 of the California General Corporation Law, (iv) voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and (e) such other matters, if any, as may be expressly required by statute. Section 3. Special Meetings. Special meetings of the shareholders for the purpose of taking any action permitted by the shareholders under the General Corporation Law and the 2 3 Articles of Incorporation of this corporation, may be called at any time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or President, or by one or more shareholders entitled to cast not less than ten percent (10%) of the votes at the meeting. Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the chairman of the Board, president, vice president or secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for the annual meeting of shareholders. In addition to the matters required by items (a) and, if applicable, (c) of the preceding Section , notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 4. Quorum. The presence in person or by proxy of the persons entitled to vote a majority of the shares at any meeting shall constitute a quorum for the transaction of business at that meeting. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 5. Adjourned Meeting and Notice Thereof. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 4 above. When any shareholders' meeting, either annual or special, is adjourned for forty-five days or more, or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided above, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place of the adjourned meeting at the meeting at which the adjournment is taken. Section 6. Voting. Unless a record date for voting purposes be fixed as provided in Section 1 of Article V of these Bylaws, then, subject to the provisions of Sections 702 and 704, inclusive, of the Corporations Code of California (relating to voting of shares held by a fiduciary, in the name of a 3 4 corporation, or in joint ownership) only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. Such vote may be viva voce or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. If a quorum is present, except with respect to election of directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law or the Articles of Incorporation. Section 7. No Cumulative Voting. No holder of any class of stock of this corporation shall be entitled to cumulate votes at any election of directors of this corporation. This provision shall become effective only when this corporation becomes a listed corporation within the meaning of Section 301.5 of the California General Corporation Law. Section 8. Validation of Defective Called or Noticed Meetings. The transactions of any meeting of shareholders, either annual or special, however called and noticed, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, whether before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, or who, though present, has, at the beginning of the meeting, properly objected to the transaction of any business thereat because the meeting was not lawfully called or convened, or to particular matters of business legally required to be included in the notice, but not so included, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 9. Proxies. Every person entitled to vote shall have the right to do so whether in person or by one or more agents authorized by a written proxy executed by such person or such person's duly authorized agent and filed with the secretary of the corporation. Any proxy duly executed is not revoked and continues in full force and effect until (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the secretary of the corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of the proxy is received by the 4 5 corporation before the vote pursuant thereto is counted; provided that no proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless the person executing it specifies therein the length of time for which such proxy is to continue in force. Section 10. Inspectors of Election. In advance of any meeting of shareholders, the Board of Directors may appoint any person other than nominees for office as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, the chairman of any such meeting may, on the request of any shareholder or its proxy, shall make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may, and on the request of any shareholder or a shareholder's proxy shall, be filled by appointment by the Board of Directors in advance of the meeting, or at the meeting by the chairman of the meeting. The duties of such inspectors shall be as prescribed by Section 707 of the General Corporation Law and shall include determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes or ballots; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes; determining when the polls close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there be three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 11. Notice of Business. At any meeting of shareholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors, (b) in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or (c) by any shareholder of the corporation who was a 5 6 shareholder of record at the time of giving of notice provided for in this bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this bylaw. For business to be properly brought before a meeting by a shareholder pursuant to clause (c) of this bylaw, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the meeting; provided, however, that if less than 70 days' notice of the date of the meeting is given by the corporation, notice by the shareholder to be timely must be so delivered no later than the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. In no event shall the public announcement of an adjournment of a meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (i) as to any business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (ii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (x) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner and (y) the class and number of shares of stock of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner. If notice has not been given pursuant to this Section, the chairman of the meeting may declare to the meeting that the proposed business was not properly brought before the meeting, and such business may not be transacted at the meeting. The foregoing provisions of this Section do not relieve any shareholder of any obligation to comply with all applicable requirements of the Exchange Act and rules and regulations thereunder. For purposes of these bylaws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Section 12. Nomination of Directors. At any meeting of shareholders, a person may be a candidate for election to the Board only if such person is nominated (a) by or at the direction of the Board, (b) by any nominating committee or person appointed by the Board, or (c) by a shareholder of record entitled to vote at such meeting who complies with the notice procedures set forth in this Section and has given timely notice of such nomination in writing to the Secretary of the corporation. To be timely, a 6 7 shareholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the meeting; provided, however, that if less than 70 days notice of the date of the meeting is given by the corporation, notice by the shareholder to be timely must be so delivered no later than the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected). The corporation may require such other information to be furnished respecting any proposed nominee as may be reasonably necessary to determine whether the proposed nominee has, or represents, interests which are opposed to or in conflict with the interests of the corporation. No person shall be eligible for election as a director at any meeting unless nominated in accordance with this Section . ARTICLE III Directors Section 1. Powers. Subject to limitations of the Articles of Incorporation and the California General Corporation Law as to action to be authorized or approved by the shareholders, and subject to the duties of directors as prescribed by these Bylaws, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be controlled by, the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the following powers, to wit: First - To select and remove all the officers, agents and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the Articles of Incorporation or these Bylaws, fix their compensation and require from them security for faithful service. Second - To conduct, manage and control the affairs and business of the corporation, and to make such rules and 7 8 regulations therefor not inconsistent with law, or with the Articles of Incorporation or these Bylaws, as they may deem best. Third - To change the principal executive office and principal office for the transaction of business of the corporation from one location to another as provided in Article I, Section 1, hereof; to fix and locate from time to time one or more subsidiary offices of the corporation within or without the State of California, as provided in Article I, Section 2, hereof; to designate any place within or without the State of California for the holding of any shareholders' meeting or meetings; and to adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time, as in their judgment they may deem best, provided such seal and such certificates shall at all times comply with the provisions of law. Fourth - To authorize the issue of shares of stock of the corporation from time to time, upon such terms as may be lawful. Fifth - To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. Sixth - By resolution adopted by a majority of the authorized number of directors, to designate an executive and other committees, each consisting of two or more directors, to serve at the pleasure of the Board, and to prescribe the manner in which proceedings of such committees shall be conducted. Unless the Board of Directors shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by any two members thereof; otherwise, the provisions of these Bylaws with respect to notice and conduct of meetings of the Board shall govern. Any such committee, to the extent provided in a resolution of the Board, shall have all of the authority of the Board, except with respect to: (i) the approval of any action for which the General Corporation Law or the Articles of Incorporation also require shareholder approval; (ii) the filling of vacancies on the Board or in any committee; (iii) the fixing of compensation of the directors for serving on the Board or on any committee; 8 9 (iv) the adoption, amendment or repeal of bylaws; (v) the amendment or repeal of any resolution of the Board; (vi) any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the Board; (vii) the appointment of other committees of the Board or the members thereof. Section 2. Number and Qualification of Directors. The authorized number of directors shall be not less than five (5) nor more than nine (9) until changed by Amendment of the Articles of Incorporation or by a Bylaw duly adopted by approval of the outstanding shares. The exact number of directors shall be fixed, within the limits specified, by amendment of the next sentence duly adopted either by the Board of Directors or the shareholders. The exact number of directors shall be six (6) until changed as provided in this Section 2. Section 3. Election and Term of Office. This section shall become effective only when this corporation becomes a listed corporation within the meaning of Section 301.5 of the California General Corporation Law. In the event that the authorized number of directors shall be fixed with at least six (6) but less than nine (9) directors, the Board of Directors shall be divided into two classes, designated Class I and Class II, effective as of the first annual meeting following the effective date of this Bylaw (the "Initial Annual Meeting"). Each class shall consist of one-half of the directors or as close an approximation as possible. The initial term of office of the directors of Class I shall expire at the annual meeting to be held during the fiscal year following the Initial Annual Meeting, and the initial term of office of the directors of Class II shall expire at the annual meeting to be held during the second fiscal year following the Initial Annual Meeting. At each annual meeting, commencing with the first annual meeting following the Initial Annual Meeting, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the second annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. In the event that the authorized number of directors shall be fixed at nine (9) or more, the Board of Directors shall be divided into three classes, designated Class I, Class II and Class III, effective as of the first annual meeting coinciding with or following the division into three classes (the "Effective Date"). Each class shall consist of one-third of the directors 9 10 or as close an approximation as possible. The initial term of office of the directors of Class I shall expire at the annual meeting to be held during the first fiscal year following the Effective Date, the initial term of office of the directors of Class II shall expire at the annual meeting to be held during second fiscal year following the Effective Date and the initial term of office of the directors of Class III shall expire at the annual meeting to be held during the third fiscal year following the Effective Date. At each annual meeting, commencing with the first annual meeting following the Effective Date, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the third annual meeting next succeeding his or her election and until his or her successor shall have been duly elected qualified. Notwithstanding the rule that the classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board of Directors shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes. This section only may be amended or repealed by the approval of the Board of Directors and the outstanding shares (as defined in Section 152 of the California General Corporation Law) voting as a single class, notwithstanding Section 903 of the California General Corporation Law. Section 4. Vacancies. A vacancy in the Board of Directors shall be deemed to exist in the case of the death, resignation or removal of any director, if a director has been declared of unsound mind by order of court or convicted of a felony, if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his or her term of office. Subject to any provision contained in the Articles of Incorporation, vacancies in the Board of Directors, except for a 10 11 vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director; and each director so elected shall hold office until his or her successor is elected at an annual or special meeting of the shareholders. Subject to any provision contained in the Articles of Incorporation, a vacancy in the Board of Directors created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present. Subject to any provision contained in the Articles of Incorporation, the shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election shall require the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present. Any director may resign effective upon giving written notice to the chairman of the Board, the president, the secretary of the Board or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or, subject to any provision contained in the Articles of Incorporation, the shareholders shall have the power to elect a successor to take office when the resignation is to become effective. Section 5. Place of Meeting. Regular meetings of the Board of Directors shall be held at any place within or without the State of California which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. In the absence of such designation, regular meetings shall be hold at the principal executive office of the corporation. Special meetings of the Board may be held either at a place so designated or at the principal executive office of the corporation. Section 6. Organization Meeting. Immediately following each annual meeting of shareholders, the Board of Directors shall hold a regular meeting at the place of said annual meeting or at such other place as shall be fixed by the Board, for the purpose of organization of the newly elected Board, election of officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with. Section 7. Other Regular Meetings. Other regular meetings of the Board of Directors shall be hold without call as provided in a resolution adopted by the Board from time to time; provided, however, should said day fall upon a legal holiday, then said meeting shall be held at the same time on the next day 11 12 thereafter ensuing which is a full business day. Notice of all such regular meetings of the Board of Directors is hereby dispensed with. Section 8. Special Meetings. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the Board, the president, any vice president or the secretary, or by any two directors, or by one or more shareholders holding not less than 25% of any series of Preferred Stock of the corporation. Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone or by telegraph or mail, charges prepaid, addressed to him or her at his or her address as it is shown upon the records of the corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which meetings of the directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company in the place in which the principal executive office of the corporation is located at least forty-eight (48) hours prior to the time of the holding of the meeting. In case such notice is delivered, personally or by telephone, as above provided, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to each such director. Section 9. Action Without a Meeting. Any action by the Board of Directors may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board and shall have the same force and effect as a unanimous vote of such directors at a meeting duly called and held. Section 10. Action at a Meeting: Quorum and Required Vote. Presence of a majority of the authorized number of directors at a meeting of the Board of Directors constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting as permitted in the preceding sentence constitutes presence in person at such meeting. Every act or decision done or made by a majority of the directors at a meeting duly hold at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number, or the same number after disqualifying one or 12 13 more directors from voting, is required by law, by the Articles of Incorporation, or by these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 11. Validation of Defectively Called or Noticed Meetings. The transactions of any meeting of the Board of Directors, however called or noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors not present or who, though present, has, prior to the meeting or at its commencement, protested the lack of proper notice, signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 12. Adjournment. A quorum of the directors may adjourn any directors' meeting to meet again at a stated day and hour; provided, however, that in the absence of a quorum a majority of the directors present at any directors' meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the Board. Section 13. Notice of Adjournment. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. Otherwise, notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 14. Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. Section 15. Indemnification of Directors, Officers, Employees and Other Agents. (a) Indemnification of Directors and Officers. Each person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, formal or informal, whether brought in the name of the corporation or otherwise and whether of a civil, criminal, administrative or investigative nature (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of 13 14 the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is an alleged action or inaction in an official capacity or in any other capacity while serving as a director or officer, shall, subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation to the fullest extent permissible under California law and the corporation's Articles of Incorporation, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that (a) the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of the corporation, (b) the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) other than a proceeding by or in the name of the corporation to procure a judgment in its favor only if any settlement of such a proceeding is approved in writing by the corporation, (c) no such person shall be indemnified (i) except to the extent that the aggregate of losses to be indemnified exceeds the amount of such losses for which the director or officer is paid pursuant to any directors' and officers' liability insurance policy maintained by the corporation; (ii) on account of any suit in which judgment is rendered against such person for an accounting of profits made from the purchase or sale by such person of securities of the corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal state or local statutory law; (iii) if a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful; and (iv) as to circumstances in which indemnity is expressly prohibited by the Law, and (d) no such person shall be indemnified with regard to any action brought by or in the right of the corporation for breach of duty to the corporation and its shareholders (i) for acts or omissions involving intentional misconduct or knowing and culpable violation of law; (ii) for acts or omissions that the director or officer believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director or officer; (iii) for any transaction from which the director or officer 14 15 derived an improper personal benefit; (iv) for acts or omissions that show a reckless disregard for the director's or officer's duty to the corporation or its shareholders in circumstances in which the director or officer was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the corporation or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's or officer's duties to the corporation or its shareholders; and (vi) for costs, charges, expenses, liabilities and losses arising under Section 310 or 316 of the General Corporation Law of California (the "Law"). The right to indemnification conferred in this Section 15 shall be a contract right and shall include the right to be paid by the corporation expenses incurred in defending any proceeding in advance of its final disposition; provided, however, that if the Law permits the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, such advances shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts to the corporation if it shall be ultimately determined that such person is not entitled to be indemnified. (b) Indemnification of Employees and Agents. A person who was or is a party or is threatened to be made a party to or is involved in any proceeding by reason of the fact that he or she is or was an employee or agent of the corporation or is or was serving at the request of the corporation as an employee or agent of another enterprise, including service with respect to employee benefit plans, whether the basis of such action is an alleged action or inaction in an official capacity or in any other capacity while serving as an employee or agent, may, subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation to the fullest extent permitted by California law and the corporation's Articles of Incorporation, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. The immediately preceding sentence is not intended to be and shall not be considered to confer a contract right on any employee or agent (other than directors and officers) of the corporation. 15 16 (c) Right of Directors and Officers to Bring Suit. If a claim under Paragraph (a) of this Section 15 is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of conduct, if any, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the claimant has not met the applicable standard of conduct. (d) Successful Defense. Notwithstanding any other provision of this Section 15, to the extent that a director or officer has been successful on the merits or otherwise (including the dismissal of an action without prejudice or the settlement of a proceeding or action without admission of liability) in defense of any proceeding referred to in paragraph (a) of this Section 15 or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. (e) Non-Exclusivity of Rights. The right to indemnification provided by this Section 15 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, agreement, vote of shareholders or disinterested directors or otherwise. (f) Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Law. (g) Expenses as a Witness. To the extent that any director or officer of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any action, suit or proceeding, he or she shall be indemnified against all costs 16 17 and expenses actually and reasonably incurred by him or her on his or her behalf in connection therewith. (h) Indemnity Agreements. The corporation may enter into agreements with any director, officer, employee or agent of the corporation providing for indemnification to the fullest extent permissible under the Law and the corporation's Articles of Incorporation. (i) Separability. Each and every paragraph, sentence, term and provision of this Section 15 is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Section 15 may be modified by a court of competent jurisdiction to preserve its validity and to provide the claimant with, subject to the limitations set forth in this Section 15 and any agreement between the corporation and claimant, the broadest possible indemnification permitted under applicable law. (j) Effect of Repeal or modification. Any repeal or modification of this Section 15 shall not adversely affect any right of indemnification of a director or officer existing at the time of such repeal or modification with respect to any action or omission occurring prior to such repeal or modification. ARTICLE IV Officers Section 1. Officers. The officers of the corporation shall be a president, a secretary and a treasurer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices, except that the offices of president and secretary shall not be held by the same person. Section 2. Election. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by the Board of Directors, and each shall hold office until he or she shall resign or shall be removed or otherwise disqualified to serve, or his or her successor shall be elected and qualified. 17 18 Section 3. Subordinate Officers, Etc. The Board of Directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation my require, each of whom shall hold office, for such period, have such authority and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. Section 4. Removal and Resignation. Any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors (subject, in each case, to the rights, if any, of an officer under any contract of employment). Any officer may resign at any time by giving written notice to the Board of Directors or the president, or to the secretary of the corporation, without prejudice, however, to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of receipt of such notice or at any time specified therein. Unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office. Section 6. Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned by the Board of Directors or prescribed by these Bylaws. Section 7. President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there shall be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and affairs of the corporation. The president shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. The president shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by these Bylaws or the Board of Directors. 18 19 Section 8. Vice President. In the absence or disability of the president, the vice presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the vice president designated by the Board of Directors, shall perform all the duties of the president, and when so acting shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or these Bylaws. Section 9. Secretary. The secretary shall record or cause to be recorded, and shall keep or cause to be kept, at the principal executive office and such other place as the Board of Directors may order, a book of minutes of actions taken at all meetings of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given thereof, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of shareholders and of the Board of Directors required by these Bylaws or by law to be given, and shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. Section 10. Treasurer. The treasurer shall be the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus and shares. Any surplus, including earned surplus, paid-in surplus, and surplus arising from a reduction of stated capital, shall be classified according to source and shown in a separate account. The books of account shall at all reasonable times be open to inspection by any director. The treasurer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. The treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president and directors, whenever they request it, an account of 19 20 all his or her transactions as treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. ARTICLE V Miscellaneous Section 1. Record Date. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion or exchange of shares. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than sixty (60) days prior to any other event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at any such meeting, to receive any report, to receive a dividend, distribution or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise may be provided in the Articles of Incorporation or these Bylaws. Section 2. Inspection of Corporate Records. The accounting books and records, the record of shareholders, and minutes of proceedings of the shareholders and of the Board of Directors and committees of the Board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or the holder of a voting trust certificate at any reasonable time during regular business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have (in person, or by agent or attorney) the right to inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation, and to obtain from the transfer agent for the corporation, if there be one, upon written demand 20 21 and upon the tender of its usual charges, a list of the shareholders' names and addresses who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date subsequent to the date of demand specified by the shareholder therein. The list shall be made available on or before the later of five (5) business days after receipt of the demand or the date specified therein as of which the list is to be compiled. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation. Such inspection by a director may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness, issued in the name of or payable to this corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 4. Annual Report to Shareholders. The annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly waived, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to the shareholders. A shareholder of shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of any such period, and, in addition, if no annual report for the last fiscal year containing an income statement and balance sheet for and as of the end of such fiscal year has been sent to shareholders, such an income statement and balance sheet for the prior fiscal year. The corporation shall use its best efforts to deliver the statement or statements requested to the person making such request within thirty days after the receipt thereof. A copy of any such statements shall be kept on file in the principal executive office of the corporation for twelve (12) months, and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy thereof shall be mailed to such shareholder. The corporation shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, 21 22 together with a balance sheet as of the and of the same period. The financial statements referred to in this Section shall be accompanied by the report thereon, if there be any, of any independent accountants engaged by the corporation in respect thereof or, if there be no such report, the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. Section 5. Certificates for Shares. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman or vice chairman of the Board or the president or any vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any of the signatures on the certificate may be facsimile, provided that in such event at least one signature, including that of either officer or the corporation's registrar or transfer agent, if any, shall be manually signed. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be an officer, transfer agent or registrar before such certificate is issued, it may nevertheless be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Any such certificate shall also contain such legend or other statement as may be required by Section 418 of the General Corporation Law, the Corporate Securities Law of 1968, the federal securities laws, these Bylaws, and any agreement between the corporation and the issuee thereof. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board of Directors or these Bylaws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the face thereof the amount remaining unpaid and the terms of payment thereof. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without surrender and cancellation of the old certificate if (1) the old certificate is lost, apparently destroyed or wrongfully taken; (2) the request for issuance of a new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction or theft; (3) the request for issuance of a new certificate is made prior to the receipt of notice by the corporation that the old certificate has been acquired by a bona fide purchaser; (4) the owner of the old certificate files a sufficient indemnity bond with or provides other adequate security to the corporation; and (5) the owner satisfies any 22 23 other reasonable requirements imposed by the corporation. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the provisions of Sections 8104 and 8405 of the California Uniform Commercial Code. Section 6. Representation of Shares of other Corporations. The president or any vice president and the secretary or any assistant secretary of this corporation are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 7. Inspection of Bylaws. The corporation shall keep in its principal executive office in California, or, if its principal executive office is not in California, then at its principal business office in California (or otherwise provide upon written request of any shareholder) the original or a copy of these Bylaws as amended or otherwise altered to date, certified by the secretary of the corporation, which shall be open to inspection by the shareholders at all reasonable times during office hours. Section 8. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the California General Corporations Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular includes the plural and the plural number includes the singular, and the term "person" includes a corporation or other entity as well as a natural person. ARTICLE VI Amendments Section 1. Power of Shareholders. New bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, except as otherwise provided by law or by the Articles of Incorporation. Section 2. Power of Directors. Subject to the right of the shareholders as provided in Section 1 of this Article VI to adopt, amend or repeal bylaws, bylaws, other than a bylaw or 23 24 amendment thereof increasing or decreasing the range of the authorized number of directors or changing Article III, Section 3, may, except as otherwise provided by law or the Articles of Incorporation, be adopted, amended or repealed by the Board of Directors. 24 25 CERTIFICATE OF SECRETARY OF PROCOM TECHNOLOGY, INC., A CALIFORNIA CORPORATION I hereby certify that I am the duly elected and acting Secretary of Procom Technology, Inc., a California corporation, and that the foregoing Bylaws, comprising 22 pages, constitute the Bylaws of said corporation as duly adopted by the Board of Directors of Procom Technology, Inc. on October __, 1996. IN WITNESS WHEREOF, I have hereunto subscribed my name this ____ day of October, 1996. ----------------------------- Frank Alaghband Secretary EX-10.1 6 FORM OF INDEMNITY AGREEMENT BETWEEN THE COMPANY 1 EXHIBIT 10.1 FORM OF INDEMNITY AGREEMENT This Indemnity Agreement (this "Agreement") is made as of October ___, 1996 by and between Procom Technology, Inc., a California corporation (the "Company"), and _____________________ (the "Indemnitee"), a director and officer of the Company. BACKGROUND A. The Indemnitee has agreed to serve as a director and officer of the Company and in such capacities will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and California statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which directors and officers are subject due to their positions with the Company and has concluded that insurance and statutory provisions may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and officers. C. In order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve as directors and officers of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Company and the Indemnitee in lieu of this Agreement, that this Agreement is not only reasonable and prudent but also necessary to promote and ensure the best interests of the Company and its shareholders. AGREEMENT In consideration of the services of the Indemnitee and in order to induce the Indemnitee to serve as a director and officer of the Company, the Company and the Indemnitee agree as follows: SECTION 1. DEFINITIONS As used in this Agreement: (a) A "Change in Control" shall be deemed to have occurred if (i) during any period of two consecutive years, individuals who at the beginning of the two year period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination 2 for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board of Directors, or (ii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such a merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of the Company or the surviving entity outstanding immediately after the merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all the Company's assets. (b) The term "Expenses" includes, without limitation, attorneys' fees, disbursements and retainers, accounting and witness fees, travel and deposition costs, expenses of investigations, judicial or administrative proceedings or appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. (c) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the name of the Company or otherwise and whether of a civil, criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he or she is serving in such capacity at the time any liability or Expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. 2 3 SECTION 2. INDEMNIFICATION 2.1 INDEMNIFICATION IN THIRD PARTY ACTIONS The Company shall indemnify the Indemnitee in accordance with the provisions of this subsection 2.1 if the Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the name of the Corporation to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of the Proceeding, to the fullest extent permitted by applicable law; provided that any settlement shall be approved in writing by the Company. 2.2 INDEMNIFICATION IN PROCEEDINGS BY OR IN THE NAME OF THE COMPANY The Company shall indemnify the Indemnitee in accordance with the provisions of this subsection 2.2 if the Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that Indemnitee was or is a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of the Proceeding, to the fullest extent permitted by applicable law. 2.3 PARTIAL INDEMNIFICATION If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of, but not the total amount of, the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him in the investigation, defense, appeal or settlement of any Proceeding, the Company shall nevertheless indemnify the Indemnitee for the portion of the Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 2.4 INDEMNIFICATION HEREUNDER NOT EXCLUSIVE The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders or disinterested directors, applicable law or otherwise, both as to 3 4 action in his official capacity and as to action in another capacity on behalf of the Company while holding office. 2.5 INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY Notwithstanding any other provisions of this Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter in the Proceeding, on the merits or otherwise, including the dismissal of a Proceeding without prejudice, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable law. SECTION 3. PRESUMPTIONS 3.1 PRESUMPTION REGARDING STANDARD OF CONDUCT The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct as defined by applicable law for indemnification pursuant to this Agreement, unless a determination that the Indemnitee has not met the relevant standards is made by (i) the shareholders of the Company by majority vote, or (ii) in a written opinion by independent legal counsel, selection of whom has been approved by the Indemnitee in writing. 3.2 DETERMINATION OF RIGHT TO INDEMNIFICATION If a claim under this Agreement is not paid by the Company within 30 days of receipt of written request from the Indemnitee, the right to indemnification as provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or shareholders of the Company or independent legal counsel to have made a determination prior to the commencement of the action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's Expenses incurred in connection with any Proceeding concerning his right to indemnification or advances in whole or in part pursuant to this Agreement also shall be indemnified by the Company regardless of the outcome of the Proceeding, unless a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in the Proceeding was not made in good faith or was frivolous. 4 5 SECTION 4. ADVANCES OF EXPENSES The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable law; provided that if applicable law requires an undertaking, the Indemnitee shall undertake in writing to repay the amount advanced to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification. SECTION 5. CHANGE IN CONTROL The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to the Change in Control), then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense advances under this Agreement or any other agreement, the Company's Articles of Incorporation, or the Company's Bylaws in effect relating to claims for indemnifiable events, the Company shall seek legal advice only from independent counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company or Indemnitee within the last five years (other than in connection with such matters)("Special Independent Counsel"). The Special Independent Counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Special Independent Counsel and may fully indemnify the Special Independent Counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement. SECTION 6. INDEMNIFICATION PROCEDURE 6.1 NOTICE Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee will, if a claim is to be made against the Company under this Agreement, notify the Company of the commencement of the Proceeding. The omission to notify the Company will not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. 6.2 COMPANY PARTICIPATION With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate in the Proceeding at its own expense and, except as 5 6 otherwise provided below, to the extent that it may wish, the Company may assume the defense of the Proceeding, with counsel reasonably satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, during the Company's good faith active defense, the Company will not be liable to the Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense of the Proceeding, other than reasonable costs of investigation or as otherwise provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employ his counsel in any Proceeding but the fees and expenses of the counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, or (iii) the Company shall not in fact have employed counsel to assume the defense of a Proceeding, in each of which cases the reasonable fees and expenses of the Indemnitee's counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has made the conclusion that there may be a conflict of interest between the Company and the Indemnitee. SECTION 7. LIMITATIONS ON INDEMNIFICATION No payments pursuant to this Agreement shall be made by the Company: (a) to indemnify or advance Expenses to the Indemnitee with respect to Proceedings initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable law, but the indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) to indemnify the Indemnitee for any Expenses, judgements, fines, penalties or ERISA excise taxes for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under the insurance; 6 7 (c) to indemnify the Indemnitee for any Expenses, judgements, fines or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; (d) to indemnify the Indemnitee for any Expenses, judgements, fines, penalties or ERISA excise taxes resulting from Indemnitee's conduct which is finally adjudged to have been willful misconduct, knowingly fraudulent or deliberately dishonest; or (e) if a court of competent jurisdiction shall finally determine that any indemnification hereunder is unlawful. SECTION 8. MAINTENANCE OF LIABILITY INSURANCE 8.1 AFFIRMATIVE COVENANT OF THE COMPANY The Company covenants and agrees that, as long as the Indemnitee shall continue to serve as a director or officer of the Company and thereafter so long as the Indemnitee shall be subject to any possible Proceeding, the Company, subject to subsection 8.3 of this Agreement, shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. 8.2 INDEMNITEE NAMED AS INSURED In all D&O Insurance policies, the Indemnitee shall be named as an insured in a manner that provides the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and officers. 8.3 EXEMPTION FROM MAINTENANCE OF INSURANCE Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in its sole discretion that insurance is not reasonably available, the premium costs are, in its opinion, disproportionate to the amount of coverage provided, the coverage provided by insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 7 8 SECTION 9. MISCELLANEOUS 9.1 SUCCESSORS AND ASSIGNS This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and his heirs, personal representatives and assigns, and the Company and its successors and assigns. 9.2 SEVERABILITY Each provision of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision of this Agreement shall be held to be invalid or unenforceable for any reason, the invalidity or unenforceability shall not affect the validity or enforceability of the other provisions of this Agreement. To the extent required, any provision of this Agreement may be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable law. 9.3 SAVINGS CLAUSE If this Agreement or any portion of it is invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties or ERISA excise taxes with respect to any Proceeding to the fullest extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9.4 INTERPRETATION; GOVERNING LAW This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of California, without regard to the conflicts of laws principles thereof. 9.5 AMENDMENTS No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee by this Agreement are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Company's Certificate of Incorporation, Bylaws or agreements including D&O Insurance policies. 8 9 9.6 COUNTERPARTS This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 9.7 NOTICES Any notice required to be given under this Agreement shall be directed to Procom Technology, Inc. at 2181 Dupont Drive, Irvine, California 92715, Attention: President and to Indemnitee at the address set forth below or to another address as either shall designate in writing. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. INDEMNITEE ____________________________________ Name: ___________________________ Address: ___________________________ ___________________________ ___________________________ ___________________________ PROCOM TECHNOLOGY, INC., a California corporation By: ________________________________ Name: ___________________________ Title: ___________________________ 9 EX-10.2 7 PROCOM TECHNOLOGY, INC. 1995 STOCK OPTION PLAN 1 Exhibit 10.2 PROCOM TECHNOLOGY, INC. 1995 STOCK OPTION PLAN 1. PURPOSE. The purpose of this Plan is to promote the success of the Corporation by providing an additional means to attract, motivate and retain key personnel, consultants, advisors and knowledgeable directors through the grant of Options that provide added long term incentives for high levels of performance and for significant efforts to improve the financial performance of the Corporation. 2. DEFINITIONS. (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Committee" shall mean a committee, if any, appointed by the Board in accordance with Section 4 of this Plan. (d) "Common Stock" shall mean the Common Stock, par value $0.001 share, of the Corporation. (e) "Corporation" shall mean Procom Technology, Inc., a California corporation. (f) "Disability" shall mean the condition of an Employee who is, in the judgment of the Board or the Committee, unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months. (g) "Effective Date" shall have the meaning given such term in Section 3 hereof. (h) "Employee" shall mean an individual who is employed (within the meaning of Code Section 3401(c) and the regulations thereunder) by the Corporation or a Subsidiary. (i) "Event" shall mean any of the following: (1) approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities other than Subsidiaries, as a result of which less than 50% 1 2 of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; (2) approval by the shareholders of the Corporation of the sale of all or substantially all of the Corporation's business assets to a person or entity which is not a Subsidiary; or (3) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, but excluding (x) any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder and (y) any person having beneficial ownership of more than 5% of the outstanding voting power at the time of adoption of this Plan) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 50% of the combined voting power of the Corporation's then outstanding securities entitled to then vote generally in the election of directors of the Corporation. (j) "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended. (k) "Exercise Price" shall mean the price per Share of Common Stock, determined by the Board or the Committee, at which an Option may be exercised. (l) "Fair Market value" shall mean the value of one Share of Common Stock, determined as follows: (1) If the Shares are traded on an exchange, the price at which Shares traded at the close of business on the date of valuation; (2) If the Shares are traded over-the-counter on the NASDAQ System, the closing price if one is available, or the mean between the bid and asked prices on said System at the close of business on the date of valuation; and (3) If neither (1) nor (2) applies, the fair market value as determined by the Board or the Committee in good faith. Such determination shall be conclusive and binding on all persons. (m) "Incentive Stock Option" shall mean an option described in Section 422(b) of the Code. (n) "Nonstatutory Stock Option" shall mean an option not described in Section 422(b), 423(b) or 424(b) of the Code. 2 3 (o) "Option" shall mean an option to purchase Common Stock under this Plan. An Option shall be designated by the Committee as a Nonstatutory Stock Option or an Incentive Stock Option. (p) "Optionee" shall mean an employee who has received an Option. (q) "Plan" shall mean the Procom Technology, Inc. 1995 Stock Option Plan, as it may be amended from time to time. (r) "Purchase Price" shall mean the Exercise Price multiplied by the number of Shares with respect to which an Option is exercised. (s) "Retirement" shall mean the voluntary termination of employment by an Employee upon the attainment of age sixty-five and the completion of not less than twenty years of service with the Corporation or a Subsidiary. (t) "Share" shall mean one share of Common Stock, adjusted in accordance with Section 10 of this Plan (if applicable). (u) "Subsidiary" shall mean any corporation at least fifty percent of the total combined voting power of which is owned by the Corporation or by another Subsidiary. 3. EFFECTIVE DATE. This Plan was adopted by the Board and approved by the Corporation's shareholders as of September 15, 1995, which is the effective date of this Plan (the "Effective Date"). 4. ADMINISTRATION. This Plan shall be administered by the Board, or by a committee appointed by the Board which shall consist of not less than two members (either entity acting in such capacity being hereafter referred to as the "Committee"). The Board shall appoint one of the members of the Committee, if there be one, as Chairman of the Committee. The Committee shall hold meetings at such times and places as it may determine. Acts of a majority of the Committee at which a quorum is present, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. The Committee shall from time to time at its discretion select the Plan participants, the number of Shares to be granted to each Optionee (no more than 100,000 options may be granted hereunder to any person during any twelve month period) and designate such Options as Incentive Stock Options or Nonstatutory Stock Options, except that no Incentive Stock Option may be granted to a non-Employee director or a non-Employee consultant. A member of the Committee shall in no event participate in any determination relating to Options held by or to be granted to such Committee member. The interpretation and 3 4 construction by the Committee of any provision of this Plan or of any Option granted hereunder shall be final. No member of the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any Option granted hereunder. 5. PARTICIPATION. (a) Eligibility. The Optionees shall be such persons as the Committee may select from among the following classes of persons, subject to the terms and conditions of (b) below: (1) Employees of the Corporation or of a Subsidiary (who may be officers, whether or not they are directors); (2) Directors of the Corporation or of a Subsidiary; and (3) Consultants, vendors, customers and others expected to provide significant services to the Corporation or a Subsidiary. Solely for purposes of this Plan, an Optionee who is a director or a consultant, vendor, customer or other provider of significant services to the Corporation or a Subsidiary shall be deemed to be an Employee, and service as a director, consultant, vendor, customer or other provider of significant services to the Corporation or a Subsidiary shall, solely for purposes of this Plan, be deemed to be employment, except that no Incentive Stock Option may be granted to a non-Employee director or non-Employee consultant, vendor, customer or other provider of significant services to the Corporation or a Subsidiary. (b) Ten-Percent Shareholders. An Employee who owns more than ten percent of the total combined voting power of all classes of outstanding stock of the Corporation, its parent or any of its Subsidiaries shall not be eligible to receive an Incentive Stock Option unless (i) the Exercise Price of the Shares subject to such Option is at least 110% of the Fair Market value of such Shares on the date of grant and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. (c) Stock Ownership. For purposes of (b) above, in determining stock ownership, an Employee shall be considered as owning the stock owned, directly or indirectly, by or for his brothers, sisters, spouses, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by or for its shareholders, partners or 4 5 beneficiaries. Stock with respect to which such Employee holds an Option shall not be counted. (d) Outstanding Stock. For purposes of (b) above, "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the Option to the Optionee. "Outstanding stock" shall not include shares authorized for issue under outstanding Options held by the Optionee or by any other person. 6. STOCK. The stock subject to Options granted under this Plan shall be Shares of the Corporation's authorized but unissued or reacquired Common Stock. The aggregate number of Shares which may be issued upon exercise of Options under this Plan shall not exceed 180,000 shares. The number of Shares subject to Options outstanding at any time shall not exceed the number of Shares remaining available for issuance under this Plan. If any outstanding Option for any reason expires or is terminated, the Shares allocable to the unexercised portion of such Option may again be made subject to any Option. The limitations established by this Section 6 shall be subject to adjustment in the manner provided in Section 10 hereof upon the occurrence of an event specified therein. 7. TERMS AND CONDITIONS OF OPTIONS. (a) Stock Option Agreements. Options shall be evidenced by written stock option agreements in such form as the Committee shall from time to time determine. Such agreements shall comply with and be subject to the terms and conditions set forth below. (b) Number of Shares. Each Option shall state the number of Shares to which it pertains and shall provide for the adjustment thereof in accordance with the provisions of Section 10 hereof. (c) Exercise Price. Each Option shall state the Exercise Price. The Exercise Price in the case of any Incentive Stock Option shall not be less than the Fair Market Value on the date of grant and, in the case of any Incentive Stock Option granted to an Optionee described in Section 5(b) hereof, shall not be less than 110% of the Fair Market Value on the date of grant. The Exercise Price in the case of any Nonstatutory Stock Option shall not be less than 85% of the Fair Market Value on the date of grant. (d) Medium and Time of Payment. The Purchase Price shall be payable in full in United States dollars upon the exercise of the Option; provided, however, that if the applicable Option Agreement so provides the Purchase Price may be paid (i) by the surrender of Shares in good form for transfer, owned by the person exercising the Option and having a Fair Market Value 5 6 on the date of exercise equal to the Purchase Price, or in any combination of cash and Shares, as long as the sum of the cash so paid and the Fair Market Value of the Shares so surrendered equal the Purchase Price, (ii) by cancellation of indebtedness owed by the Corporation to the Optionee, (iii) with a full recourse promissory note executed by the Optionee or (iv) any combination of the foregoing. The interest rate and other terms and conditions of such note shall be determined by the Committee. The Committee may, if it desires, require that the Optionee pledge his or her Shares to the Corporation for the purpose of securing the payment of such note and require that the stock certificate(s) representing such Shares shall not be released to the Optionee until such note has been paid in full. If the Corporation determines that it is required to withhold state or federal income tax as a result of the exercise of an Option, as a condition to the exercise thereof, an Employee may be required to make arrangements satisfactory to the Corporation to enable it to satisfy such withholding requirements. (e) Term and Nontransferability of Options. Each Option shall state the time or times, and the conditions upon which, all or part thereof becomes exercisable. No Option shall be exercisable after the expiration of ten years from the date it was granted, and no Incentive Stock Option granted to an Optionee described in Section 5(b) hereof shall be exercisable after the expiration of five years from the date it was granted. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee and shall not be assignable or transferable. In the event of the Optionee's death, the Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution. (f) Termination of Employment, Except by Death, Disability or Retirement. If an Optionee ceases to be an Employee for any reason other than his or her death, Disability or Retirement, such Optionee shall have the right, subject to the restrictions of (e) above, to exercise the Option at any time within thirty days after termination of employment, but only to the extent that, at the date of termination of employment, the Optionee's right to exercise such Option had vested pursuant to the terms of the applicable option agreement and had not previously been exercised; provided, however, that if the Optionee was terminated for cause (as defined in the applicable option agreement) any Option not exercised in full prior to such termination shall be canceled. For this purpose, the employment relationship shall be treated as continuing intact while the Optionee is on military leave, sick leave or other bona fide leave of absence (to be determined in the sole discretion of the Committee). The foregoing notwithstanding, (i) in the case of an Incentive Stock Option, employment shall not be deemed to continue beyond ninety days after the Optionee's reemployment rights are guaranteed by statute or by contract, and (ii) in the case of a Nonstatutory Stock Option, the Committee may extend or 6 7 otherwise modify the period of time specified herein during which the Option may be exercised following termination of Optionee's employment. (g) Death of Optionee. If an Optionee dies while an Employee, or after ceasing to be an Employee but during the period while he or she could have exercised the Option under this Section 7, and has not fully exercised the Option, then the Option may be exercised in full, subject to the restrictions of (e) above, at any time within three months after the Optionee's death, by the executors or administrators of his or her estate or by any person or persons who have acquired the Option directly from the Optionee by bequest or inheritance, but only to the extent that, at the date of death, the Optionee's right to exercise such Option had accrued and had not been forfeited pursuant to the terms of the applicable Option Agreement and had not previously been exercised. The foregoing notwithstanding, in the case of a Nonstatutory Stock Option, the Committee may extend or otherwise modify the period of time specified herein during which the Option may be exercised following termination of Optionee's employment, or amend an Incentive Stock Option to convert it into a Nonstatutory Stock Option with an extended term. (h) Disability of Optionee. If an Optionee ceases to be an Employee by reason of Disability, such Optionee shall have the right, subject to the restrictions of (e) above, to exercise the Option at any time within three months after termination of employment, but only to the extent that, at the date of termination of employment, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable option agreement and had not previously been exercised. The foregoing notwithstanding, in the case of a Nonstatutory Stock Option, the Committee may extend or otherwise modify the period of time specified herein during which the Option may be exercised following termination of Optionee's employment, or amend an Incentive Stock Option to convert it into a Nonstatutory Stock Option with an extended term. (i) Retirement of Optionee. If an Optionee ceases to be an Employee by reason of Retirement, such Optionee shall have the right, subject to the restrictions of (e) above, to exercise the Option at any time within twelve months after termination of employment, but only to the extent that, at the date of termination of employment, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable option agreement and had not previously been exercised. The foregoing notwithstanding, in the case of a Nonstatutory Stock Option, the Committee may extend or otherwise modify the period of time specified herein during which the Option may be exercised following termination of Optionee's employment, or amend an Incentive Stock Option to convert it into a Nonstatutory Stock Option with an extended term. 7 8 (j) Rights as a Shareholder. An Optionee, or a transferee of an Optionee, shall have no rights as a shareholder with respect to any Shares covered by his or her Option until the date of the issuance of a stock certificate for such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 10 hereof. (k) Modification, Extension and Renewal of Option. Within the limitations of this Plan, the Committee may modify, extend, renew or reprice outstanding Options or accept the cancellation of outstanding Options (to the extent not previously exercised) for the granting of new Options with, if desired, lower exercise prices, in substitution therefor. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted. (l) Other Provisions. The stock option agreements authorized under this Plan may contain such other provisions not inconsistent with the terms of this Plan (including, without limitation, restrictions upon the exercise of the Option) as the Committee deems advisable. 8. LIMITATION ON VALUE OF EXERCISABLE SHARES. In the case of Incentive Stock Options granted hereunder, the aggregate Fair Market Value (determined as of the date of the grant thereof) of the Shares with respect to which Incentive Stock Options become exercisable by any employee of the Corporation for the first time during any calendar year (under this Plan and all other plans maintained by the Corporation, its parent or its Subsidiaries) shall not exceed $100,000. 9. TERM OF PLAN. Options may be granted pursuant to this Plan until the expiration of ten years from the effective date of this Plan. 10. RECAPITALIZATIONS. Subject to any required action by shareholders, the number of Shares covered by this Plan as provided in Section 6 hereof, the number of Shares covered by each outstanding Option and the Exercise Price thereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of Shares or the payment of a stock dividend (but only of Common Stock) or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Corporation. Subject to any required action by shareholders, if the Corporation is the surviving corporation in any merger or consolidation, each outstanding Option shall apply to the securities to which a holder of the number of Shares subject to the Option would have been entitled in the merger or 8 9 consolidation. To the extent that the foregoing adjustments relate to securities of the Corporation, such adjustments shall be made by the Committee, whose determination shall be conclusive and binding on all persons. Except as expressly provided in this Section 10, the Optionee shall have no rights by reason of subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger or consolidation or spin-off of assets or stock of another corporation, and any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to this Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes to its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business assets. 11. SECURITIES LAW REQUIREMENTS. (a) Legality of Issuance. The issuance of any Shares upon the exercise of any Option and the grant of any Option shall be contingent upon the following: (1) the Corporation and the Optionee shall have taken all actions required to register the Shares under the Securities Act of 1933, as amended (the "Act"), and to qualify the Option and the Shares under any and all applicable state securities or "blue sky" laws or regulations, or to perfect an exemption from the respective registration and qualification requirements thereof; (2) any applicable listing requirement of any stock exchange on which the Common Stock is listed shall have been satisfied; and (3) any other applicable provision of state or federal law shall have been satisfied. (b) Restrictions on Transfer. Regardless of whether the offering and sale of Shares under this Plan has been registered under the Act or has been registered or qualified under the securities laws of any state, the Corporation may impose restrictions on the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Corporation and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Act, the securities laws of any state or any other law. In the event that the sale of Shares under this Plan is not registered under the Act but an 9 10 exemption is available which requires an investment representation or other representation, each Optionee shall be required to represent that such Shares are being acquired for investment, and not with a view to the sale or distribution thereof, and to make such other representations as are deemed necessary or appropriate by the Corporation and its counsel. Any determination by the Corporation and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on all persons. Stock certificates evidencing Shares acquired under this Plan pursuant to an unregistered transaction shall bear the following restrictive legend and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law. "THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT." (c) Registration or Qualification of Securities. The Corporation may, but shall not be obligated to register or qualify the issuance of Options and/or the sale of Shares under the Act or any other applicable law. The Corporation shall not be obligated to take any affirmative action in order to cause the issuance of Options or the sale of Shares under this Plan to comply with any law. (d) Exchange of Certificates. If, in the opinion of the Corporation and its counsel, any legend placed on a stock certificate representing shares sold under this Plan is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but lacking such legend. 12. AMENDMENT OF THIS PLAN. The Board may from time to time, with respect to any Shares at the time not subject to Options, suspend or discontinue this Plan or revise or amend it in any respect whatsoever except that, without the approval of the Corporation's shareholders, no such revision or amendment shall: (a) Increase the number of Shares subject to this Plan; (b) Change the designation in Section 5 hereof with respect to the classes of persons eligible to receive Options; (c) Amend this Section 12 to defeat its purpose. 13. ACCELERATION OF OPTIONS. Unless prior to an Event the Board determines that, upon its occurrence, there shall be no 10 11 acceleration of Options or determines those selected Options which shall be accelerated and the extent to which they shall be accelerated, upon the occurrence of an Event each Option shall become immediately exercisable to the full extent theretofore not exercisable; subject, however, to compliance with applicable regulatory requirements, including, without limitation, Rule 16b- 3 promulgated by the Commission pursuant to the Exchange Act and Section 422 of the Code. For purposes of this section only, the Board shall mean the Board as constituted immediately prior to the Event. 14. EXECUTION. To record the adoption of this Plan in the form set forth above by the Board as of the Effective Date, the Corporation has caused this Plan to be executed in the name and on behalf of the Corporation where provided below by an officer of the Corporation thereunto duly authorized. PROCOM TECHNOLOGY, INC., a California corporation By: _______________________ Its:_______________________ 11 EX-10.3 8 AMENDED & RESTATED EXECUTIVE EMPLOYMENT AGREEMENT 1 Exhibit 10.3 AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT This Amended and Restated Executive Employment Agreement ("Agreement") is dated as of October 28, 1996, between Procom Technology, Inc., a California corporation (the "Company"), and Alex Razm'joo (the "Executive"). WITNESSETH: WHEREAS, the Company believes that the Executive is a valued employee of the Company and wishes to ensure his continued employment with the Company and document the terms of the Executive's employment by the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to reinforce and encourage the continued attention and dedication of certain key members of the Company's management, including the Executive, to their assigned duties without distraction in uncertain circumstances arising from the possibility of a change in control of the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to minimize the personal considerations of certain key members of management in their evaluation of any potential change in control of the Company. WHEREAS, the Company has determined that the loss of the Executive's services would have a detrimental effect on the implementation of a change in control of the Company (in the event the Company determines to effect such a change in control of the Company). NOW, THEREFORE, taking into account the foregoing and in consideration of the mutual promises and conditions contained herein, the parties hereto agree as follows: ARTICLE I EMPLOYMENT 1.1 Employment. The Company employs the Executive and the Executive hereby accepts employment as the President and Chairman of the Board of the Company upon the terms and conditions hereinafter set forth. 2 1.2 Term. The employment of the Executive by the Company under the terms and conditions of this Agreement will commence on the date hereof and continue for a period of three (3) years ("Employment Term"). Commencing on the first anniversary of the date hereof, the Employment Term shall be extended on a daily basis such that the remaining term shall at all times be three (3) full years. 1.3 Executive Duties. As the Company's President and Chairman of the Board, the Executive shall perform such duties as are requested by and shall report directly to the Company's Board of Directors. The Executive agrees to devote his full business time (with allowances for vacations and sick leave) and attention and best efforts to the affairs of the Company and its subsidiaries and affiliates during the Employment Term. ARTICLE II COMPENSATION AND BENEFITS 2.1 Annual Salary. During the Employment Term, the Company shall pay to the Executive a base salary at the initial rate of not less than Two Hundred Twenty-Five Thousand ($225,000) per year, payable in substantially equal semimonthly installments. The Company will review annually and may, in the discretion of the Board of Directors, increase such base salary in light of the Executive's performance, inflation in cost of living or other factors. The Company also shall pay to the Executive an annual incentive compensation bonus to be calculated and paid as set forth on Exhibit A. For purposes of this Agreement, the Executive's annual base salary and annual incentive compensation bonus collectively shall be referred to herein as his "Annual Salary." 2.2 Benefits. During the Employment Term, the Executive shall be eligible for participation in and covered by any and all such performance, bonus, profit sharing, incentive, stock option, and other compensation plans and such medical, dental, disability, life, and other insurance plans and such other benefits generally available to other employees of the Company in similar employment positions, on the same terms as such employees, subject to meeting applicable eligibility requirements (collectively referred to herein as the "Company Benefit Plans"). 2.2.1 The Company shall maintain for the Executive during the term of this Agreement a life insurance policy of not less than One Million Dollars ($1,000,000). In addition, the Company shall provide to the Executive a One Thousand Dollar ($1,000) annual tax preparation allowance. 2.3 Reimbursement of Expenses. The Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred by the Executive in performing services hereunder, including all expenses of travel, entertainment and A-1 3 living expenses while away from home on business at the request of, or in the service of, the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. 2.4 Automobile Allowance. The Company shall provide the Executive with an automobile allowance in the amount of Seven Hundred Fifty Dollars ($750) per month as reimbursement to the Executive of costs and expenses incurred by the Executive for the purchase or lease and maintenance and operation of an automobile for use by the Executive in the performance of the Executive's duties hereunder. Such automobile allowance shall be paid in substantially equal semi-monthly installments. 2.5 Vacation and Holidays. The Executive shall be entitled to an annual vacation leave of four (4) weeks at full pay or such greater vacation benefits as may be provided for by the Company's vacation policies applicable to senior executives of the Company. Any unused vacation time may be accumulated and carried over from one year to the next; provided, however, if any vacation time would otherwise be carried over for a second year, the Executive may, at his option, elect not to have such vacation time carried over but may instead request the Company to compensate the Executive for such vacation time by paying the Executive for such time at the Executive's then current base salary rate. Except to the extent that accumulated vacation time is paid off by the Company as described above, none of the accumulated vacation time will be lost for any reason. Executive shall be entitled to such holidays as are established by the Company for all employees. ARTICLE III CONFIDENTIALITY AND NONDISCLOSURE 3.1 Confidentiality. Executive will not during Executive's employment by the Company or thereafter at any time disclose, directly or indirectly, to any person or entity or use for Executive's own benefit any trade secrets or confidential information relating to the Company's business, operations, marketing data, business plans, strategies, employees, negotiations and contracts with other companies, or any other subject matter pertaining to the business of the Company or any of its clients, customers, consultants, or licensees, known, learned, or acquired by Executive during the period of Executive's employment by the Company (collectively "Confidential Information"), except as may be necessary in the ordinary course of performing Executive's particular duties as an employee of the Company. 3.2 Return of Confidential Material. Executive shall promptly deliver to the Company on termination of Executive's employment with the Company, whether or not for Cause and whatever the reason, or at any time the Company may so request, 2 4 all memoranda, notes, records, reports, manuals, drawings, blueprints, Confidential Information and any other documents of a confidential nature belonging to the Company, including all copies of such materials which Executive may then possess or have under Executive's control. Upon termination of Executive's employment by the Company, Executive shall not take any document, data, or other material of any nature containing or pertaining to the proprietary information of the Company. 3.3 Prohibition on Solicitation of Customers. During the term of Executive's employment with the Company, and for a period of two (2) years thereafter, Executive shall not, directly or indirectly, either for Executive or for any other person or entity, solicit any person or entity to terminate such person's or entity's contractual and/or business relationship with the Company, nor shall Executive interfere with or disrupt or attempt to interfere with or disrupt any such relationship. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.4 Prohibition on Solicitation of Employees, Agents or Independent Contractors After Termination. During the term of Executive's employment with the Company and for a period of two (2) years following the termination of Executive's employment with the Company, Executive will not solicit any of the employees, agents, or independent contractors of the Company to leave the employ of the Company for a competitive company or business. However, Executive may solicit any employee, agent or independent contractor who voluntarily terminates his or her employment with the Company after a period of 120 days have elapsed since the termination date of such employee, agent or independent contractor. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.5 Right to Injunctive and Equitable Relief. Executive's obligations not to disclose or use Confidential Information and to refrain from the solicitations described in this Article III are of a special and unique character which gives them a peculiar value. The Company cannot be reasonably or adequately compensated for damages in an action at law in the event Executive breaches such obligations. Therefore, Executive expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond or other security in the event of such breach in addition to any other rights or remedies which the Company may possess or be entitled to pursue. Furthermore, the obligations of Executive and the rights and remedies of the Company under this Article III are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies created by applicable law relating to misappropriation or theft of trade secrets or Confidential Information. 3.6 Survival of Obligations. Executive agrees that the terms of this Article III shall survive the term of this 4 5 Agreement and the termination of Executive's employment by the Company. ARTICLE IV TERMINATION 4.1 Definitions. For purposes of this Article IV, the following definitions shall be applicable to the terms set forth below: (a) Cause. "Cause" shall mean only the following: (i) the Executive's death or Disability; (ii) the willful and continued failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his or her duties; (iii) willful misconduct by the Executive which is materially injurious to the Company; (iv) conviction of a felony under the laws of the State of California; (v) habitual drunkenness by the Executive; or (vi) a willful, material breach of this Agreement by the Executive. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive in bad faith and without a reasonable belief that such action or omission by the Executive was in the best interests of the Company. Notwithstanding anything to the contrary in the foregoing, no termination or other action shall be considered to be for Cause under this Agreement unless (x) the Executive first shall have received at least 30 days written notice setting forth the reasons for the Company's intention to terminate or take other action and shall have been provided an opportunity to appear, accompanied by counsel, and be heard before the Board of Directors; (y) after such appearance before the Board, the Board of Directors shall have duly adopted by a majority of the Directors of the Company then in office, and shall have provided to the Executive a certified resolution finding that in the good faith opinion of such Directors the Executive was guilty of conduct constituting Cause, as set forth above, and specifying the particulars thereof in detail; and (z) the Executive shall have failed to cure or remedy the event constituting Cause within 30 days after the Executive's receipt of such certified resolution from the Board of Directors. (b) Disability. "Disability" shall mean a physical or mental incapacity as a result of which the Executive becomes unable to continue the proper performance of his duties hereunder (reasonable absences because of sickness for up to three (3) consecutive months excepted). A determination of Disability shall be subject to the certification of a qualified medical doctor agreed to by the Company and the Executive or, in the event of the Executive's incapacity to designate a doctor, the Executive's legal representative. In the absence of 5 6 agreement between the Company and the Executive, each party shall nominate a qualified medical doctor and the two doctors so nominated shall select a third doctor, who shall make the determination as to Disability. (c) Good Reason. "Good Reason" shall mean each of the following: (i) the failure of the Company to vest the Executive, without the Executive's consent, with the powers and authority of the Executive's office or position of employment as contemplated herein, or any removal of the Executive from or failure to re-elect the Executive, without the Executive's consent, to a position of employment consistent with the position and status of Executive as set forth herein; (ii) a reduction by the Company, without the Executive's consent, in the Executive's annual base salary as it may exist from time to time; (iii) a failure by the Company, without the Executive's consent, to continue any Company Benefit Plans in which the Executive presently is entitled to participate, as the same may be modified from time to time; (iv) a failure, without the Executive's consent, by the Company to continue the Executive as a participant in any Company Benefit Plans on at least the same basis as he presently participates in such plans; (v) the requirement by the Company, without Executive's consent, that the Executive be based anywhere other than within 50 miles of the Executive's present office location, except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (vi) a failure by the Company to comply with any material provisions of this Agreement which has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company, or if such failure is not capable of being cured in such time, a cure shall not have been diligently initiated by the Company within such thirty-day period; or (vii) a failure by the Company to obtain from any successor, before the succession takes place, an agreement to assume and perform this Agreement; provided, however, that any of the foregoing actions shall not be considered to be Good Reason if such action is undertaken by the Company for Cause. 4.2 Termination by Company. The Executive's employment hereunder may be terminated by the Company immediately for Cause. Subject to the other provisions contained in this Agreement, the Company may terminate this Agreement for any reason other than Cause upon thirty (30) days' written notice to Executive. The effective date of termination ("Effective Date") shall be considered to be thirty (30) days subsequent to written notice of termination; however, the Company may elect to have Executive leave the Company immediately. 4.3 Severance Benefits Received Upon Termination. (a) If (i) at any time the Executive's employment is terminated by the Company for Cause, or (ii) at any time the Executive's employment is terminated by the Executive without Good Reason, the Company shall pay the Executive his base salary 6 7 through the end of the month during which such termination occurs (or at the Executive's election, the rate in effect on the first day of the month preceding the month in which the date of termination occurs) plus credit for any accrued vacation and the Company shall thereafter have no further obligations under this Agreement to the Executive or his or her dependents, beneficiaries or estate; provided, however, that the Company will continue to honor any obligations that may have been accrued under then existing Company Benefit Plans or any other agreements or arrangements applicable to the Executive. (b) If (i) at any time the Executive's employment is terminated by the Company without Cause, or (ii) at any time the Executive's employment is terminated by the Executive for Good Reason, then the Company shall: (1) pay to the Executive within four business days following the date of termination his monthly base salary in effect on the date of the termination through the end of the month during which such termination occurs, plus payment for any vacation earned but not taken; and (2) pay to the Executive as severance pay in a lump sum, in cash, within seven business days following the date of termination, an amount equal to (i) the Executive's monthly base salary in effect on the date of termination, multiplied by (ii) thirty-five (35) months; provided, however, that if the lump sum severance payment under this Section 4.3(b)(2), either alone or together with other payments which the Executive has the right to receive from the Company, would constitute a "excess parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Article III being subject to the excise tax imposed by Section 4999 of the Code. The determination of any reduction in the lump sum severance payment under this Section 4.3(b)(2) pursuant to the foregoing proviso shall be made by the Company's independent auditors in good faith and such determination shall be conclusive and binding on the Executive and the Company; (3) pay to the Executive a sum equal to (i) one-twelfth of the Executive's annual compensation bonus for the entirety of the year in which the termination occurs, multiplied by (ii) the number of months or portion thereof the Executive was employed by the Company during the year in which the termination occurs. The Company shall make such incentive compensation bonus payment to the Executive concurrently with its payment of bonuses to other executives of the Company; and (4) maintain, at the Company's expense, in full force and effect, for the Executive's continued benefit until the earlier of (i) two years after the date of termination or (ii) the Executive's commencement of full time employment with 7 8 a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which the Executive was entitled to participate immediately prior to the date of termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans or programs. Subsequent health insurance benefits will be in accordance with COBRA. 4.4 No Obligation to Mitigate Damages; No Effect on Other Contractual Rights. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination, or otherwise (except as provided in Section 4.3(b)(3)). (b) The provisions of this Agreement, and any payment or benefit provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any Company Benefit Plan, employment agreement or other contract, plan or arrangement. ARTICLE V ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY 5.1 Assumption of Obligations. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Article V or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement the Executive is employed by any corporation a majority of the voting securities of which is then owned by the Company, "Company" as used in this Agreement shall in addition include 8 9 such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to the Executive pursuant to this Agreement. 5.2 Beneficial Interests. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him or her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. ARTICLE VI GENERAL PROVISIONS 6.1 Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 Attn: Frederick Judd If to the Executive: Mr. Alex Razm'joo 12 Salzburg Newport Beach, CA 92660 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.2 No Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 6.4 Severability or Partial Invalidity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any 9 10 other provision of this Agreement, which shall remain in full force and effect. 6.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 6.6 Legal Fees and Expenses. Should any party institute any action or proceeding to enforce this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with such action or proceeding. 6.7 Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the parties with respect to the subject matter hereof. This Agreement is intended by the parties as the final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence may be introduced in any judicial proceeding involving this Agreement. 6.8 Assignment. Subject to the provisions of Article V hereof, this Agreement and the rights, duties, and obligations hereunder may not assigned or delegated by any party without the prior written consent of the other party. Notwithstanding the foregoing provisions of this Section 6.8, the Company may assign or delegate its rights, duties, and obligations hereunder to any person or entity which succeeds to all or substantially all of the business of the Company through merger, consolidation, reorganization, or other business combination or by acquisition of all or substantially all of the assets of the Company; provided that such person assumes the Company's obligations under this Agreement in accordance with Section 5.1. 6.9 Arbitration. Any controversy, dispute, claim or other matter in question arising out of or relating to this Agreement shall be settled, at the request of either party, by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), and judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof, subject to the following terms, conditions and exceptions: 10 11 (a) Notice of the demand for arbitration shall be filed in writing with the other party and with the AAA. There shall be a panel of three (3) arbitrators whose selection shall be made in accordance with the procedures then existing for the selection of such arbitrators by the AAA. (b) Reasonable discovery shall be allowed in arbitration. (c) The costs and fees of the arbitration shall be allocated by the arbitrators. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PROCOM TECHNOLOGY, INC., a California corporation By: ALEX AYDIN ---------------------------- Its: Executive Vice President, Finance and Administration --------------------------- EXECUTIVE /s/ ALEX RAZMJOO ------------------------------- Alex Razmjoo 11 12 EXHIBIT A ANNUAL INCENTIVE COMPENSATION BONUS As set forth in Section 2.1 of the Agreement, the Executive shall receive from the Company an annual incentive compensation bonus which shall be part of the Executive's Annual Salary. The amount of the annual incentive compensation bonus will be determined by the Board of Directors (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists). The amount of the Executive's annual incentive bonus shall be based upon attainment by the Company of mutually agreed upon financial objectives. Accordingly, if all of the mutually agreed-upon financial objectives are attained, the Executive will receive an annual incentive compensation bonus equal to a percentage of the Executive's base salary during the applicable fiscal year. Should the Company not attain all of the relevant financial objectives, the Board of Directors shall use its discretion (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists) in determining the amount of the Executive's annual incentive compensation bonus. The annual incentive compensation bonus calculation shall be made promptly after preparation of the Company's audited financial statements are completed following each of the Company's fiscal years. The Company agrees to use its best efforts to complete the audit of its financial statements so as to permit payment of this annual incentive compensation bonus within ninety (90) days of the Company's fiscal year end. A-1 EX-10.4 9 AMENDED & RESTATED EXECUTIVE EMPLOYMENT AGREEMENT 1 Exhibit 10.4 AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT This Amended and Restated Executive Employment Agreement ("Agreement") is dated as of October 28, 1996, between Procom Technology, Inc., a California corporation (the "Company"), and Frank Alaghband (the "Executive"). WITNESSETH: WHEREAS, the Company believes that the Executive is a valued employee of the Company and wishes to ensure his continued employment with the Company and document the terms of the Executive's employment by the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to reinforce and encourage the continued attention and dedication of certain key members of the Company's management, including the Executive, to their assigned duties without distraction in uncertain circumstances arising from the possibility of a change in control of the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to minimize the personal considerations of certain key members of management in their evaluation of any potential change in control of the Company. WHEREAS, the Company has determined that the loss of the Executive's services would have a detrimental effect on the implementation of a change in control of the Company (in the event the Company determines to effect such a change in control of the Company). NOW, THEREFORE, taking into account the foregoing and in consideration of the mutual promises and conditions contained herein, the parties hereto agree as follows: ARTICLE I EMPLOYMENT 1.1 Employment. The Company employs the Executive and the Executive hereby accepts employment as the Executive Vice President, Operations of the Company upon the terms and conditions hereinafter set forth. 2 1.2 Term. The employment of the Executive by the Company under the terms and conditions of this Agreement will commence on the date hereof and continue for a period of three (3) years ("Employment Term"). Commencing on the first anniversary of the date hereof, the Employment Term shall be extended on a daily basis such that the remaining term shall at all times be three (3) full years. 1.3 Executive Duties. As the Company's Executive Vice President, Operations, the Executive shall perform such duties as are requested by and shall report directly to the Company's Board of Directors. The Executive agrees to devote his full business time (with allowances for vacations and sick leave) and attention and best efforts to the affairs of the Company and its subsidiaries and affiliates during the Employment Term. ARTICLE II COMPENSATION AND BENEFITS 2.1 Annual Salary. During the Employment Term, the Company shall pay to the Executive a base salary at the initial rate of not less than Two Hundred Twenty-Five Thousand ($225,000) per year, payable in substantially equal semimonthly installments. The Company will review annually and may, in the discretion of the Board of Directors, increase such base salary in light of the Executive's performance, inflation in cost of living or other factors. The Company also shall pay to the Executive an annual incentive compensation bonus to be calculated and paid as set forth on Exhibit A. For purposes of this Agreement, the Executive's annual base salary and annual incentive compensation bonus collectively shall be referred to herein as his "Annual Salary." 2.2 Benefits. During the Employment Term, the Executive shall be eligible for participation in and covered by any and all such performance, bonus, profit sharing, incentive, stock option, and other compensation plans and such medical, dental, disability, life, and other insurance plans and such other benefits generally available to other employees of the Company in similar employment positions, on the same terms as such employees, subject to meeting applicable eligibility requirements (collectively referred to herein as the "Company Benefit Plans"). 2.2.1 The Company shall maintain for the Executive during the term of this Agreement a life insurance policy of not less than One Million Dollars ($1,000,000). In addition, the Company shall provide to the Executive a One Thousand Dollar ($1,000) annual tax preparation allowance. 2.3 Reimbursement of Expenses. The Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred by the Executive in performing services hereunder, including all expenses of travel, entertainment and 2 3 living expenses while away from home on business at the request of, or in the service of, the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. 2.4 Automobile Allowance. The Company shall provide the Executive with an automobile allowance in the amount of Seven Hundred Fifty Dollars ($750) per month as reimbursement to the Executive of costs and expenses incurred by the Executive for the purchase or lease and maintenance and operation of an automobile for use by the Executive in the performance of the Executive's duties hereunder. Such automobile allowance shall be paid in substantially equal semi-monthly installments. 2.5 Vacation and Holidays. The Executive shall be entitled to an annual vacation leave of four (4) weeks at full pay or such greater vacation benefits as may be provided for by the Company's vacation policies applicable to senior executives of the Company. Any unused vacation time may be accumulated and carried over from one year to the next; provided, however, if any vacation time would otherwise be carried over for a second year, the Executive may, at his option, elect not to have such vacation time carried over but may instead request the Company to compensate the Executive for such vacation time by paying the Executive for such time at the Executive's then current base salary rate. Except to the extent that accumulated vacation time is paid off by the Company as described above, none of the accumulated vacation time will be lost for any reason. Executive shall be entitled to such holidays as are established by the Company for all employees. ARTICLE III CONFIDENTIALITY AND NONDISCLOSURE 3.1 Confidentiality. Executive will not during Executive's employment by the Company or thereafter at any time disclose, directly or indirectly, to any person or entity or use for Executive's own benefit any trade secrets or confidential information relating to the Company's business, operations, marketing data, business plans, strategies, employees, negotiations and contracts with other companies, or any other subject matter pertaining to the business of the Company or any of its clients, customers, consultants, or licensees, known, learned, or acquired by Executive during the period of Executive's employment by the Company (collectively "Confidential Information"), except as may be necessary in the ordinary course of performing Executive's particular duties as an employee of the Company. 3.2 Return of Confidential Material. Executive shall promptly deliver to the Company on termination of Executive's employment with the Company, whether or not for Cause and whatever the reason, or at any time the Company may so request, 3 4 all memoranda, notes, records, reports, manuals, drawings, blueprints, Confidential Information and any other documents of a confidential nature belonging to the Company, including all copies of such materials which Executive may then possess or have under Executive's control. Upon termination of Executive's employment by the Company, Executive shall not take any document, data, or other material of any nature containing or pertaining to the proprietary information of the Company. 3.3 Prohibition on Solicitation of Customers. During the term of Executive's employment with the Company, and for a period of two (2) years thereafter, Executive shall not, directly or indirectly, either for Executive or for any other person or entity, solicit any person or entity to terminate such person's or entity's contractual and/or business relationship with the Company, nor shall Executive interfere with or disrupt or attempt to interfere with or disrupt any such relationship. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.4 Prohibition on Solicitation of Employees, Agents or Independent Contractors After Termination. During the term of Executive's employment with the Company and for a period of two (2) years following the termination of Executive's employment with the Company, Executive will not solicit any of the employees, agents, or independent contractors of the Company to leave the employ of the Company for a competitive company or business. However, Executive may solicit any employee, agent or independent contractor who voluntarily terminates his or her employment with the Company after a period of 120 days have elapsed since the termination date of such employee, agent or independent contractor. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.5 Right to Injunctive and Equitable Relief. Executive's obligations not to disclose or use Confidential Information and to refrain from the solicitations described in this Article III are of a special and unique character which gives them a peculiar value. The Company cannot be reasonably or adequately compensated for damages in an action at law in the event Executive breaches such obligations. Therefore, Executive expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond or other security in the event of such breach in addition to any other rights or remedies which the Company may possess or be entitled to pursue. Furthermore, the obligations of Executive and the rights and remedies of the Company under this Article III are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies created by applicable law relating to misappropriation or theft of trade secrets or Confidential Information. 3.6 Survival of Obligations. Executive agrees that the terms of this Article III shall survive the term of this 4 5 Agreement and the termination of Executive's employment by the Company. ARTICLE IV TERMINATION 4.1 Definitions. For purposes of this Article IV, the following definitions shall be applicable to the terms set forth below: (a) Cause. "Cause" shall mean only the following: (i) the Executive's death or Disability; (ii) the willful and continued failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his or her duties; (iii) willful misconduct by the Executive which is materially injurious to the Company; (iv) conviction of a felony under the laws of the State of California; (v) habitual drunkenness by the Executive; or (vi) a willful, material breach of this Agreement by the Executive. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive in bad faith and without a reasonable belief that such action or omission by the Executive was in the best interests of the Company. Notwithstanding anything to the contrary in the foregoing, no termination or other action shall be considered to be for Cause under this Agreement unless (x) the Executive first shall have received at least 30 days written notice setting forth the reasons for the Company's intention to terminate or take other action and shall have been provided an opportunity to appear, accompanied by counsel, and be heard before the Board of Directors; (y) after such appearance before the Board, the Board of Directors shall have duly adopted by a majority of the Directors of the Company then in office, and shall have provided to the Executive a certified resolution finding that in the good faith opinion of such Directors the Executive was guilty of conduct constituting Cause, as set forth above, and specifying the particulars thereof in detail; and (z) the Executive shall have failed to cure or remedy the event constituting Cause within 30 days after the Executive's receipt of such certified resolution from the Board of Directors. (b) Disability. "Disability" shall mean a physical or mental incapacity as a result of which the Executive becomes unable to continue the proper performance of his duties hereunder (reasonable absences because of sickness for up to three (3) consecutive months excepted). A determination of Disability shall be subject to the certification of a qualified medical doctor agreed to by the Company and the Executive or, in the event of the Executive's incapacity to designate a doctor, the Executive's legal representative. In the absence of 5 6 agreement between the Company and the Executive, each party shall nominate a qualified medical doctor and the two doctors so nominated shall select a third doctor, who shall make the determination as to Disability. (c) Good Reason. "Good Reason" shall mean each of the following: (i) the failure of the Company to vest the Executive, without the Executive's consent, with the powers and authority of the Executive's office or position of employment as contemplated herein, or any removal of the Executive from or failure to re-elect the Executive, without the Executive's consent, to a position of employment consistent with the position and status of Executive as set forth herein; (ii) a reduction by the Company, without the Executive's consent, in the Executive's annual base salary as it may exist from time to time; (iii) a failure by the Company, without the Executive's consent, to continue any Company Benefit Plans in which the Executive presently is entitled to participate, as the same may be modified from time to time; (iv) a failure, without the Executive's consent, by the Company to continue the Executive as a participant in any Company Benefit Plans on at least the same basis as he presently participates in such plans; (v) the requirement by the Company, without Executive's consent, that the Executive be based anywhere other than within 50 miles of the Executive's present office location, except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (vi) a failure by the Company to comply with any material provisions of this Agreement which has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company, or if such failure is not capable of being cured in such time, a cure shall not have been diligently initiated by the Company within such thirty-day period; or (vii) a failure by the Company to obtain from any successor, before the succession takes place, an agreement to assume and perform this Agreement; provided, however, that any of the foregoing actions shall not be considered to be Good Reason if such action is undertaken by the Company for Cause. 4.2 Termination by Company. The Executive's employment hereunder may be terminated by the Company immediately for Cause. Subject to the other provisions contained in this Agreement, the Company may terminate this Agreement for any reason other than Cause upon thirty (30) days' written notice to Executive. The effective date of termination ("Effective Date") shall be considered to be thirty (30) days subsequent to written notice of termination; however, the Company may elect to have Executive leave the Company immediately. 4.3 Severance Benefits Received Upon Termination. (a) If (i) at any time the Executive's employment is terminated by the Company for Cause, or (ii) at any time the Executive's employment is terminated by the Executive without Good Reason, the Company shall pay the Executive his base salary 6 7 through the end of the month during which such termination occurs (or at the Executive's election, the rate in effect on the first day of the month preceding the month in which the date of termination occurs) plus credit for any accrued vacation and the Company shall thereafter have no further obligations under this Agreement to the Executive or his or her dependents, beneficiaries or estate; provided, however, that the Company will continue to honor any obligations that may have been accrued under then existing Company Benefit Plans or any other agreements or arrangements applicable to the Executive. (b) If (i) at any time the Executive's employment is terminated by the Company without Cause, or (ii) at any time the Executive's employment is terminated by the Executive for Good Reason, then the Company shall: (1) pay to the Executive within four business days following the date of termination his monthly base salary in effect on the date of the termination through the end of the month during which such termination occurs, plus payment for any vacation earned but not taken; and (2) pay to the Executive as severance pay in a lump sum, in cash, within seven business days following the date of termination, an amount equal to (i) the Executive's monthly base salary in effect on the date of termination, multiplied by (ii) thirty-five (35) months; provided, however, that if the lump sum severance payment under this Section 4.3(b)(2), either alone or together with other payments which the Executive has the right to receive from the Company, would constitute a "excess parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Article III being subject to the excise tax imposed by Section 4999 of the Code. The determination of any reduction in the lump sum severance payment under this Section 4.3(b)(2) pursuant to the foregoing proviso shall be made by the Company's independent auditors in good faith and such determination shall be conclusive and binding on the Executive and the Company; (3) pay to the Executive a sum equal to (i) one-twelfth of the Executive's annual compensation bonus for the entirety of the year in which the termination occurs, multiplied by (ii) the number of months or portion thereof the Executive was employed by the Company during the year in which the termination occurs. The Company shall make such incentive compensation bonus payment to the Executive concurrently with its payment of bonuses to other executives of the Company; and (4) maintain, at the Company's expense, in full force and effect, for the Executive's continued benefit until the earlier of (i) two years after the date of termination or (ii) the Executive's commencement of full time employment with 7 8 a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which the Executive was entitled to participate immediately prior to the date of termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans or programs. Subsequent health insurance benefits will be in accordance with COBRA. 4.4 No Obligation to Mitigate Damages; No Effect on Other Contractual Rights. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination, or otherwise (except as provided in Section 4.3(b)(3)). (b) The provisions of this Agreement, and any payment or benefit provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any Company Benefit Plan, employment agreement or other contract, plan or arrangement. ARTICLE V ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY 5.1 Assumption of Obligations. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Article V or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement the Executive is employed by any corporation a majority of the voting securities of which is then owned by the Company, "Company" as used in this Agreement shall in addition include 8 9 such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to the Executive pursuant to this Agreement. 5.2 Beneficial Interests. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him or her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. ARTICLE VI GENERAL PROVISIONS 6.1 Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 Attn: Frederick Judd If to the Executive: Mr. Frank Alaghband 2807 Harborview Drive Corona Del Mar, CA 92625 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.2 No Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 6.4 Severability or Partial Invalidity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any 9 10 other provision of this Agreement, which shall remain in full force and effect. 6.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 6.6 Legal Fees and Expenses. Should any party institute any action or proceeding to enforce this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with such action or proceeding. 6.7 Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the parties with respect to the subject matter hereof. This Agreement is intended by the parties as the final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence may be introduced in any judicial proceeding involving this Agreement. 6.8 Assignment. Subject to the provisions of Article V hereof, this Agreement and the rights, duties, and obligations hereunder may not assigned or delegated by any party without the prior written consent of the other party. Notwithstanding the foregoing provisions of this Section 6.8, the Company may assign or delegate its rights, duties, and obligations hereunder to any person or entity which succeeds to all or substantially all of the business of the Company through merger, consolidation, reorganization, or other business combination or by acquisition of all or substantially all of the assets of the Company; provided that such person assumes the Company's obligations under this Agreement in accordance with Section 5.1. 6.9 Arbitration. Any controversy, dispute, claim or other matter in question arising out of or relating to this Agreement shall be settled, at the request of either party, by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), and judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof, subject to the following terms, conditions and exceptions: 10 11 (a) Notice of the demand for arbitration shall be filed in writing with the other party and with the AAA. There shall be a panel of three (3) arbitrators whose selection shall be made in accordance with the procedures then existing for the selection of such arbitrators by the AAA. (b) Reasonable discovery shall be allowed in arbitration. (c) The costs and fees of the arbitration shall be allocated by the arbitrators. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PROCOM TECHNOLOGY, INC., a California corporation By: ALEX RAZMJOO --------------------------- Its: President and Chief Executive Officer -------------------------- EXECUTIVE /s/ FRANK ALAGHBAND ------------------------------ Frank Alaghband 11 12 EXHIBIT A ANNUAL INCENTIVE COMPENSATION BONUS As set forth in Section 2.1 of the Agreement, the Executive shall receive from the Company an annual incentive compensation bonus which shall be part of the Executive's Annual Salary. The amount of the annual incentive compensation bonus will be determined by the Board of Directors (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists). The amount of the Executive's annual incentive bonus shall be based upon attainment by the Company of mutually agreed upon financial objectives. Accordingly, if all of the mutually agreed-upon financial objectives are attained, the Executive will receive an annual incentive compensation bonus equal to a percentage of the Executive's base salary during the applicable fiscal year. Should the Company not attain all of the relevant financial objectives, the Board of Directors shall use its discretion (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists) in determining the amount of the Executive's annual incentive compensation bonus. The annual incentive compensation bonus calculation shall be made promptly after preparation of the Company's audited financial statements are completed following each of the Company's fiscal years. The Company agrees to use its best efforts to complete the audit of its financial statements so as to permit payment of this annual incentive compensation bonus within ninety (90) days of the Company's fiscal year end. A-1 EX-10.5 10 AMENDED & RESTATED EXECUTIVE EMPLOYMENT AGREEMENT 1 Exhibit 10.5 AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT This Amended and Restated Executive Employment Agreement ("Agreement") is dated as of October 28, 1996, between Procom Technology, Inc., a California corporation (the "Company"), and Alex Aydin (the "Executive"). WITNESSETH: WHEREAS, the Company believes that the Executive is a valued employee of the Company and wishes to ensure his continued employment with the Company and document the terms of the Executive's employment by the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to reinforce and encourage the continued attention and dedication of certain key members of the Company's management, including the Executive, to their assigned duties without distraction in uncertain circumstances arising from the possibility of a change in control of the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to minimize the personal considerations of certain key members of management in their evaluation of any potential change in control of the Company. WHEREAS, the Company has determined that the loss of the Executive's services would have a detrimental effect on the implementation of a change in control of the Company (in the event the Company determines to effect such a change in control of the Company). NOW, THEREFORE, taking into account the foregoing and in consideration of the mutual promises and conditions contained herein, the parties hereto agree as follows: ARTICLE I EMPLOYMENT 1.1 Employment. The Company employs the Executive and the Executive hereby accepts employment as the Executive Vice President, Finance of the Company upon the terms and conditions hereinafter set forth. 2 1.2 Term. The employment of the Executive by the Company under the terms and conditions of this Agreement will commence on the date hereof and continue for a period of three (3) years ("Employment Term"). Commencing on the first anniversary of the date hereof, the Employment Term shall be extended on a daily basis such that the remaining term shall at all times be three (3) full years. 1.3 Executive Duties. As the Company's Executive Vice President, Finance, Executive shall perform such duties as are requested by and shall report directly to the Company's Board of Directors. The Executive agrees to devote his full business time (with allowances for vacations and sick leave) and attention and best efforts to the affairs of the Company and its subsidiaries and affiliates during the Employment Term. ARTICLE II COMPENSATION AND BENEFITS 2.1 Annual Salary. During the Employment Term, the Company shall pay to the Executive a base salary at the initial rate of not less than Two Hundred Twenty-Five Thousand ($225,000) per year, payable in substantially equal semimonthly installments. The Company will review annually and may, in the discretion of the Board of Directors, increase such base salary in light of the Executive's performance, inflation in cost of living or other factors. The Company also shall pay to the Executive an annual incentive compensation bonus to be calculated and paid as set forth on Exhibit A. For purposes of this Agreement, the Executive's annual base salary and annual incentive compensation bonus collectively shall be referred to herein as his "Annual Salary." 2.2 Benefits. During the Employment Term, the Executive shall be eligible for participation in and covered by any and all such performance, bonus, profit sharing, incentive, stock option, and other compensation plans and such medical, dental, disability, life, and other insurance plans and such other benefits generally available to other employees of the Company in similar employment positions, on the same terms as such employees, subject to meeting applicable eligibility requirements (collectively referred to herein as the "Company Benefit Plans"). 2.2.1 The Company shall maintain for the Executive during the term of this Agreement a life insurance policy of not less than One Million Dollars ($1,000,000). In addition, the Company shall provide to the Executive a One Thousand Dollar ($1,000) annual tax preparation allowance. 2.3 Reimbursement of Expenses. The Executive shall be entitled to receive prompt reimbursement of all reasonable 2 3 expenses incurred by the Executive in performing services hereunder, including all expenses of travel, entertainment and living expenses while away from home on business at the request of, or in the service of, the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. 2.4 Automobile Allowance. The Company shall provide the Executive with an automobile allowance in the amount of Seven Hundred Fifty Dollars ($750) per month as reimbursement to the Executive of costs and expenses incurred by the Executive for the purchase or lease and maintenance and operation of an automobile for use by the Executive in the performance of the Executive's duties hereunder. Such automobile allowance shall be paid in substantially equal semi-monthly installments. 2.5 Vacation and Holidays. The Executive shall be entitled to an annual vacation leave of four (4) weeks at full pay or such greater vacation benefits as may be provided for by the Company's vacation policies applicable to senior executives of the Company. Any unused vacation time may be accumulated and carried over from one year to the next; provided, however, if any vacation time would otherwise be carried over for a second year, the Executive may, at his option, elect not to have such vacation time carried over but may instead request the Company to compensate the Executive for such vacation time by paying the Executive for such time at the Executive's then current base salary rate. Except to the extent that accumulated vacation time is paid off by the Company as described above, none of the accumulated vacation time will be lost for any reason. Executive shall be entitled to such holidays as are established by the Company for all employees. ARTICLE III CONFIDENTIALITY AND NONDISCLOSURE 3.1 Confidentiality. Executive will not during Executive's employment by the Company or thereafter at any time disclose, directly or indirectly, to any person or entity or use for Executive's own benefit any trade secrets or confidential information relating to the Company's business, operations, marketing data, business plans, strategies, employees, negotiations and contracts with other companies, or any other subject matter pertaining to the business of the Company or any of its clients, customers, consultants, or licensees, known, learned, or acquired by Executive during the period of Executive's employment by the Company (collectively "Confidential Information"), except as may be necessary in the ordinary course of performing Executive's particular duties as an employee of the Company. 3 4 3.2 Return of Confidential Material. Executive shall promptly deliver to the Company on termination of Executive's employment with the Company, whether or not for Cause and whatever the reason, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints, Confidential Information and any other documents of a confidential nature belonging to the Company, including all copies of such materials which Executive may then possess or have under Executive's control. Upon termination of Executive's employment by the Company, Executive shall not take any document, data, or other material of any nature containing or pertaining to the proprietary information of the Company. 3.3 Prohibition on Solicitation of Customers. During the term of Executive's employment with the Company, and for a period of two (2) years thereafter, Executive shall not, directly or indirectly, either for Executive or for any other person or entity, solicit any person or entity to terminate such person's or entity's contractual and/or business relationship with the Company, nor shall Executive interfere with or disrupt or attempt to interfere with or disrupt any such relationship. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.4 Prohibition on Solicitation of Employees, Agents or Independent Contractors After Termination. During the term of Executive's employment with the Company and for a period of two (2) years following the termination of Executive's employment with the Company, Executive will not solicit any of the employees, agents, or independent contractors of the Company to leave the employ of the Company for a competitive company or business. However, Executive may solicit any employee, agent or independent contractor who voluntarily terminates his or her employment with the Company after a period of 120 days have elapsed since the termination date of such employee, agent or independent contractor. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.5 Right to Injunctive and Equitable Relief. Executive's obligations not to disclose or use Confidential Information and to refrain from the solicitations described in this Article III are of a special and unique character which gives them a peculiar value. The Company cannot be reasonably or adequately compensated for damages in an action at law in the event Executive breaches such obligations. Therefore, Executive expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond or other security in the event of such breach in addition to any other rights or remedies which the Company may possess or be entitled to pursue. Furthermore, the obligations of Executive and the rights and remedies of the Company under this Article III are cumulative and in addition to, and not in lieu of, any obligations, rights, or 4 5 remedies created by applicable law relating to misappropriation or theft of trade secrets or Confidential Information. 3.6 Survival of Obligations. Executive agrees that the terms of this Article III shall survive the term of this Agreement and the termination of Executive's employment by the Company. ARTICLE IV TERMINATION 4.1 Definitions. For purposes of this Article IV, the following definitions shall be applicable to the terms set forth below: (a) Cause. "Cause" shall mean only the following: (i) the Executive's death or Disability; (ii) the willful and continued failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his or her duties; (iii) willful misconduct by the Executive which is materially injurious to the Company; (iv) conviction of a felony under the laws of the State of California; (v) habitual drunkenness by the Executive; or (vi) a willful, material breach of this Agreement by the Executive. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive in bad faith and without a reasonable belief that such action or omission by the Executive was in the best interests of the Company. Notwithstanding anything to the contrary in the foregoing, no termination or other action shall be considered to be for Cause under this Agreement unless (x) the Executive first shall have received at least 30 days written notice setting forth the reasons for the Company's intention to terminate or take other action and shall have been provided an opportunity to appear, accompanied by counsel, and be heard before the Board of Directors; (y) after such appearance before the Board, the Board of Directors shall have duly adopted by a majority of the Directors of the Company then in office, and shall have provided to the Executive a certified resolution finding that in the good faith opinion of such Directors the Executive was guilty of conduct constituting Cause, as set forth above, and specifying the particulars thereof in detail; and (z) the Executive shall have failed to cure or remedy the event constituting Cause within 30 days after the Executive's receipt of such certified resolution from the Board of Directors. (b) Disability. "Disability" shall mean a physical or mental incapacity as a result of which the Executive 5 6 becomes unable to continue the proper performance of his duties hereunder (reasonable absences because of sickness for up to three (3) consecutive months excepted). A determination of Disability shall be subject to the certification of a qualified medical doctor agreed to by the Company and the Executive or, in the event of the Executive's incapacity to designate a doctor, the Executive's legal representative. In the absence of agreement between the Company and the Executive, each party shall nominate a qualified medical doctor and the two doctors so nominated shall select a third doctor, who shall make the determination as to Disability. (c) Good Reason. "Good Reason" shall mean each of the following: (i) the failure of the Company to vest the Executive, without the Executive's consent, with the powers and authority of the Executive's office or position of employment as contemplated herein, or any removal of the Executive from or failure to re-elect the Executive, without the Executive's consent, to a position of employment consistent with the position and status of Executive as set forth herein; (ii) a reduction by the Company, without the Executive's consent, in the Executive's annual base salary as it may exist from time to time; (iii) a failure by the Company, without the Executive's consent, to continue any Company Benefit Plans in which the Executive presently is entitled to participate, as the same may be modified from time to time; (iv) a failure, without the Executive's consent, by the Company to continue the Executive as a participant in any Company Benefit Plans on at least the same basis as he presently participates in such plans; (v) the requirement by the Company, without Executive's consent, that the Executive be based anywhere other than within 50 miles of the Executive's present office location, except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (vi) a failure by the Company to comply with any material provisions of this Agreement which has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company, or if such failure is not capable of being cured in such time, a cure shall not have been diligently initiated by the Company within such thirty-day period; or (vii) a failure by the Company to obtain from any successor, before the succession takes place, an agreement to assume and perform this Agreement; provided, however, that any of the foregoing actions shall not be considered to be Good Reason if such action is undertaken by the Company for Cause. 4.2 Termination by Company. The Executive's employment hereunder may be terminated by the Company immediately for Cause. Subject to the other provisions contained in this Agreement, the Company may terminate this Agreement for any reason other than Cause upon thirty (30) days' written notice to Executive. The effective date of termination ("Effective Date") shall be considered to be thirty (30) days subsequent to written 6 7 notice of termination; however, the Company may elect to have Executive leave the Company immediately. 4.3 Severance Benefits Received Upon Termination. (a) If (i) at any time the Executive's employment is terminated by the Company for Cause, or (ii) at any time the Executive's employment is terminated by the Executive without Good Reason, the Company shall pay the Executive his base salary through the end of the month during which such termination occurs (or at the Executive's election, the rate in effect on the first day of the month preceding the month in which the date of termination occurs) plus credit for any accrued vacation and the Company shall thereafter have no further obligations under this Agreement to the Executive or his or her dependents, beneficiaries or estate; provided, however, that the Company will continue to honor any obligations that may have been accrued under then existing Company Benefit Plans or any other agreements or arrangements applicable to the Executive. (b) If (i) at any time the Executive's employment is terminated by the Company without Cause, or (ii) at any time the Executive's employment is terminated by the Executive for Good Reason, then the Company shall: (1) pay to the Executive within four business days following the date of termination his monthly base salary in effect on the date of the termination through the end of the month during which such termination occurs, plus payment for any vacation earned but not taken; and (2) pay to the Executive as severance pay in a lump sum, in cash, within seven business days following the date of termination, an amount equal to (i) the Executive's monthly base salary in effect on the date of termination, multiplied by (ii) thirty-five (35) months; provided, however, that if the lump sum severance payment under this Section 4.3(b)(2), either alone or together with other payments which the Executive has the right to receive from the Company, would constitute a "excess parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Article III being subject to the excise tax imposed by Section 4999 of the Code. The determination of any reduction in the lump sum severance payment under this Section 4.3(b)(2) pursuant to the foregoing proviso shall be made by the Company's independent auditors in good faith and such determination shall be conclusive and binding on the Executive and the Company; (3) pay to the Executive a sum equal to (i) one-twelfth of the Executive's annual compensation bonus for the 7 8 entirety of the year in which the termination occurs, multiplied by (ii) the number of months or portion thereof the Executive was employed by the Company during the year in which the termination occurs. The Company shall make such incentive compensation bonus payment to the Executive concurrently with its payment of bonuses to other executives of the Company; and (4) maintain, at the Company's expense, in full force and effect, for the Executive's continued benefit until the earlier of (i) two years after the date of termination or (ii) the Executive's commencement of full time employment with a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which the Executive was entitled to participate immediately prior to the date of termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans or programs. Subsequent health insurance benefits will be in accordance with COBRA. 4.4 No Obligation to Mitigate Damages; No Effect on Other Contractual Rights. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination, or otherwise (except as provided in Section 4.3(b)(3)). (b) The provisions of this Agreement, and any payment or benefit provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any Company Benefit Plan, employment agreement or other contract, plan or arrangement. ARTICLE V ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY 5.1 Assumption of Obligations. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the 8 9 Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Article V or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement the Executive is employed by any corporation a majority of the voting securities of which is then owned by the Company, "Company" as used in this Agreement shall in addition include such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to the Executive pursuant to this Agreement. 5.2 Beneficial Interests. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him or her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. ARTICLE VI GENERAL PROVISIONS 6.1 Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 Attn: Frederick Judd If to the Executive: Mr. Alex Aydin 418 Villa Point Newport Beach, CA 92660 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.2 No Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and 9 10 the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 6.4 Severability or Partial Invalidity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 6.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 6.6 Legal Fees and Expenses. Should any party institute any action or proceeding to enforce this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with such action or proceeding. 6.7 Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the parties with respect to the subject matter hereof. This Agreement is intended by the parties as the final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence may be introduced in any judicial proceeding involving this Agreement. 6.8 Assignment. Subject to the provisions of Article V hereof, this Agreement and the rights, duties, and obligations hereunder may not assigned or delegated by any party without the prior written consent of the other party. Notwithstanding the foregoing provisions of this Section 6.8, the Company may assign or delegate its rights, duties, and obligations hereunder to any person or entity which succeeds to all or substantially all of the business of the Company through 10 11 merger, consolidation, reorganization, or other business combination or by acquisition of all or substantially all of the assets of the Company; provided that such person assumes the Company's obligations under this Agreement in accordance with Section 5.1. 6.9 Arbitration. Any controversy, dispute, claim or other matter in question arising out of or relating to this Agreement shall be settled, at the request of either party, by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), and judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof, subject to the following terms, conditions and exceptions: (a) Notice of the demand for arbitration shall be filed in writing with the other party and with the AAA. There shall be a panel of three (3) arbitrators whose selection shall be made in accordance with the procedures then existing for the selection of such arbitrators by the AAA. (b) Reasonable discovery shall be allowed in arbitration. (c) The costs and fees of the arbitration shall be allocated by the arbitrators. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PROCOM TECHNOLOGY, INC., a California corporation By: ALEX RAZMJOO --------------------------- Its: President and Chief Executive Officer -------------------------- EXECUTIVE /s/ ALEX AYDIN ------------------------------ Alex Aydin 11 12 EXHIBIT A ANNUAL INCENTIVE COMPENSATION BONUS As set forth in Section 2.1 of the Agreement, the Executive shall receive from the Company an annual incentive compensation bonus which shall be part of the Executive's Annual Salary. The amount of the annual incentive compensation bonus will be determined by the Board of Directors (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists). The amount of the Executive's annual incentive bonus shall be based upon attainment by the Company of mutually agreed upon financial objectives. Accordingly, if all of the mutually agreed-upon financial objectives are attained, the Executive will receive an annual incentive compensation bonus equal to a percentage of the Executive's base salary during the applicable fiscal year. Should the Company not attain all of the relevant financial objectives, the Board of Directors shall use its discretion (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists) in determining the amount of the Executive's annual incentive compensation bonus. The annual incentive compensation bonus calculation shall be made promptly after preparation of the Company's audited financial statements are completed following each of the Company's fiscal years. The Company agrees to use its best efforts to complete the audit of its financial statements so as to permit payment of this annual incentive compensation bonus within ninety (90) days of the Company's fiscal year end. A-1 EX-10.6 11 AMENDED & RESTATED EXECUTIVE EMPLOYMENT AGREEMENT 1 Exhibit 10.6 AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT This Amended and Restated Executive Employment Agreement ("Agreement") is dated as of October 28, 1996, between Procom Technology, Inc., a California corporation (the "Company"), and Nick Shahrestany (the "Executive"). WITNESSETH: WHEREAS, the Company believes that the Executive is a valued employee of the Company and wishes to ensure his continued employment with the Company and document the terms of the Executive's employment by the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to reinforce and encourage the continued attention and dedication of certain key members of the Company's management, including the Executive, to their assigned duties without distraction in uncertain circumstances arising from the possibility of a change in control of the Company. WHEREAS, the Company also has determined that it is in the best interests of the Company and its shareholders to minimize the personal considerations of certain key members of management in their evaluation of any potential change in control of the Company. WHEREAS, the Company has determined that the loss of the Executive's services would have a detrimental effect on the implementation of a change in control of the Company (in the event the Company determines to effect such a change in control of the Company). NOW, THEREFORE, taking into account the foregoing and in consideration of the mutual promises and conditions contained herein, the parties hereto agree as follows: ARTICLE I EMPLOYMENT 1.1 Employment. The Company employs the Executive and the Executive hereby accepts employment as the Executive Vice President, Sales & Marketing of the Company upon the terms and conditions hereinafter set forth. 2 1.2 Term. The employment of the Executive by the Company under the terms and conditions of this Agreement will commence on the date hereof and continue for a period of three (3) years ("Employment Term"). Commencing on the first anniversary of the date hereof, the Employment Term shall be extended on a daily basis such that the remaining term shall at all times be three (3) full years. 1.3 Executive Duties. As the Company's Executive Vice President, Sales & Marketing, the Executive shall perform such duties as are requested by and shall report directly to the Company's Board of Directors. The Executive agrees to devote his full business time (with allowances for vacations and sick leave) and attention and best efforts to the affairs of the Company and its subsidiaries and affiliates during the Employment Term. ARTICLE II COMPENSATION AND BENEFITS 2.1 Annual Salary. During the Employment Term, the Company shall pay to the Executive a base salary at the initial rate of not less than Two Hundred Twenty-Five Thousand ($225,000) per year, payable in substantially equal semimonthly installments. The Company will review annually and may, in the discretion of the Board of Directors, increase such base salary in light of the Executive's performance, inflation in cost of living or other factors. The Company also shall pay to the Executive an annual incentive compensation bonus to be calculated and paid as set forth on Exhibit A. For purposes of this Agreement, the Executive's annual base salary and annual incentive compensation bonus collectively shall be referred to herein as his "Annual Salary." 2.2 Benefits. During the Employment Term, the Executive shall be eligible for participation in and covered by any and all such performance, bonus, profit sharing, incentive, stock option, and other compensation plans and such medical, dental, disability, life, and other insurance plans and such other benefits generally available to other employees of the Company in similar employment positions, on the same terms as such employees, subject to meeting applicable eligibility requirements (collectively referred to herein as the "Company Benefit Plans"). 2.2.1 The Company shall maintain for the Executive during the term of this Agreement a life insurance policy of not less than One Million Dollars ($1,000,000). In addition, the Company shall provide to the Executive a One Thousand Dollar ($1,000) annual tax preparation allowance. 2.3 Reimbursement of Expenses. The Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred by the Executive in performing services hereunder, including all expenses of travel, entertainment and 2 3 living expenses while away from home on business at the request of, or in the service of, the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. 2.4 Automobile Allowance. The Company shall provide the Executive with an automobile allowance in the amount of Seven Hundred Fifty Dollars ($750) per month as reimbursement to the Executive of costs and expenses incurred by the Executive for the purchase or lease and maintenance and operation of an automobile for use by the Executive in the performance of the Executive's duties hereunder. Such automobile allowance shall be paid in substantially equal semi-monthly installments. 2.5 Vacation and Holidays. The Executive shall be entitled to an annual vacation leave of four (4) weeks at full pay or such greater vacation benefits as may be provided for by the Company's vacation policies applicable to senior executives of the Company. Any unused vacation time may be accumulated and carried over from one year to the next; provided, however, if any vacation time would otherwise be carried over for a second year, the Executive may, at his option, elect not to have such vacation time carried over but may instead request the Company to compensate the Executive for such vacation time by paying the Executive for such time at the Executive's then current base salary rate. Except to the extent that accumulated vacation time is paid off by the Company as described above, none of the accumulated vacation time will be lost for any reason. Executive shall be entitled to such holidays as are established by the Company for all employees. ARTICLE III CONFIDENTIALITY AND NONDISCLOSURE 3.1 Confidentiality. Executive will not during Executive's employment by the Company or thereafter at any time disclose, directly or indirectly, to any person or entity or use for Executive's own benefit any trade secrets or confidential information relating to the Company's business, operations, marketing data, business plans, strategies, employees, negotiations and contracts with other companies, or any other subject matter pertaining to the business of the Company or any of its clients, customers, consultants, or licensees, known, learned, or acquired by Executive during the period of Executive's employment by the Company (collectively "Confidential Information"), except as may be necessary in the ordinary course of performing Executive's particular duties as an employee of the Company. 3.2 Return of Confidential Material. Executive shall promptly deliver to the Company on termination of Executive's employment with the Company, whether or not for Cause and whatever the reason, or at any time the Company may so request, 3 4 all memoranda, notes, records, reports, manuals, drawings, blueprints, Confidential Information and any other documents of a confidential nature belonging to the Company, including all copies of such materials which Executive may then possess or have under Executive's control. Upon termination of Executive's employment by the Company, Executive shall not take any document, data, or other material of any nature containing or pertaining to the proprietary information of the Company. 3.3 Prohibition on Solicitation of Customers. During the term of Executive's employment with the Company, and for a period of two (2) years thereafter, Executive shall not, directly or indirectly, either for Executive or for any other person or entity, solicit any person or entity to terminate such person's or entity's contractual and/or business relationship with the Company, nor shall Executive interfere with or disrupt or attempt to interfere with or disrupt any such relationship. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.4 Prohibition on Solicitation of Employees, Agents or Independent Contractors After Termination. During the term of Executive's employment with the Company and for a period of two (2) years following the termination of Executive's employment with the Company, Executive will not solicit any of the employees, agents, or independent contractors of the Company to leave the employ of the Company for a competitive company or business. However, Executive may solicit any employee, agent or independent contractor who voluntarily terminates his or her employment with the Company after a period of 120 days have elapsed since the termination date of such employee, agent or independent contractor. None of the foregoing shall be deemed a waiver of any and all rights and remedies the Company may have under applicable law. 3.5 Right to Injunctive and Equitable Relief. Executive's obligations not to disclose or use Confidential Information and to refrain from the solicitations described in this Article III are of a special and unique character which gives them a peculiar value. The Company cannot be reasonably or adequately compensated for damages in an action at law in the event Executive breaches such obligations. Therefore, Executive expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond or other security in the event of such breach in addition to any other rights or remedies which the Company may possess or be entitled to pursue. Furthermore, the obligations of Executive and the rights and remedies of the Company under this Article III are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies created by applicable law relating to misappropriation or theft of trade secrets or Confidential Information. 3.6 Survival of Obligations. Executive agrees that the terms of this Article III shall survive the term of this 4 5 Agreement and the termination of Executive's employment by the Company. ARTICLE IV TERMINATION 4.1 Definitions. For purposes of this Article IV, the following definitions shall be applicable to the terms set forth below: (a) Cause. "Cause" shall mean only the following: (i) the Executive's death or Disability; (ii) the willful and continued failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his or her duties; (iii) willful misconduct by the Executive which is materially injurious to the Company; (iv) conviction of a felony under the laws of the State of California; (v) habitual drunkenness by the Executive; or (vi) a willful, material breach of this Agreement by the Executive. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive in bad faith and without a reasonable belief that such action or omission by the Executive was in the best interests of the Company. Notwithstanding anything to the contrary in the foregoing, no termination or other action shall be considered to be for Cause under this Agreement unless (x) the Executive first shall have received at least 30 days written notice setting forth the reasons for the Company's intention to terminate or take other action and shall have been provided an opportunity to appear, accompanied by counsel, and be heard before the Board of Directors; (y) after such appearance before the Board, the Board of Directors shall have duly adopted by a majority of the Directors of the Company then in office, and shall have provided to the Executive a certified resolution finding that in the good faith opinion of such Directors the Executive was guilty of conduct constituting Cause, as set forth above, and specifying the particulars thereof in detail; and (z) the Executive shall have failed to cure or remedy the event constituting Cause within 30 days after the Executive's receipt of such certified resolution from the Board of Directors. (b) Disability. "Disability" shall mean a physical or mental incapacity as a result of which the Executive becomes unable to continue the proper performance of his duties hereunder (reasonable absences because of sickness for up to three (3) consecutive months excepted). A determination of Disability shall be subject to the certification of a qualified medical doctor agreed to by the Company and the Executive or, in the event of the Executive's incapacity to designate a doctor, the Executive's legal representative. In the absence of 5 6 agreement between the Company and the Executive, each party shall nominate a qualified medical doctor and the two doctors so nominated shall select a third doctor, who shall make the determination as to Disability. (c) Good Reason. "Good Reason" shall mean each of the following: (i) the failure of the Company to vest the Executive, without the Executive's consent, with the powers and authority of the Executive's office or position of employment as contemplated herein, or any removal of the Executive from or failure to re-elect the Executive, without the Executive's consent, to a position of employment consistent with the position and status of Executive as set forth herein; (ii) a reduction by the Company, without the Executive's consent, in the Executive's annual base salary as it may exist from time to time; (iii) a failure by the Company, without the Executive's consent, to continue any Company Benefit Plans in which the Executive presently is entitled to participate, as the same may be modified from time to time; (iv) a failure, without the Executive's consent, by the Company to continue the Executive as a participant in any Company Benefit Plans on at least the same basis as he presently participates in such plans; (v) the requirement by the Company, without Executive's consent, that the Executive be based anywhere other than within 50 miles of the Executive's present office location, except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (vi) a failure by the Company to comply with any material provisions of this Agreement which has not been cured within thirty (30) days after notice of such noncompliance has been given by the Executive to the Company, or if such failure is not capable of being cured in such time, a cure shall not have been diligently initiated by the Company within such thirty-day period; or (vii) a failure by the Company to obtain from any successor, before the succession takes place, an agreement to assume and perform this Agreement; provided, however, that any of the foregoing actions shall not be considered to be Good Reason if such action is undertaken by the Company for Cause. 4.2 Termination by Company. The Executive's employment hereunder may be terminated by the Company immediately for Cause. Subject to the other provisions contained in this Agreement, the Company may terminate this Agreement for any reason other than Cause upon thirty (30) days' written notice to Executive. The effective date of termination ("Effective Date") shall be considered to be thirty (30) days subsequent to written notice of termination; however, the Company may elect to have Executive leave the Company immediately. 4.3 Severance Benefits Received Upon Termination. (a) If (i) at any time the Executive's employment is terminated by the Company for Cause, or (ii) at any time the Executive's employment is terminated by the Executive without Good Reason, the Company shall pay the Executive his base salary 6 7 through the end of the month during which such termination occurs (or at the Executive's election, the rate in effect on the first day of the month preceding the month in which the date of termination occurs) plus credit for any accrued vacation and the Company shall thereafter have no further obligations under this Agreement to the Executive or his or her dependents, beneficiaries or estate; provided, however, that the Company will continue to honor any obligations that may have been accrued under then existing Company Benefit Plans or any other agreements or arrangements applicable to the Executive. (b) If (i) at any time the Executive's employment is terminated by the Company without Cause, or (ii) at any time the Executive's employment is terminated by the Executive for Good Reason, then the Company shall: (1) pay to the Executive within four business days following the date of termination his monthly base salary in effect on the date of the termination through the end of the month during which such termination occurs, plus payment for any vacation earned but not taken; and (2) pay to the Executive as severance pay in a lump sum, in cash, within seven business days following the date of termination, an amount equal to (i) the Executive's monthly base salary in effect on the date of termination, multiplied by (ii) thirty-five (35) months; provided, however, that if the lump sum severance payment under this Section 4.3(b)(2), either alone or together with other payments which the Executive has the right to receive from the Company, would constitute a "excess parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Article III being subject to the excise tax imposed by Section 4999 of the Code. The determination of any reduction in the lump sum severance payment under this Section 4.3(b)(2) pursuant to the foregoing proviso shall be made by the Company's independent auditors in good faith and such determination shall be conclusive and binding on the Executive and the Company; (3) pay to the Executive a sum equal to (i) one-twelfth of the Executive's annual compensation bonus for the entirety of the year in which the termination occurs, multiplied by (ii) the number of months or portion thereof the Executive was employed by the Company during the year in which the termination occurs. The Company shall make such incentive compensation bonus payment to the Executive concurrently with its payment of bonuses to other executives of the Company; and (4) maintain, at the Company's expense, in full force and effect, for the Executive's continued benefit until the earlier of (i) two years after the date of termination or (ii) the Executive's commencement of full time employment with 7 8 a new employer, all life insurance, medical, health and accident, and disability plans, programs or arrangements in which the Executive was entitled to participate immediately prior to the date of termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans or programs. Subsequent health insurance benefits will be in accordance with COBRA. 4.4 No Obligation to Mitigate Damages; No Effect on Other Contractual Rights. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the date of termination, or otherwise (except as provided in Section 4.3(b)(3)). (b) The provisions of this Agreement, and any payment or benefit provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any Company Benefit Plan, employment agreement or other contract, plan or arrangement. ARTICLE V ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY 5.1 Assumption of Obligations. The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Article V or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement the Executive is employed by any corporation a majority of the voting securities of which is then owned by the Company, "Company" as used in this Agreement shall in addition include 8 9 such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to the Executive pursuant to this Agreement. 5.2 Beneficial Interests. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him or her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. ARTICLE VI GENERAL PROVISIONS 6.1 Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 Attn: Frederick Judd If to the Executive: Mr. Nick Shahrestany 16 Vienna Newport Beach, CA 92660 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.2 No Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 6.4 Severability or Partial Invalidity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any 9 10 other provision of this Agreement, which shall remain in full force and effect. 6.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 6.6 Legal Fees and Expenses. Should any party institute any action or proceeding to enforce this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with such action or proceeding. 6.7 Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the parties with respect to the subject matter hereof. This Agreement is intended by the parties as the final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence may be introduced in any judicial proceeding involving this Agreement. 6.8 Assignment. Subject to the provisions of Article V hereof, this Agreement and the rights, duties, and obligations hereunder may not assigned or delegated by any party without the prior written consent of the other party. Notwithstanding the foregoing provisions of this Section 6.8, the Company may assign or delegate its rights, duties, and obligations hereunder to any person or entity which succeeds to all or substantially all of the business of the Company through merger, consolidation, reorganization, or other business combination or by acquisition of all or substantially all of the assets of the Company; provided that such person assumes the Company's obligations under this Agreement in accordance with Section 5.1. 6.9 Arbitration. Any controversy, dispute, claim or other matter in question arising out of or relating to this Agreement shall be settled, at the request of either party, by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), and judgement upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof, subject to the following terms, conditions and exceptions: 10 11 (a) Notice of the demand for arbitration shall be filed in writing with the other party and with the AAA. There shall be a panel of three (3) arbitrators whose selection shall be made in accordance with the procedures then existing for the selection of such arbitrators by the AAA. (b) Reasonable discovery shall be allowed in arbitration. (c) The costs and fees of the arbitration shall be allocated by the arbitrators. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PROCOM TECHNOLOGY, INC., a California corporation By: ALEX RAZMJOO --------------------------- Its: President and Chief Executive Officer -------------------------- EXECUTIVE /s/ NICK SHAHRESTANY ------------------------------ Nick Shahrestany 11 12 EXHIBIT A ANNUAL INCENTIVE COMPENSATION BONUS As set forth in Section 2.1 of the Agreement, the Executive shall receive from the Company an annual incentive compensation bonus which shall be part of the Executive's Annual Salary. The amount of the annual incentive compensation bonus will be determined by the Board of Directors (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists). The amount of the Executive's annual incentive bonus shall be based upon attainment by the Company of mutually agreed upon financial objectives. Accordingly, if all of the mutually agreed-upon financial objectives are attained, the Executive will receive an annual incentive compensation bonus equal to a percentage of the Executive's base salary during the applicable fiscal year. Should the Company not attain all of the relevant financial objectives, the Board of Directors shall use its discretion (after consultation with, or based upon the recommendations of, the Compensation Committee of the Board of Directors, if any such committee exists) in determining the amount of the Executive's annual incentive compensation bonus. The annual incentive compensation bonus calculation shall be made promptly after preparation of the Company's audited financial statements are completed following each of the Company's fiscal years. The Company agrees to use its best efforts to complete the audit of its financial statements so as to permit payment of this annual incentive compensation bonus within ninety (90) days of the Company's fiscal year end. A-1 EX-10.7 12 FORM OF REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.7 FORM OF REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") which shall be effective as of October 29, 1996, is made and entered into by and among Procom Technology, Inc., a California corporation (the "Company"), and each of the investors/shareholders identified on the signature page hereto (each an "Investor" and collectively the "Investors"). RECITALS WHEREAS, the Investor are shareholders of the Company; and WHEREAS, in order to induce the Investors to enter into certain lock-up agreements in connection with the Company's proposed initial public offering, the Company has agreed to provide the registration rights set forth in this Agreement with respect to the "Registrable Securities" (as such term is defined in Section 1); NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements herein contained, the parties, intending to be legally bound, hereby agree as follows: 1. Definitions. For purposes of this Agreement: (a) the term "Common Stock" means the Company's authorized voting common stock and any class of securities issued in exchange for the Common Stock or into which the Common Stock is converted; (b) the term "Holder" means any Investor owning of record Registrable Securities but shall not include any assignee thereof; (c) the term "Registrable Securities" means: (i) the Common Stock owned by each of the Investors as of the date hereof, and (ii) any Common Stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, such Common Stock; (d) the term "Registration Expenses" means all expenses incurred by the Company in complying with Sections 2 and 12 hereof, including, without limitation, all registration and filing fees, underwriters' expense allowances (but not including non-accountable 1 2 or other fixed percentage allowances), printing expenses, fees and disbursements of counsel for the Company and one counsel for the Investors as a group, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but not including the compensation of regular employees of the Company which shall be paid in any event by the Company); (e) the terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 1933 Act, and the declaration or ordering of the effectiveness of such registration statement or document by the Securities and Exchange Commission; (f) the term "Selling Expenses" means all underwriting discounts and selling commissions applicable to the sale of Registrable Securities, and all non-accountable underwriters' expense allowances that constitute a fixed percentage of the proceeds of the offering or of the offering price; and (g) the number of shares of Registrable Securities "then outstanding" shall be the number of shares of Common Stock outstanding which are Registrable Securities. 2. Piggy-back Registration Rights. If, at any time the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its securities under the 1933 Act in connection with the public offering of such securities solely for cash the Company shall, each such time, promptly give each Holder written notice of such registration together with a list of the jurisdictions in which the Company intends to attempt to qualify such securities under applicable state securities laws. Upon the written request of any Holder given within 10 days after written notice from the Company in accordance with Section 15, the Company shall, subject to the provisions of Section 6 (in the case of an underwritten offering), cause to be registered under the 1933 Act all of the Registrable Securities that each such Holder has requested to be registered; provided, however, in the event and to the extent such a Holder may freely sell his Registrable Securities without registration under the 1933 Act without regard to any restrictions set forth in Rule 144 under the 1933 Act and the person acquiring the securities does not acquire "restricted Securities" within the meaning of 2 3 Rule 144, the Company may elect not to register such Registrable Securities. 3. Obligations of the Company. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the Securities and Exchange Commission ("SEC") a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one year unless all Registrable Securities to be distributed pursuant to such registration statement have been sold prior to the expiration of such one-year period; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) Use its best efforts to register and qualify the securities covered by such registration statement under the securities laws of such jurisdictions as the Company believes shall be reasonably appropriate for the distribution of the securities covered by the registration statement and such jurisdictions as the Holders participating in the offering shall reasonably request, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction, and further provided that (anything in this Agreement to the contrary notwithstanding with respect to the bearing of expenses) if any jurisdiction in which the securities shall be qualified shall require that expenses incurred in connection with the qualification of the securities in that jurisdiction be borne by selling shareholders and provided there is 3 4 no exemption from such requirement by reason of the Company's obligation to pay such expenses pursuant to the foregoing provisions of this Section 3, such expenses shall be payable by the selling Holders pro rata, to the extent required by such jurisdiction; and (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with terms generally satisfactory to the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. 4. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. In that connection, each selling Holder shall be required to represent to the Company that all such information which is given is both complete and accurate in all material respects. 5. Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Agreement shall be borne by the Company except that Registration Expenses incurred by the Company in complying a request for any registration made under Section 12 hereof shall be borne by the Holders of the securities so registered pro rata on the basis of the number of shares so registered, and in all cases all Selling Expenses shall be borne by the Holders of the securities so registered pro rata on the basis of the number of shares so registered. 6. Underwriting Requirements. The right of any Holder to "piggyback" in an underwritten public offering of the Company's securities pursuant to Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and any other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of Section 2 and this Section 6, if the underwriter determines that marketing factors require a limita- 4 5 tion of the number of shares to be underwritten the underwriter may exclude some or all of the Registrable Securities from such registration and underwriting, provided that the Holders are allowed to participate in the offering in the same proportion (based on the total number of securities held by such Holders at the time of filing of the registration statement) as any other shareholder of the Company existing as of the date of this Agreement participating in the offering. Any reduction in the number of Registrable Securities included in such registration shall be borne equally by the Holders as a group pro rata based on the number of shares held by such Holders at the time of filing of the registration statement. If any Holder disapproves of the terms of any such underwriting, it may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 7. Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 8. Indemnification. If any Registrable Securities are included in a registration statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers, directors and partners of each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they or any of them may become subject under the 1933 Act, the 1934 Act or any other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise from or are based upon any of the following statements, omissions or violations (collectively a "Violation") (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state 5 6 securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law, each as applicable to the subject registration statement; and the Company will reimburse each such Holder, officer, director or partner, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 8 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises from or is based upon a violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, any underwriter (within the meaning of the 1933 Act) for the Company, any person who controls such underwriter, any other Holder selling securities in such registration statement or any of its directors or officers or any person who controls such Holder against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, or underwriter or other such Holder or director, officer or controlling person may become subject, under the 1933 Act, the 1934 Act or any other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise from or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or controlling person, other Holder, officer, director or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 8 shall not apply to amounts paid in settlement 6 7 of any such loss, claim damage, liability or action if such settlement is effected without the consent of the Holder which consent shall not be unreasonably withheld; provided, that in no event shall any indemnity under this Section 8(b) exceed the gross proceeds from the offering received by the Holder. (c) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this Section 8 is applicable but for any reason is held to be unavailable from the Company or any Holder, the Company and the Holders participating in the registration shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted) to which the Company and the participating Holders may be subject in such proportion so that the participating Holders are responsible for that portion of the foregoing amount represented by the ratio of the proceeds received by the participating Holders in the offering to the total proceeds received from the offering by the Company and all selling shareholders (other than participating Holders) and the Company shall be responsible for the portion represented by the ratio of proceeds received by the Company to the total proceeds received by the Company and all selling shareholders (other than participating Holders); provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8(c), each person, if any, who controls the Company or any Holder within the meaning of the Securities Act, each officer of the Company who shall have signed the registration statement and each director of the Company shall have the same rights to contribution as the Company. (d) No settlement of any action in which the Holders participating in a registration are defendants shall be effected without the prior written consent of such Holders unless (i) the obligations of the Company for indemnification or contribution pursuant to this Agreement survive and are not extinguished by reason of the settlement and remain in full force and effect under applicable federal and state laws, rules, regulations and orders or (ii) all claims and actions against the participating Holders and each person who controls a participating holder within the meaning of Section 14 of the Securities Act or Section 20 of the 7 8 Exchange Act are extinguished by the settlement and the indemnifying party obtains a full release of all claims and actions against the participating Holders and each such control person, which release shall be to the reasonable satisfaction of the participating Holders. (e) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel selected by the indemnifying party or parties and reasonably acceptable to the indemnified party; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding (and provided further that all indemnified parties similarly situated shall be represented jointly by a single counsel). The failure to notify an indemnifying party within a reasonable time of the commencement of any such action, to the extent prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 8, but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 8. (f) The obligations of the Company and the Holders under this Section 8 shall survive through the completion of any offering of Registrable Securities in a registration statement made under the terms of this Agreement and otherwise. 9. Reports Under Securities Exchange Act of 1934. With a view of making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: 8 9 (a) use its best efforts to make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times; (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; (c) furnish to any Holder so long as the Holder owns any Registrable Securities, forthwith upon request: (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act or that it qualifies as a Registrant where securities may be resold pursuant to Form S-3; (ii) a copy of the most recent annual or quarterly report of the Company and all other reports and documents filed by the Company with the SEC; and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration; and (d) take such action as is necessary to enable the Holders to use Form S-3 for the sale of their Registrable Securities. 10. Assignment of Registration Rights. The registration rights provided for hereunder may not be assigned by operation of law or otherwise and shall not succeed to any future owner of the Registrable Securities. 11. "Market Stand-off" Agreement. Each Holder hereby agrees that it shall not, to the extent requested by the Company and an underwriter of Common Stock (or other securities) of the Company, sell or otherwise transfer or dispose of any Registrable Securities or any interest therein in a market or other transaction during the 180-day period following the effective date of any registration statement of the Company filed under the 1933 Act (other than a registration form relating to: (a) a registration of a stock option, stock purchase or compensation or incentive plan or of stock issued or issuable pursuant to any such plan, or a dividend investment plan; (b) a registration of securities proposed to be issued in exchange for securities or assets of or in connection with a merger or consolidation with, another corporation; or (c) a registration of securities proposed to be issued in exchange for other securities of the Company). In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect 9 10 to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such 180-day period. 12. Form S-3 Registration. If the Company shall receive, at any time after the first anniversary of the Company's initial public offering and the Company is at that time eligible for use of S-3 with respect to secondary stock sales by its shareholders, a request or requests from the Initiating Holders that the Company effect a registration on Form S-3 (or any similar successor form) and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliance as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 12: (i) if the Company is not qualified as a registrant entitled to use Form S-3 (or the applicable successor form); or (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and any other securities at an aggregate price to the public of less than $2,500,000; or (iii) if the Company has, within the 12-month period preceding the date of such request, already effected one registrations on Form S-3 (or applicable successor form) for the Holders pursuant to this Section 12; or (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. Notwithstanding the foregoing, if the Company shall furnish to a Holder or Holders requesting S-3 registration, a certificate signed by the President of the Company stating that in the good faith judgment of the Board 10 11 of Directors it would be detrimental to the Company for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 180 days; provided, however, that the Company shall not obtain such a deferral more than once in any 12-month period. Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. 13. Remedies. Except as provided in Section 7 of this Agreement, each Holder of Registrable Securities, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy of law would be adequate. 14. Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of at least a majority of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof with respect to a matter which relates exclusively to the rights of Holders of Registrable Securities whose securities are being sold pursuant to a registration statement and which does not directly or indirectly affect the rights of other holders of Registrable Securities may be given by the holders of a majority of the Registrable Securities being sold; provided, however, that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. 15. Notices. All notices, demands and requests required by this Agreement shall be in writing and shall be deemed to have been given for all purposes (a) upon personal delivery, (b) one day after being sent, when sent by professional overnight courier service from and to locations within the continental United States, (c) five days after posting when sent by registered or certified mail, or (d) on the date of transmission when sent by telegram, telegraph, telex or telecopier, addressed to the Company or an Investor at its address set forth on the signature pages hereof. Any party hereto may from time to time by notice in writing 11 12 served upon the others as provided herein, designate a different mailing address or a different person to which such notices or demands are thereafter to be addressed or delivered. 16. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company. Investors may not assign their rights hereunder without the express written consent of the Company. 17. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original, and when executed, separately or together, shall constitute a single original instrument, effective in the same manner as if the parties hereto had executed one and the same instrument. 18. Captions. Captions are provided herein for convenience only and they are not to serve as a basis for interpretation or construction of this Agreement, nor as evidence of the intention of the parties hereto. 19. Cross-References. All cross-references in this Agreement, unless specifically directed to another agreement or document, refer to provisions within this Agreement. 20. Governing Law. This Agreement shall be governed by and construed in accordance with, the laws of the State of Nevada, without reference to conflicts of laws provisions. 21. Severability. The provisions of this Agreement are severable. The invalidity, in whole or in part, of any provision of this Agreement shall not affect the validity or enforceability of any other of its provisions. If one or more provisions hereof shall be declared invalid or unenforceable, the remaining provisions shall remain in full force and effect and shall be construed in the broadest possible manner to effectuate the purposes hereof. The parties further agree to replace such void or unenforceable provisions of this Agreement with valid and enforceable provisions which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provisions. 22. Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto with regard to the subject matter hereof and is a complete and exclusive statement of the terms and conditions thereof, and shall 12 13 supersede any and all prior oral and written correspondence, conversations, negotiations, agreements and understandings relating to the same subject matter. 23. Attorneys' Fees. In any action at law or in equity to enforce any of the provisions or rights under this Agreement, the unsuccessful party to such litigation, as determined by the court in a final judgement or decree, shall pay the successful party all costs, expenses and reasonable attorney's fees, as set by the court and not by a jury, incurred by the successful party (including, without limitation, costs, expenses and fees on any appeal). 13 14 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement with the intent and agreement that the same shall be effective as of the day and year first above written. THE COMPANY: PROCOM TECHNOLOGY, INC., a California Corporation 2181 Dupont Drive Irvine, California 92715 By:_____________________________________ THE INVESTORS: ALEX RAZM'JOO c/o Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 By:_____________________________________ FRANK ALAGHBAND c/o Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 By:_____________________________________ ALEX AYDIN c/o Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 By:_____________________________________ NICK SHAHRESTANY c/o Procom Technology, Inc. 2181 Dupont Drive Irvine, California 92715 By:_____________________________________ EX-10.8 13 LEASE, DATED FEBRUARY 10, 1992 1 EXHIBIT 10.8 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-GROSS (Do not use this form for Multi-Tenant Property) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, February 10, 1992, is made by and between 2181 Dupont Associates, a California Limited Partnership ("LESSOR") and Procom Technology, Inc., a California Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 2181 Dupont Drive, Irvine, located in the County of Orange, State of California, and generally described as (describe briefly the nature of the property) an approximately 63,000 square foot portion of an approximately 81,000 square foot freestanding industrial facility located on tax assessor's parcel #445-112-08 (See Exhibit A) ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: Three (3) years and one (1) months ("ORIGINAL TERM") commencing April 1, 1992 ("COMMENCEMENT DATE") and ending April 30, 1995 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: Upon mutual execution of lease documents ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $28,000.00 per month ("BASE RENT"), payable on the first (1st) day of each month commencing April 1, 1992 (See Paragraph 4 for further provisions.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $28,000.00 as Base Rent for the period April 1, 1992 - April 30, 1992. 1.7 SECURITY DEPOSIT: $28,000.00 ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: General office, assembly, warehousing, and distributing of computer related products. (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY." 1992 is the "BASE PREMIUM." (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Hensley Realty Corporation (not participating in commissions - See Section 15) represents [X] Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and Lee & Associates - Mr. Chris Coyte and Mr. Jim Snyder represents [X] Lessee exclusively ("LESSEE'S BROKER"); [ ] both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("GUARANTOR"). 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 58 and Exhibits A all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3 (a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. It Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use , (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. Initials [SIG] ------- PAGE 1 2 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, it any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved, Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee tails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit. Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be field in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, Initials [SIG] --------- PAGE 2 3 any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises, but excluding foundations, the exterior roof and the structural aspects of the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (See Section 57) (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Upon receipt of written notice of the need for such repairs and subject to Paragraph 13.5, Lessor shall, at Lessor's expense keep the foundations, exterior roof heating, ventilating and air conditioning equipment and systems and structural aspects of the Premises in good order, condition and repair including repair of roof leaks. Lessor shall not, however, be obligated to paint the exterior surface of the exterior walls or to maintain the windows, doors or plate glass or the interior surface of exterior walls. Lessor shall not, in any event, have any obligation to make any repairs until Lessor receives written notice of the need for such repairs. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Alterations and/or Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and cumulative cost thereof during the term of this Lease as extended does not exceed $50,000.00. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT OF PREMIUM INCREASES. (a) Lessee shall pay to Lessor any insurance cost increase ("INSURANCE COST INCREASE") occurring during the term of this Lease. "INSURANCE COST INCREASE" is defined as any increase in the actual cost of the insurance required under Paragraphs 8.2(b), 8.3(a) and 8.3(b). ("REQUIRED INSURANCE"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. "INSURANCE COST INCREASE" shall include, but not be limited to, increases resulting from the nature of Lessee's occupancy, any act or omission of Lessee, requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, and/or a premium rate increase. If the parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "BASE PREMIUM." In lieu thereof, if the Premises have been previously occupied, the "BASE PREMIUM" shall be the annual premium applicable to the most recent occupancy. If the Premises have never been occupied, the "BASE PREMIUM" shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the commencement of the Original Term, assuming the most nominal use possible of the Premises. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance Carried By Lessor). (b) Lessee shall pay any such Insurance Cost Increase to Lessor within thirty (30) days after receipt by Lessee of a copy of the premium statement or other reasonable evidence of the amount due. If the Insurance policies maintained hereunder cover other property besides the Premises. Lessor shall also deliver to Lessee a statement of the amount of such Insurance Cost Increase attributable only to the Premises showing in reasonable detail the manner in which such amount was computed. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement or Expiration of the Lease term. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or Initials [SIG] --------- PAGE 3 4 as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage, including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) RENTAL VALUE. Lessor shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide" Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor certified copies of, or certificates evidencing the existence and amounts of, the insurance, and with the additional insureds, required under Paragraphs 8.2(a) and 8.4. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of this Lease's express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rattler than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. Initials [SIG] --------- PAGE 4 5 9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. It Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage-Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises. (See Section 52.) (c) ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1(a) hereof, Lessee shall pay to Lessor upon demand therefor the entirety of any increase in Real Property Taxes assessed by reason of Alterations or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom. and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. Initials _________ PAGE 5 6 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively. "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of fifty (50%) percent or more of the voting control of Lessee shall constitute a change in control for this purpose. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is less, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3. (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. Initials _________ PAGE 6 7 (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due and within three (3) days of written demand the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall Initials _________ _________ PAGE 7 8 have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to Lee & Associates (Brokers) or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $50,000.00 for brokerage services rendered by said Brokers to Lessor in this transaction. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, Indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 It Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 10% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. It notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. Initials _____ _____ PAGE 8 9 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations In connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof arid the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. Initials ____ ____ PAGE 9 10 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a multiple tenant building, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. See Addendum 49 - 58 attached hereto and made a part thereof. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. SET NEW Executed at Newport Beach Executed at Costa Mesa --------------------------------------------- --------------------------------------------- on on Feb 11, 1992 ------------------------------------------------------ ------------------------------------------------------ by LESSOR: by LESSEE: 2181 Dupont Associates, a California Limited Procom Technology, Inc, a California - --------------------------------------------------------- --------------------------------------------------------- Partnership Corporation - --------------------------------------------------------- --------------------------------------------------------- By /s/ RICHARD N. DICK By /s/ ALEX AYDIN ------------------------------------------------------ ------------------------------------------------------ Name Printed: Mr. Richard N. Dick Name Printed: Mr. Alex Aydin ------------------------------------------- ------------------------------------------- Title: Managing General Partner Title: Chief Financial Officer -------------------------------------------------- -------------------------------------------------- By SEE ATTACHED SIGNATURE PAGE By ------------------------------------------------------ ------------------------------------------------------ Name Printed: Name Printed: ------------------------------------------- ------------------------------------------- Title: Title: -------------------------------------------------- -------------------------------------------------- Address: Address: ------------------------------------------------ ------------------------------------------------ - --------------------------------------------------------- --------------------------------------------------------- Tel. No. ( ) Fax No. ( ) Tel. No. ( ) Fax No. ( ) ------ ------------- --- ------------- ------ ------------- --- -------------
NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071 (213) 687-6777. Fax No. (213) 687-8616. (C) Copyright 1990--By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. FORM 105G-3/90 11 LESSOR: 2181 DUPONT ASSOCIATES, a California Limited Partnership By: /s/ RICHARD N. DICK ------------------------------- Richard N. Dick, Managing General Partner By: SOD Partners, a California general partnership, General Partner By: /s/ DONALD S. GRANT ------------------------------- Donald S. Grant, Special Co-Trustee of the J. And P. O'Donnell Revocable Trust dated October 20, 1982, Partner By: /s/ VIRGINIA L. S. BECK -------------------------------- Virginia L. S. Beck, Special Co-Trustee of the Lee Sammis Irrevocable Trust dated March 4, 1991, Partner 12 ADDENDUM TO THAT CERTAIN LEASE DATED FEBRUARY 10, 1992 BY AND BETWEEN 2181 DUPONT ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP (HEREIN CALLED LESSOR) AND PROCOM TECHNOLOGY, INC, A CALIFORNIA CORPORATION (HEREIN CALLED LESSEE) FOR THAT REAL PROPERTY COMMONLY KNOWN AS 2181 DUPONT DRIVE, IRVINE, CALIFORNIA. 49. BASE RENT SCHEDULE:
Months Monthly Rent ------ ------------ 1-12 $28,000 per month Industrial Gross 13-24 $33,000 per month Industrial Gross 25-36 $35,250 per month Industrial Gross 37 $ 0.00 per month Industrial Gross
50. TENANT IMPROVEMENTS: Lessee shall be granted, by Lessor, a Tenant Improvement Allowance in the amount of $10,000.00 to be used at Lessee's discretion. Said Tenant Improvement Allowance shall be due within seven (7) days of Lessee's written notification to Lessor of Lessee's desire to appropriate such funds to facilitate needed Tenant Improvements. Lessor, at its sole cost and expense and prior to the lease Commencement Date described in Section 1.3 of this Lease, shall re-carpet (re-tile) and re-paint the existing office areas using identical materials and finishes to those that exist in the reception area of the facility. Lessor, at it's sole cost and expense, shall raise the warehouse lighting contained in "Area One" in attached Exhibit A to the maximum allowable level. Additionally, the Lessor shall remove the ducting for the heating, ventilating and air-conditioning system in "Area One" of Exhibit A, except for the ducting presently servicing the cafeteria/office area. 51. BUILDING IDENTITY: Lessor shall remove the existing signage on the facade of the building and the lettering on the monument sign and provide those areas for Lessee's new signing which shall be approved by Lessor. Lessee may, at it's sole cost and option, install it's signage on the building and have nonexclusive use to the existing monument sign. The size, style and type of the signs permitted shall be subject to the declaration of Covenants, Considerations, and Restriction's (CC&R's) and all applicable laws, regulations and ordinances of the City of Irvine and shall also be consistent with the sign criteria of the project. Lessee shall be responsible for the maintenance and removal of Lessee's signs. 52. PROPERTY TAXES: Lessor shall pay Real Property Taxes applicable to the Premises during the initial Lease Term. If Lessee exercises it's Option to Extend defined in Section 55 of this Lease, Lessee shall pay, in addition to rent, during the Extended Term, the amount, if any, by which the Real Property Taxes applicable to the Premises increased over the 1991-92 base year taxes when the initial lease Commencement Date occurred. 53. CONDITION OF PREMISES: Per the provisions of Section 7.1(b), Lessee shall pay for the periodic and normal maintenance of the heating, ventilating and air-conditioning system(s) on the Premises. Lessor shall pay for extended repair and/or replacement of the existing heating, ventilating and air-conditioning system(s). 54. HAZARDOUS WASTE AND ASBESTOS: Any hazardous materials and/or asbestos shall be removed prior to commencement of construction of Tenant Improvements and shall be and remain Lessor's full liability. Lessee shall only be liable for those materials brought on the premises by Lessee, its agents, vendors or associates, and Lessor shall indemnify Lessee for all liability arising from other hazardous materials previously or currently on the premises, or brought on the premises by past tenants or person. PAGE 11 13 55. OPTION TO EXTEND: Lessor hereby grants Lessee an Option to Extend the term of this Lease for a one (1) year period commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor, and Lessor actually receives, on a date which is prior to the date that the option period would commence (if exercised) by at least six (6) and not more than nine (9) months, a written notice of the exercise of the option to extend this lease for said additional term, time being of the essence. If said notification of the exercise of said option is not so given and received, this option shall automatically expire; (ii) The provisions of paragraph 39, including the provision relating to the default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this Option shall apply; (iv) The monthly rent for each month of the option period shall be $48,000 per month, Industrial Gross and the Premises Area shall be increased to the entire facility consisting of approximately 81,000 square feet. 56. PRIOR ENTRY: Lessor consents to the entry of Lessee into and upon the premises prior to the commencement date of this Lease for the purpose of cleaning, repairing, furnishing and decorating. Prior to the commencement date of this Lease and during the period Lessor has consented to Lessee's entry into and upon the premises, Lessee shall indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the premises, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any negligence of the Lessee, or any of Lessee's agents, contractors, or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought hereon; and in case any action or proceeding be brought against Lessor by reasons of any such claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property, which includes all plate glass and doors, or any injury to persons, in or upon or against the premises arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. If Lessee enters the premises pursuant to this paragraph, he does so as a mere licensee of Lessor and without any right or color of right whatsoever, it being agreed and understood that Lessee's right of possession does not arise until Lessor tenders possession of premises in accordance with the terms and conditions of this Lease. 57. MULTI-TENANT BUILDING: Because Lessee's Premises is part of a larger building, the Common Area Maintenance and other costs shall be prorated between the various lessees occupying the Property. Lessee's share of the building costs shall be 84% (63,000 sq. ft. 75,000 sq. ft.) Said costs shall include the following: ELECTRICITY: It is contemplated that Lessor will lease the remaining approximately 13,000 sq. ft. of space in the building to another lessee. Lessee shall pay the electrical bill for the entire property and bill Lessor for the prorata amount estimated for the use that occupies the 13,000 sq. ft. space. An electrical consultant shall be retained to make the estimate of usage in said excess area, or if possible, the area shall be separately metered by a house meter. LANDSCAPING: Lessor, at it's sole cost and expense, shall maintain the building landscaping at the level that currently exists. PAGE 2 14 58. CONSULT YOUR ATTORNEY: All negotiations and agreements are merged within the above-referenced lease agreement, and there are no oral agreements or implied covenants by the owner, employees, or agents thereof. The party(s) acknowledge that this agreement may have been filled in by Lee & Associates (hereinafter "Broker"), for submission by you to your attorney for approval; as such, all parties are advised and encouraged by Broker to contact their attorneys to answer any questions that may exist prior to the execution of same. Any financial statements, information, reports, materials, etc., provided to Broker, and submitted by Broker to Lessor and/or Lessee, are so provided without any independent investigation by Broker; as such, Broker assumes no responsibility for the accuracy of same. Any verification, credit check, etc., are the sole responsibility of the owner. No warranties, recommendations, or representations are made by Broker as to the accuracy, the legal sufficiency, legal effect, or tax consequences of the above-referenced. 59. BUILDING EXPANSION: Lessor shall have the right during the entire term of this lease to develop an additional industrial building at the rear of the property not to exceed 20,000 square feet. LESSOR: LESSEE: 2181 Dupont Associates, Procom Technology, Inc., a California Partnership A California Corporation By: RICHARD N. DICK By: [SIG] -------------------------- -------------------------------- Richard N. Dick Managing General Partner Title: Executive Vice President ---------------------------- SOD Partners, a California general partnership, General Partner By: DONALD S. GRANT --------------------------------- Donald S. Grant, Special Co- Trustee of the J. and P. O'Donnell Revocable Trust dated October 20, 1982, Partner By: VIRGINIA L. S. BECK ---------------------------------- Virginia L. S. Beck, Special Co- Trustee of the Lee Sammis Irrevocable Trust dated March 4, 1991, Partner PAGE 13 15 2181 DUPONT DRIVE EXHIBIT A Lease dated February 10, 1992 Lessor: 2181 Dupont Associates, a California Limited Partnership Lessee: Procom Technology, Inc., a California Corporation 16 FIRST AMENDMENT TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS (EXTENSION OF TERM) THIS FIRST AMENDMENT TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS ("Amendment"), dated as of March 15, 1995, is entered into by and between 2181 DUPONT ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP ("Landlord"), and PROCOM TECHNOLOGY, INC., a California corporation ("Tenant"), with reference to the following recitals: RECITALS A. Landlord and Tenant entered into that certain Standard Industrial/Commercial Single-Tenant Lease - Gross dated as of February 10, 1992 ("Lease"), concerning certain premises located at 2181 Dupont Drive, Irvine, California 92715 ("Premises"). The capitalized terms used and not otherwise defined herein shall have the same definitions as set forth in the Lease. B. Landlord and Tenant now desire to modify the Lease to extend the Term, all upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree that the Lease shall be modified and/or supplemented as follows: 1. EXTENSION OF TERM. Commencing May 1, 1995, the Term of the Lease is hereby extended on a month to month basis, terminable by either party upon ninety (90) days prior written notice to the other party. 2. MONTHLY RENT. Notwithstanding any provision of the Lease, (a) commencing April 1, 1995, Tenant shall pay to Landlord at such place as Landlord may designate, without deduction, offset, prior notice or demand, a monthly Base Rent of Thirty-Five Thousand Two Hundred Fifty Dollars ($35,250.00) in lawful money of the United States, and (b) although Tenant shall not receive any free rent for April, 1995, the monthly Base Rent for the final thirty (30) days of the Term shall be waived so long as Tenant is not in Breach or Default of the Lease or this Amendment. 3. TERMINATION OF OPTION TO EXTEND, EXPANSION RIGHT. Sections 55 and 59 of the Lease are hereby deleted in their entirety. 4. GENERAL. (a) Effect of Amendment; Ratification. Except to the extent the Lease is modified by this Amendment, the terms and provisions of the Lease shall remain unmodified and in full force and effect. In the event of conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall prevail. (b) Attorneys' Fees. The provisions of the Lease respecting payment of attorney's fees shall also apply to this Amendment. 17 (c) Counterparts. If this Amendment is executed in counterparts, each counterpart shall be deemed an original. (d) Authority to Execute Amendment. Each individual executing this Amendment on behalf of a corporation or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of the corporation or partnership and that this Amendment is binding upon the corporation or partnership in accordance with its terms. (e) Governing Law. This Amendment and any enforcement of the agreements and modifications set forth above shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. "Landlord" 2181 DUPONT ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP By: /s/ RICHARD N. DICK -------------------------------- Richard N. Dick, Managing General Partner By: SOD Partners, a California general partnership, General Partner By: /s/ JOHN D. O'DONNELL --------------------------- John D. O'Donnell, Trustee of the J. and P. O'Donnell Revocable Trust dated October 20, 1982, Partner By: /s/ JANICE ROSENQUIST --------------------------- Janice Rosenquist, Trustee of the Lee Sammis Irrevocable Trust dated March 4, 1991, Partner "Tenant" PROCOM TECHNOLOGY, INC., a California corporation By: /SIG/ -------------------------------- Its EVP ----------------------------- By: -------------------------------- Its ----------------------------- -2- 18 SECOND AMENDMENT TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS (Extension of Term) THIS SECOND AMENDMENT TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS ("Amendment"), dated as of May 18, 1995, is entered into by and between 2181 DUPONT ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP ("Lessor"), and PROCOM TECHNOLOGY, INC., a California corporation ("Lessee"), with reference to the following recitals: RECITALS A. Lessor and Lessee entered into that certain Standard Industrial/Commercial Single-Tenant Lease - Gross dated as of February 10, 1992, as amended by that certain First Amendment to Standard Industrial/Commercial Single-Tenant Lease - Gross dated as of March 15, 1995 (collectively, the "Lease"), concerning certain premises located at 2181 Dupont Drive, Irvine, California 92715 ("Premises"). The capitalized terms used and not otherwise defined herein shall have the same definitions as set forth in the Lease. B. Lessor and Lessee now desire to modify the Lease to further extend the Term, all upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree that the Lease shall be modified and/or supplemented as follows: 1. EXTENSION OF TERM. The Term of the Lease is hereby extended commencing June 1, 1995 through and including July 31, 1998. 2. FURTHER EXTENSION OPTION. Upon the expiration of the extended Term of the Lease, provided no Breach or Default by Lessee has occurred and is continuing, Lessee shall have the option to further extend the Term of the Lease for an additional four (4) months, so long as (i) Lessee provides to Lessor written notice of its intent to exercise such further extension option not less than one hundred twenty (120) days prior to the expiration of the extended Term, and (ii) during any such further extension period, all of the terms and provisions of the Lease shall be and remain in full force and effect, as amended by this Amendment, except that Monthly Rent shall be increased during such further extended Term to an amount equal to Forty-Three Thousand One Hundred Twenty-Five Dollars ($43,125.00) per month. 3. MONTHLY RENT. Notwithstanding any provision of the Lease, Monthly Rent for each month of the extended Term shall be as follows: (a) June, 1995 and July, 1995 shall be at Thirty-Five Thousand Two Hundred Fifty Dollars ($35,250.00) per month; (b) Commencing August 1, 1995 through and including the expiration of the extended Term, Thirty-Seven Thousand Five Hundred Dollars ($37,500.00) per month; (c) Notwithstanding the foregoing, provided Tenant is not in Breach or Default of the Lease or this Amendment, Monthly Rent for January, 1997 shall be waived. 19 All Monthly Rent hereunder shall be due on or before the first (1st) calendar day of each calendar month, made payable to Lessor at such place as Lessor may designate, without deduction, offset, prior notice or demand, in lawful money of the United States. Throughout the extended Term, Lessee shall also continue to pay all other amounts required to be paid by Lessee under the Lease. 4. HVAC MAINTENANCE. Throughout the extended Term of the Lease, Lessee shall, at Lessee's expense, enter into and maintain at all times an HVAC preventative maintenance service contract with Conditioned Air Technicians providing the services as described in EXHIBIT "1" attached hereto, or with such other reputable service contractor and/or on such other terms and conditions as may be approved by Lessor in its sole discretion. Notwithstanding such HVAC preventative maintenance contract, Lessor shall bear the expense of any repairs and replacement of all or any portion of the HVAC system serving the Building, unless such repair or replacement is due to any act or omission of Lessee, its sublessees, employees, agents or contractors, in which event Lessee shall bear the expense of such repair and/or replacement. 5. LIMITED REFURBISHMENT. Promptly following August 1, 1995, Lessor shall complete, at Lessor's expense, the following limited refurbishment work at the Premises: (a) Replace carpet in the general office areas of the premises on an as needed basis. (b) Enlarge the reception area to include the office on the right side thereof, and thereafter re-carpet and repaint the reception area; (c) Secure, repaint and re-carpet the 1,000 square foot office in the rear warehouse area of the Premises and provide a new entrance door to said office; and (d) Provide-touch-up painting on an as-needed basis in the general office areas of the Premises. All such painting and carpeting shall be done by contractors chosen by Lessor, and shall be undertaken using Lessor's then-standard style, make, grade and color of paint and carpeting. Other than such limited refurbishment, Lessor shall have no obligation to do any other improvement work at the Premises. 6. SUBLEASING. Lessor hereby approves a sublease between Lessee and Hughes Data Corporation for the rear twelve thousand (12,000) square foot portion of the Premises, including warehouse and one (1) office. Such approval shall not (i) relieve Lessee from any liability, obligation or responsibility under the Lease, or (ii) constitute a waiver of Lessor's right to approve any other proposed sublease of all or any portion of the Premises in accordance with Section 12 of the Lease, or (iii) affect or diminish any of Lessor's rights under Section 12 of the Lease with respect to the approved sublease with Hughes Data Corporation or with respect to any other future sublease of all or any portion of the Premises which may be approved by Lessor pursuant to said Section 12; all of which rights of Lessor and obligations of Lessee are hereby reserved and preserved. In no event shall Hughes Data Corporation or any other future sublessee of all or any portion of the Premises have any right of occupancy of all or any portion of the Premises beyond the expiration or earlier termination of the Term of the Lease. 7. GENERAL. (a) Effect of Amendment; Ratification. Except to the extent the Lease is modified by this Amendment, the terms and provisions of the Lease shall remain unmodified -2- 20 and in full force and effect. In the event of conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall prevail. (b) Attorneys' Fees. The provisions of the Lease respecting payment of attorney's fees shall also apply to this Amendment. (c) Counterparts. If this Amendment is executed in counterparts, each counterpart shall be deemed an original. (d) Authority to Execute Amendment. Each individual executing this Amendment on behalf of a corporation or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of the corporation or partnership and that this Amendment is binding upon the corporation or partnership in accordance with its terms. (e) Governing Law. This Amendment and any enforcement of the agreements and modifications set forth above shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. "Lessor" 2181 DUPONT ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP By: /s/ RICHARD N. DICK -------------------------------- Richard N. Dick, Managing General Partner By: SOD Partners, a California general partnership, General Partner By: /s/ JOHN D. O'DONNELL ------------------------------- John D. O'Donnell, Trustee of the J. and P. O'Donnell Revocable Trust dated October 20, 1982, Partner [SIGNATURES CONTINUED] By: /s/ JANICE ROSENQUIST ------------------------------- Janice Rosenquist, Co-Trustee of the Lee Sammis Irrevocable Trust dated March 4, 1991, Partner -3- 21 "Lessee" PROCOM TECHNOLOGY, INC., a California corporation By: /SIG/ -------------------------------- Its EVP ----------------------------- By: /SIG/ -------------------------------- Its ----------------------------- -4- 22 [CONDITIONED AIR TECHNICIANS LOGO] Air Conditioning and Refrigeration Contractors Lic. #563781 Page 1 of 2 MAINTENANCE SERVICE AGREEMENT I/We: Procom Technology 2181 Dupont Drive Irvine, CA 92715 Attention: Libby Harris (714) 852-1000 Request maintenance as a preventive measure for our Heating-Air Conditioning-Ventilating equipment. Conditioned Air Technicians shall inspect the equipment at least 12 times per year and perform the usual service operation for preventive maintenance on a regularly scheduled basis. This servicing shall be of good practice and workmanship and in the manner recommended by the manufacturer. Conditioned Air Technicians shall furnish necessary skilled technicians, testing equipment, tools and other devices necessary to carry out proper maintenance. The following items shall be inspected and performed: 1. Check, clean or replace filters. 2. Lubricate fan and motor bearings as required. 3. Check and adjust all belts. 4. Check electrical wiring and connections. 5. Check voltage and amperage for each load. 6. Check all control operations including safety. 7. Visually check for refrigerant leaks. 8. Check for excessive vibration or noise. 9. Check drains from coils. 10. Check for clean evaporator and condenser coils. 11. Check complete heating cycle. 12. Check complete cooling cycle. 13. Check thermostat. 14. Light clean-up around units. It is understood that this maintenance service shall be performed only during regular working hours, scheduled at the option to the maintenance contractor. 2650 Walnut Ave., Suite A, Tustin, CA 92680 o (714) 544-0494 o FAX (714) 544-0459 23 Page 2 of 2 Emergency service shall be extra to this agreement, billed at the prevailing rate, plus parts. Conditioned Air Technicians shall endeavor to answer all requests for service within the same day, provided overtime is not involved, unless overtime is agreeable. This agreement may be cancelled by either party by giving Thirty (30) days written notice. This agreement covers the following pieces of equipment: 1. Carrier M#50DD054600AA Serial # K689552 - UNIT #1 2. Carrier M#48DD016B Serial # K688012 - UNIT #2 3. Carrier M#50DD046600XC Serial # A795254 - UNIT #4 4. Carrier M#48DD024 Serial # K689539 - UNIT #5 5. Carrier M#50DD044600XC Serial # A795255 - UNIT #6 6. BARD M#P60 Serial # 117454 - UNIT #8 For the sum of $240.00 per month, plus parts and filters, payable as service rendered. 10% off all parts and filters. The above amount is subject to review at anniversary. A Thirty (30) day written notice will be given if any change is found necessary. Dated this Thirteenth Day of May 1995. Contractor: Owner or Purchaser: CONDITIONED AIR TECHNICIANS PROCOM TECHNOLOGY ------------------------------- Name 2181 DUPONT DRIVE ------------------------------- Address /s/ SCOTT S. BYINGTON 5-13-95 /SIG/ 5/8/95 - -------------------------------- ------------------------------- Scott S. Byington / Date Authorized Signature / Date Service to Start: June 1995 ------------------- Month EX-11.1 14 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
1994 1995 1996 ---------- ---------- ---------- Net income (loss)...................................... $ (773,000) $ 723,000 $2,849,000 ========= ========= ========= Shares outstanding..................................... 9,000,000 9,000,000 9,000,000 Net incremental shares from assumed exercise of options using the treasury stock method...................... 166,725 166,725 166,725 --------- --------- --------- Total shares used in computation of EPS................ 9,166,725 9,166,725 9,166,725 ========= ========= ========= Earnings per share..................................... $ (0.08) $ 0.08 $ 0.31 ========= ========= =========
EX-21.1 15 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES Procom FSC, Inc., a U.S. Virgin Islands Corporation EX-23.1 16 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and all references to our Firm) included in or made part of this registration statement. ARTHUR ANDERSEN LLP Orange County, California October 29, 1996 EX-27.1 17 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL DATA OF THE COMPANY AS OF JULY 26, 1996 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL DATA. 1,000 U.S. DOLLARS YEAR JUL-26-1996 JUL-29-1995 JUL-26-1996 1 793 0 9,234 373 9,760 20,608 476 1,191 21,112 15,976 0 0 0 3 0 21,112 73,456 73,456 51,489 51,489 17,036 0 282 4,649 1,800 2,849 0 0 0 2,849 .31 .31
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