-----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, AOAV2bESxb2R1NWT07pyUAnQVLgngiNCi7/TZ8vLW44X9CjSzq1RjmGrdnxraNr4 S6OqdWaJF2L0KbD/lhkfuA== 0000950149-97-000710.txt : 19970403 0000950149-97-000710.hdr.sgml : 19970403 ACCESSION NUMBER: 0000950149-97-000710 CONFORMED SUBMISSION TYPE: 10SB12G PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970402 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIAD PARK LLC CENTRAL INDEX KEY: 0001037037 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943264115 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10SB12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-22343 FILM NUMBER: 97573834 BUSINESS ADDRESS: STREET 1: 3055 TRIAD DRIVE CITY: LIVERMORE STATE: CA ZIP: 94550 BUSINESS PHONE: 5104490606 MAIL ADDRESS: STREET 1: 3055 TRIAD DRIVE CITY: LIVERMORE STATE: CA ZIP: 94550 10SB12G 1 FORM 10-SB 1 As filed with the Securities and Exchange Commission on April 2, 1997. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________ FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 TRIAD PARK, LLC (Name of Small Business Issuer in Its Charter) DELAWARE 94-3264115 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3055 TRIAD DRIVE LIVERMORE, CALIFORNIA 94550 (Address of principal executive offices) (510) 449-0606 (Issuer's telephone number, including area code) Securities to be registered under Section 12(b) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered ------------------- ------------------------------ Not applicable Not applicable Securities to be registered under Section 12(g) of the Act: Membership Interests ================================================================================ 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. The information provided under the captions "Summary of Spin-Off Transaction," "Plan of Distribution," "Risk Factors," "Description of Properties of the Company," "Business of the Company" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the information statement attached to this Form 10-SB registration statement as Exhibit 12.1 ("Information Statement") is incorporated by reference. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The information provided under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Information Statement is incorporated by reference. ITEM 3. DESCRIPTION OF PROPERTY. The information provided under the captions "Summary of Spin-Off Transaction," "Plan of Distribution," "Risk Factors -- Real Estate Related Risks," "Description of Lease Agreement" and "Description of Properties of the Company" in the Information Statement is incorporated by reference. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information provided under the caption "Holdings of Principal Share Holders and Security Holdings of Managing Member(s), Executive Officers and Advisory Board Members" in the Information Statement is incorporated by reference. ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. The information provided under the captions "Summary of Spin-Off Transaction" and "Management of the Company" in the Information Statement is incorporated by reference. ITEM 6. EXECUTIVE COMPENSATION. The information provided under the caption "Compensation of Management" in the Information Statement is incorporated by reference. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information provided under the captions "Summary of Spin-Off Transaction," "Transactions with Interested Parties" and "Relationships Between Triad and the Company" in the Information Statement is incorporated by reference. 2 3 ITEM 8. DESCRIPTION OF SECURITIES. The information provided under the captions "Description of Shares" and "Summary of Limited Liability Company Agreement" in the Information Statement is incorporated by reference. PART II ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS. The information provided under the captions "Summary of Spin-Off Transaction," "Summary of Limited Liability Company Agreement -- Distribution" and "Trading of Shares" in the Information Statement is incorporated by reference. Upon completion of the Distribution, it is expected that there will be approximately 1100 holders of record of Triad Park, LLC's membership interests. ITEM 2. LEGAL PROCEEDINGS. Management of the Registrant is not aware of any legal proceedings, or pending legal proceedings, to which the Registrant is a party or to which the property of the Registrant is subject. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. None of the events described in this Item has occurred within the past twenty-four (24) months. ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant was formed on February 10, 1997. All of the outstanding Shares were issued by Registrant to Triad Systems Corporation and to 3055 Management Corp. pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933. The information provided under the caption "Plan of Distribution -- Contribution Transactions" in the Information Statement is incorporated by reference. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The information provided in Section 4.9 of the Registrant's Limited Liability Company Agreement filed as Exhibit 2.1 to this Form 10-SB is incorporated by reference. Pursuant to this Section, members of the Advisory Board and officers of the Registrant are indemnified to the fullest extent not prohibited by Delaware law. PART F/S The financial statements listed in "Index to Financial Statements" in the Information Statement are incorporated by reference. 3 4 PART III ITEM 1. INDEX TO EXHIBITS. The exhibits filed herewith are listed in the "Index to Exhibits" on page 5 of this Form 10-SB and are incorporated by reference. SIGNATURES In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 2, 1997 TRIAD PARK, LLC By: 3055 MANAGEMENT CORP., its Manager By: /s/ JAMES R. PORTER ------------------------- James R. Porter Vice President, Secretary and Chief Financial Officer 4 5 EXHIBIT INDEX
No. Item Page - --- ---- ---- 2 Charter and By-Laws 2.1 Limited Liability Company Agreement of Triad Park, LLC 2.2 By-Laws of Triad Park, LLC 3 Instruments defining the rights of security holders 3.1 Limited Liability Company Agreement of Triad Park, LLC (see Exhibit 2.1) 3.2 By-Laws of Triad Park, LLC (see Exhibit 2.2) 3.3 Form of Rights Plan of Triad Park, LLC 6 Material contracts 6.1 Real Estate Distribution Agreement, dated as of February 26, 1997, by and between Triad Systems Corporation, 3055 Triad Dr. Corp., 3055 Management Corp. and Triad Park, LLC 6.2 Project Lease Agreement, dated as of August 1, 1988, between 3055 Triad Dr. Corp. and Triad Systems Corporation 6.3 First Amendment to Project Lease Agreement, dated as of February 26, 1997, by and between Triad Park, LLC, 3055 Triad Dr. Corp. and Triad Systems Corporation 12 Additional exhibits 12.1 Information Statement 12.2 Appraisal of: Triad Business Park, Livermore, California, Prepared for: Triad Systems Corporation, November, 1996 27 Financial Data Schedule 27.1 Financial Data Schedule
5 EX-2.1 2 LIMITED LIABILITY COMPANY AGREEMENT 1 LIMITED LIABILITY COMPANY AGREEMENT OF TRIAD PARK, LLC This Limited Liability Company Agreement of Triad Park, LLC, a Delaware limited liability company (the "COMPANY"), is entered into effective as of the 26th day of February, 1997, among Triad Systems Corporation, a Delaware corporation ("TRIAD") and 3055 Management Corp., a California corporation, as the initial members of the Company, and the Persons who subsequently become members of the Company in accordance with the provisions of this Limited Liability Company Agreement. RECITALS A. Triad is the owner of certain real estate assets located in the City of Livermore, State of California, commonly referred to as Triad Park. Triad and 3055 Management Corp. desire to form the Company to acquire, own, manage, develop and sell the real estate assets. B. Following the formation of the Company and the transfer of the real estate assets to the Company, Triad will transfer its membership interests in the Company to its shareholders, as a dividend distribution. Upon receipt of the dividend distribution, the shareholders of Triad shall become members of the Company. C. 3055 Management Corp. will contribute cash to the Company for its membership interest and will be the initial manager of the Company. Therefore, Triad and 3055 Management Corp., for themselves and on behalf of the Share Holders (as defined below), agree to form a limited liability company under the Delaware Limited Liability Company Act on the following terms and conditions: SECTION 1. FORMATION 1.1 FORMATION OF COMPANY. The Company has been organized as a Delaware limited liability company by the filing of a Certificate of Formation pursuant to the Delaware Limited Liability Company Act with the Delaware Secretary of State. 1.2 NAME. The name of the Company is "Triad Park, LLC" and all Company business shall be conducted under that name or such other names that comply with applicable law as the Manager (as defined below) may select from time to time. 1.3 PURPOSE AND SCOPE. Subject to the provisions of this Agreement and the Certificate, the purposes of the Company are to acquire the Property (as defined below) and to liquidate the Property, and in the course of liquidating the Property to hold, maintain, operate, develop, improve, subdivide, lease, finance, refinance, offer for sale and sell the Property and any portion of the Property, and do any and all other acts or things that may be necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of these purposes, 2 including but not limited to entering into joint venture arrangements with third parties as deemed appropriate to accomplish these purposes. 1.4 TERM. The Company shall commence on the date the Certificate is filed and shall continue until it is wound up and dissolved pursuant to the provisions of Section 7 of this Agreement. 1.5 OFFICE; AGENT. The registered office of the Company required by the Act to be maintained in the State of Delaware shall be located at 1209 Orange Street, Wilmington, Delaware 19801, or such other office (which need not be a place of business of the Company) as the Manager may designate from time to time in the manner provided by law. The name and address of the registered agent of the Company shall be The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The Company may have such other offices as the Manager may designate from time to time. 1.6 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: (a) ACT. The Delaware Limited Liability Company Act, as amended from time to time. (b) ADVISORY BOARD. The board described in Section 4.6 of this Agreement. (c) AFFILIATE. When used with reference to a specified Person, (i) any Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the specified Person, (ii) any Person that is an officer or director of, partner or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, director, partner, or trustee, or with respect to which the specified Person serves in a similar capacity, (iii) any Person that, directly or indirectly, is the beneficial owner of ten percent (10%) or more of any class or voting securities of, or otherwise has a substantial beneficial interest in, the specified Person or of which the specified Person has a substantial beneficial interest, and (iv) any immediate family member or spouse of the specified Person. (d) AGREEMENT. This Limited Liability Company Agreement, as originally executed and as amended, modified, supplemented or restated from time to time in accordance with its terms. (e) BANKRUPTCY. With respect to a Person, the Person (i) makes an assignment for the benefit of creditors, (ii) files a voluntary petition in bankruptcy, (iii) is adjudged a bankrupt or insolvent, or has entered against him an order for relief, in any bankruptcy or insolvency proceeding, (iv) files a petition or answer seeking for himself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of this nature, or (vi) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the Person or of all or any substantial part of his properties, or (vii) is the subject of any proceeding against the Person seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, if the proceeding has not been dismissed within 90 days after its commencement. 2 3 (f) BYLAWS. Rules and regulations governing meetings of Share Holders, voting procedures and similar matters, as adopted and amended from time to time by the Advisory Board. (g) CERTIFICATE. The Certificate of Formation of the Company, as originally filed and as amended or restated from time to time in accordance with this Agreement and the Act. (h) CODE. The Internal Revenue Code of 1986 or any successor statute, as amended from time to time. (i) COMPANY. Triad Park, LLC, a Delaware limited liability company. (j) DISTRIBUTABLE CASH. Cash funds of the Company from any source, less the sum of (i) an amount sufficient for the payment of all expenses of the Company then due and payable, (ii) reasonable reserves for the Company as determined by the Manager and approved by the Advisory Board and (iii) amounts required to be retained by the Company under the terms of the Distribution Agreement. (k) DISTRIBUTION AGREEMENT. The Real Estate Distribution Agreement among the Company, Triad, 3055 Management Corp. and 3055 Triad Dr. Corp., a California Corporation, as amended from time to time. (l) DISTRIBUTION DATE. The date on which Triad completes the distribution of the Shares to those Persons who were shareholders of Triad on the Record Date. (m) FISCAL YEAR. The taxable year of the Company shall end December 31 of each year. (n) INITIAL MEMBERS. Triad and 3055 Management Corp. (o) MAJOR DECISIONS. As defined in Section 4.6(b). (p) MAJORITY VOTE. The vote of Share Holders holding more than fifty percent (50%) of the Shares. (q) MANAGER. 3055 Management Corp., and any Person or Persons who succeed it as manager of the Company. (r) PERSON. A natural person, partnership (whether general or limited and whether domestic or foreign), limited liability company, trust, estate, association, corporation, custodian, nominee, or any other individual or entity, in its own or any representative capacity. (s) PROPERTY. The land and improvements to be contributed to the Company by Triad pursuant to the Distribution Agreement. (t) RECORD DATE. The date as of which the Triad stockholders of record who will receive the distributions of Shares are determined. (u) RIGHTS AGREEMENT. As defined in Section 9. 3 4 (v) SHARE. A Share Holder's rights as a member in the Company, collectively, including the right to share in the income, gains, losses, deductions, credit, or similar items of, and to receive distributions from, the Company, any right to vote or participate in management, and any right to information concerning the business and affairs of the Company. (w) SHARE HOLDER. A Person who is a member in the Company by being a holder of one or more Shares. (x) SPINOFF DISTRIBUTION. The distribution by Triad of the Shares to the Persons who were shareholders of Triad on the Record Date. (y) TAX DISTRIBUTION. As defined in Section 3.1. (z) TRANSFER AGENT. The company selected by the Manager, with the approval of the Advisory Board, to serve as registrar and transfer agent for the Shares, and any Person or Persons who succeed it as registrar and transfer agent for the Shares. (aa) TRANSFER APPLICATION. An application for transfer of Shares in the form set forth on the back of a Share certificate, substantially in the form attached to this Agreement as Exhibit A. (bb) TRIAD. Triad Systems Corporation, a Delaware corporation. SECTION 2. CAPITALIZATION OF THE COMPANY 2.1 TRIAD CONTRIBUTION. Prior to the Distribution Date, and subject to terms and conditions of the Distribution Agreement, Triad shall transfer title to its interest in the Property to the Company, subject only to the liabilities, liens and encumbrances as are expressly permitted under the Distribution Agreement, together with such other assets as may be required by the Distribution Agreement. In exchange for its contribution, Triad shall be admitted as an Initial Member and shall be issued a number of Shares equal to the aggregate number of outstanding shares of stock of Triad as of the Record Date. It is agreed that the fair market value of Triad's contribution shall be determined based upon an appraisal and shall be consistent with the value used for Triad's income tax returns. 2.2 3055 MANAGEMENT CORP. CONTRIBUTION. At the time Triad transfers the Property to the Company, 3055 Management Corp. shall contribute to the Company its promissory note in an amount equal to 1.01% of the fair market value of Triad's contribution pursuant to Section 2.1. The promissory note shall be due and payable 5 days after the Spinoff Distribution, shall be interest-free if timely paid, and shall contain such other provisions as Triad may reasonably require. In exchange for its contribution of the promissory note, 3055 Management Corp. shall be admitted as an Initial Member and shall be issued a number of Shares equal to 1.01% of the number of Shares issued to Triad pursuant to Section 2.1. 2.3 ADDITIONAL CAPITAL. No Share Holder shall have any obligation to contribute additional capital to the Company, other than as required under Sections 2.1 and 2.2 of this Agreement. If Company capital and revenues are insufficient to meet its cash requirements and the Company is unable to obtain loans on terms the Advisory Board deems acceptable, the Company may issue additional membership interests in exchange for additional contributions to the capital of the 4 5 Company, on such terms as are determined by the Advisory Board, which may involve the issuance of more Shares or may involve the issuance of other membership interests with priority over existing Shares as to distributions, taxable income or loss, voting rights and participation in management. Provided the additional membership interests have been issued in conformity with the determination of the Advisory Board, this Agreement may be amended by the Manager to reflect the sale of the additional membership interests, the admission of additional members and any changes in allocations of distributions, taxable income or loss, voting rights and participation in management, and such amendment shall not require the approval of the Share Holders. 2.4 LOANS. Subject to the approval of the Advisory Board, the Manager, from time to time and in its reasonable judgment, may obtain loans from third parties to meet operating expenses and capital expenditures of the Company, which loans may be unsecured or secured by all or a portion of Company assets. If loans from third parties are unavailable on terms and conditions which the Manager deems reasonable, then any Share Holder may, but shall not be obligated to, loan money to the Company. Any loan from a Share Holder shall bear interest at such rate and be payable on such terms as the lending Share Holder and the Manager may determine. SECTION 3. DISTRIBUTIONS AND ALLOCATIONS 3.1 DISTRIBUTIONS. In general, the Company shall distribute Distributable Cash to the Share Holders at such times and in such amounts as the Advisory Board may determine. Notwithstanding the preceding sentence, for each Fiscal Year of the Company in which the Company has taxable income (except the Fiscal Year in which the Company is liquidated), and to the extent the Company has sufficient Distributable Cash, the Company shall distribute not less than an amount equal to the product of (i) the Company's taxable income multiplied by (ii) the highest marginal federal income tax rate imposed on individual taxpayers (the "TAX DISTRIBUTION"). The Tax Distribution shall be completed not later than ninety (90) days after the end of the Fiscal Year in which the Company has taxable income. 3.2 ALLOCATION OF DISTRIBUTIONS. Distributions of the Tax Distribution and distributions of Distributable Cash shall be allocated and distributed to the Share Holders in proportion to their record ownership of Shares as of the date the distribution is declared. A declared distribution shall be made as soon as practicable after the declaration date. 3.3 WITHHOLDINGS AS DISTRIBUTIONS. Any amounts withheld by the Company pursuant to the Code or any other provision of state or local law with respect to any allocation or distribution to a Share Holder shall be treated as a distribution to the Share Holder for all purposes under this Agreement. If withholding payments exceed the amount of distributions the Share Holder would otherwise have received from the Company, the Share Holder shall be obligated to return such excess payments to the Company, plus interest at the rate of 10% per annum from the date(s) of such excess payments. 3.4 LIMITATIONS ON DISTRIBUTIONS. No Share Holder shall become entitled to any distribution from the Company until such time as the distribution is actually paid by the Company. No Share Holder has any right to demand and receive any distribution from the Company in any form other than money. No Share Holder may be compelled to accept from the Company a distribution of any asset in kind in lieu of a proportionate distribution of money being made to other 5 6 Share Holders. No distribution shall be made by the Company if the distribution is prohibited by Section 18-607(a) of the Act. 3.5 ALLOCATIONS OF INCOME OR LOSS. (a) Within 45 days after the end of each calendar month, the Company shall conduct an interim closing of the books as of the end of the last day of that calendar month. On the basis of the closing of the books for each calendar month, the Company shall determine the amounts of income, gain, loss, deduction and credit attributable to that calendar month. (b) Items of income, gain, loss, deduction or credit of the Company for any calendar month shall be allocated among the Share Holders of record as of the last day of that calendar month, in proportion to their ownership of Shares on such date. For purposes of accounting for transfers of Shares under this Section 3.5, transfers which are effective on or before the 15th day of a calendar month shall be deemed to be effective as of the first day of the calendar month, and transfers which are effective after the 15th day of a calendar month shall be deemed to be effective as of the first day of the succeeding calendar month. The effective date of a transfer of Shares shall be determined under Section 5.5 below. The allocations of income, gain, loss, deduction and credit under this Section 3.5 shall not affect the allocation of distributions under Sections 3.2 and 7.3. 3.6 REDEMPTION OF SHARES. Within 5 days after 3055 Management Corp. pays the promissory note described in Section 2.2 of this Agreement, the Company shall redeem Shares from the Share Holder or Share Holders who are the stockholders of 3055 Management Corp. The redemption shall be for an amount of cash equal to the capital contribution of 3055 Management Corp. and the number of Shares to be redeemed shall be equal to the number of Shares issued to 3055 Management Corp. If 3055 Management Corp. has more than one stockholder, the redemption shall be in proportion to their ownership of the stock of 3055 Management Corp. SECTION 4. MANAGEMENT 4.1 MANAGEMENT. The business and affairs of the Company shall be managed by the Manager. The Manager shall direct, manage, and control the business of the Company to the best of its ability and shall devote such time and effort to the business and affairs of the Company as may be necessary and appropriate for the success of the Company. The Manager need not be a Share Holder. The initial Manager shall be 3055 Management Corp. who shall continue as the Manager until it resigns or is removed by the Advisory Board. The Manager may resign upon 60 days prior written notice to the Advisory Board. The Manager may be removed at any time, with or without cause, by the Advisory Board and the Advisory Board may appoint the successor to any Manager who resigns or is removed. 4.2 SPECIFIC AUTHORITY OF THE MANAGER. Except as otherwise provided in this Agreement, the Manager shall have full and complete authority, power, and discretion to manage and control the business, affairs, and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business. Subject to the approval rights of the Advisory Board for Major Decisions, the Manager shall have the power and authority to take any of the following actions: 6 7 (a) To operate, maintain, develop and improve the Property and to apply for and obtain land use entitlements, building permits, zoning designations and variances, as the Manager determines are necessary or appropriate or in the best interests of the business of the Company; (b) To borrow money and, to secure any such borrowings, to mortgage, pledge or otherwise encumber any and all assets of the Company and the rights of the Company under any agreements; (c) To cause to be paid all amounts due and payable by the Company to any person and to collect all amounts due to the Company; (d) To lease any portion of the Property, and modify, terminate or extend any lease of any portion of the Property; (e) To employ such agents, employees, accountants, attorneys, consultants and other Persons, including itself and its Affiliates, necessary or appropriate to carry out the business and affairs of the Company, whether or not any such persons so employed are affiliated or related to any Share Holder, and to pay such fees, expenses, salaries, wages and other compensation to such Persons as the Manager shall in its sole discretion determine, except that any compensation paid to the Manager or any Affiliate of the Manager shall be approved by the Advisory Board; (f) To pay, extend, renew, modify, adjust, submit to arbitration, prosecute, defend or compromise, upon such terms as it may determine and upon such evidence as it may deem sufficient, any obligation, suit, liability, cause of action or claim, including taxes, either in favor of or against the Company; (g) To pay any and all reasonable fees and to make any and all reasonable expenditures which it, in its sole discretion, deems necessary or appropriate in connection with the organization of the Company, the management of the affairs of the Company, and the carrying out of its obligations and responsibilities under this Agreement and the Act, and to enforce all rights of the Company; (h) To offer for sale, sell, or otherwise dispose of any of any part of or any interest in the assets owned by the Company; (i) To file applications, to communicate and otherwise deal with any and all governmental agencies having jurisdiction over, or in any way affecting, the Company, the Property, or any aspect of the Company's business; (j) To make or revoke any election permitted the Company by any taxing authority; (k) To maintain such insurance coverage for public liability, fire and casualty, and any and all other insurance necessary or appropriate to the business of the Company, in such amounts and of such types, as the Manager shall determine from time to time, provided the insurance is available on terms which the Manager deems reasonable; (l) To apply, in accordance with the provisions of this Agreement, any insurance proceeds to the restoration of the Property or to distribute the proceeds; 7 8 (m) To cause to be paid any and all taxes, charges and assessments that may be levied, assessed or imposed upon the Company and any of the assets of the Company, unless the same are contested by the Manager in good faith; (n) To establish and maintain such reserves as the Manager and the Advisory Board determine are reasonably necessary or appropriate, and to invest Company reserves in such liquid investments as the Manager may select from time to time; (o) To engage in any kind of activity and to perform and carry out contracts of any kind necessary to, or in connection with or convenient or incidental to, the accomplishment of the purposes of the Company, so long as such activities and contracts may be lawfully carried on or performed by a limited liability company under applicable law, including but not limited to joint ventures or other business relationships for the joint development and sale of the Property or any portion of the Property; (p) To submit to the vote of the Advisory Board or the Share Holders any matter which the Manager determines is appropriate for approval; (q) To admit additional Share Holders or other members and permit additional capital contributions as provided in Section 2.3 (and appropriately amend this Agreement if necessary to reflect the admissions and additional capital contributions and other terms); and (r) Upon the dissolution of the Company, to liquidate and terminate the Company in accordance with the provisions of this Agreement. 4.3 LIMITATION ON MANAGER'S AUTHORITY. The Manager shall not have authority to: (a) Do any act in contravention of this Agreement or knowingly refrain from doing any act required by this Agreement; (b) Perform any act that would subject the Share Holders to liability for Company obligations in any jurisdiction, or refrain from performing any act if such failure would subject the Share Holders to personal liability for Company obligations in any jurisdiction; (c) Confess a judgment against the Company which would make it impossible to carry on the business of the Company; (d) Acquire any real property, including any interest in real property, or any other illiquid asset, other than the Property (except that this limitation shall not be construed to prevent the Manager from entering into lot line adjustments and similar arrangements with adjacent property owners); (e) Cause the Company to acquire any asset or enter into any transaction if the effect of such acquisition or transaction will be the receipt by the Company of income which is not "qualifying income" as that term is defined in Section 7704 of the Code; (f) Take any action that would cause the Company to be taxed as a corporation for federal income tax purposes; or 8 9 (g) Except as otherwise provided herein, amend this Agreement without the approval of the Share Holders. 4.4 DUTIES OF THE MANAGER. (a) Subject to the terms and conditions of this Agreement, the Manager shall proceed to liquidate the Property. (b) The Manager shall take all actions which may be necessary or appropriate for the continuation of the Company's existence as a limited liability company under the Act and to preserve the limited liability of the Share Holders. (c) The Manager shall cause to be prepared and timely filed each year, at the expense of the Company, all federal, state or local tax or information returns required of the Company, and shall cause the Company to pay any and all taxes that may be imposed on the Company, or for which the Company has a legal obligation to collect and/or remit, when and as the taxes are due. (d) The Manager shall not be obligated to devote full time to the affairs of the Company, but shall devote the amount of time reasonably necessary to manage the Company's business and perform the Manager's duties. 4.5 COMPENSATION. As compensation for additional California tax liability that the Share Holder-owners of 3055 Management Corp. will suffer, 3055 Management Corp. shall receive an annual fee equal to two percent (2%) of the net income, if any, allocated to 3055 Management Corp. under Section 3.5 for the previous Fiscal Year. This fee shall be paid within 60 days following the end of such Fiscal Year. 3055 Management Corp. or any successor Manager shall be entitled to receive additional compensation from the Company only as specified in a written agreement between the Manager and the Company, which agreement and any modifications of the agreement shall require the approval of the Advisory Board. 4.6 ADVISORY BOARD. (a) Following the Spinoff Distribution, an advisory board (the "ADVISORY BOARD") shall be formed. The Advisory Board shall be comprised of not less than three nor more than five individuals. The exact number of members of the Advisory Board shall be set from time to time by resolution of the Advisory Board. The initial members of the Advisory Board shall be those Persons who were members of the Board of Directors of Triad on the date of the contribution by Triad contemplated by Section 2.1 and who agree to serve as members of the Advisory Board. Those initial members of the Advisory Board shall hold office until the first meeting of Share Holders. Subsequent members of the Advisory Board shall be elected for two year terms. Members of the Advisory Board must be at least 18 years of age, but need not be Share Holders. Each member of the Advisory Board shall hold office until the expiration of the term for which elected or until a successor has been elected. A member of the Advisory Board may be removed at any time, with or without cause, by a Majority Vote. If a vacancy on the Advisory Board exists other than by removal, the vacancy may be filled by majority vote of the remaining members of the Advisory Board. If a vacancy on the Advisory Board exists because of the removal of a member, such vacancy may be filled only by Majority Vote. 9 10 (b) The Advisory Board shall meet with the Manager from time to time to consider Major Decisions and, in the discretion of its members, to advise and comment on the Company's business plan. In addition, any member of the Advisory Board may propose business strategies to the Manager. Except with respect to Major Decisions, any actions taken by the Advisory Board shall be advisory only and the Manager shall not be required or otherwise bound to act in accordance with any recommendations made by the Advisory Board or any of its members. The following proposed actions of the Company ("MAJOR DECISIONS") shall require approval of a majority of those members of the Advisory Board voting at a meeting at which a quorum is present: (1) Any offer to sell additional Shares or other membership interests and the rights, preferences and privileges of any additional membership interests. (2) The removal of the Manager, the engagement of a successor Manager, any contract, agreement or transaction with the Manager or any of its Affiliates and the payment of any compensation to the Manager or any of its Affiliates pursuant to Section 4.5. (3) Any contract, lease, agreement, or other transaction which will or might obligate the Company to perform any duties or make any payments for a period longer than three years, and the extension of any contract, lease, agreement, or other transaction beyond three years. (4) All sales, leases, or other dispositions of the Property or any portion of the Property, and the entering into any listing agreement for the purpose of selling, leasing or disposing of the Property or any portion of the Property. (5) Entering into any partnership, joint venture, or similar arrangement with any Person for the purpose of developing or marketing the Property or any portion of the Property. (6) Borrowing money or terminating, modifying, or amending any agreement relating to Company borrowings. (7) The construction of improvements to the Property or any portion of the Property, and the entering into any contracts or agreements to construct improvements to the Property, except those improvements required by existing agreements with the City of Livermore. (8) Any amendment, modification or termination of the existing agreements with the City of Livermore. (9) The appointment and removal of officers of the Company and the compensation, if any, to be paid to any officers. (10) The selection and terms of engagement of any management company to manage the Property and/or the liquidation of the Property. (11) The amount of any reserves to be retained by the Company in connection with the determination of Distributable Cash and the decision to make any distribution of Distributable Cash. 10 11 (12) The adoption of Bylaws and any amendment to the Bylaws. (13) The filing on behalf of the Company of a voluntary petition in bankruptcy or request for similar relief under any statute, law or regulation. (14) Entering into, and any amendment, modification or termination of the Rights Agreement, and the exercise of any rights, powers or elections under the Rights Agreement. (15) Selection and the terms of engagement of the Company's independent certified public accountants. (c) Meetings of the Advisory Board shall be held whenever called by the Manager or by any member of the Advisory Board. Notice of each meeting shall be given to each member of the Advisory Board at least two business days before the date on which the meeting is to be held. Members of the Advisory Board may participate in a meeting of the Advisory Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another. A quorum shall be at least one-half of the members of the Advisory Board. Participation in a meeting shall be a waiver of the requirement of notice of the meeting. (d) Any action required or permitted to be taken by the Advisory Board may be taken without a meeting, if all the members of the Advisory Board consent in writing to that action. Any action by written consent shall have the same force and effect as a unanimous vote of the Advisory Board. All written consents shall be filed with the minutes of the proceedings of the Advisory Board. (e) Members of the Advisory Board shall not possess or exercise any power of a manager under the Act. No member of the Advisory Board is an agent of the Company and no member of the Advisory Board (other than the Manager or an officer) can bind or execute any instrument on behalf of the Company. (f) Members of the Advisory Board shall be entitled to receive reimbursement of expenses and an annual retainer fee of $10,000 plus a fee of $750 for each regular meeting and $250 for each telephonic meeting of the Advisory Board which they attend, as compensation for their services as members of the Advisory Board. 4.7 OFFICERS. The Advisory Board may, from time to time, appoint one or more individuals to be officers of the Company. Any officers so appointed shall have such authority and perform such duties as set forth in the Bylaws or as the Advisory Board may, from time to time, delegate to them. Any number of offices may be held by the same individual. The salaries or other compensation, if any, of the officers and agents of the Company shall be fixed from time to time by the Advisory Board. Any officer may be removed from office, either with or without cause, by the Advisory Board. 4.8 LIABILITY OF MANAGER AND OTHERS. The Manager, an officer, or a member of the Advisory Board shall not be liable to the Company or the Share Holders for any mistake of fact or judgment or for the doing of, or failing to do, any act in conducting the business, operations and affairs of the Company, which may cause or result in any loss or damage to the Company or the 11 12 Share Holders, unless such mistake, act or failure to act is the result of the person's fraud, bad faith or willful misconduct. In performing his or her duties, a Manager, an officer, or a member of the Advisory Board shall be entitled to rely on information, opinion, reports, or statements, including financial statements and other financial information, prepared or provided by any attorney, independent accountant, officer, employee or other agent of the Company, or other Person as to matters which the Manager, officer, or member of the Advisory Board believes to be within such Person's professional or expert competence. The Manager, any officer and the members of the Advisory Board shall have only the duties imposed upon them by this Agreement. 4.9 INDEMNIFICATION. The Company shall indemnify and hold harmless, to the fullest extent permitted by law, (i) each Manager, (ii) each officer, (iii) each member of the Advisory Board, and (iv) each agent, partner, employee, counsel and Affiliate of each Manager, officer, member of the Advisory Board, or of any of their Affiliates (individually, an "Indemnified Party"), as follows: (a) The Company shall indemnify and hold harmless, to the fullest extent permitted by law, any Indemnified Party from and against any and all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements and other amounts ("Indemnified Costs") arising from all claims, demands, actions, suits or proceedings ("Actions"), whether civil, criminal, administrative or investigative, in which the Indemnified Party may be involved, or threatened to be involved, as a party or otherwise arising as a result of its status as (i) a Manager, (ii) an officer, (iii) a member of the Advisory Board, or (iv) an agent, partner, employee, counsel or Affiliate of a Manager, an officer, a member of the Advisory Board, or any of their Affiliates, regardless of whether the Indemnified Party continues in the capacity at the time the liability or expense is paid or incurred, and regardless of whether the Action is brought by a third party, a Share Holder, or by or in the right of the Company; provided, however, no such Person shall be indemnified for any Indemnified Costs which proximately result from the Person's fraud, bad faith or willful misconduct or the Person's material breach of this Agreement. (b) The Company shall pay or reimburse, to the fullest extent allowed by law and consistent with Section 4.9(a) above, in advance of the final disposition of the proceeding, Indemnified Costs incurred by the Indemnified Party in connection with any Action that is the subject of Section 4.9(a) above. (c) Notwithstanding any other provision of this Section 4.9, the Company shall pay or reimburse Indemnified Costs incurred by an Indemnified Party in connection with such Person's appearance as a witness or other participation in a proceeding involving or affecting the Company at a time when the Indemnified Party is not a named defendant or respondent in the proceeding. (d) The Manager shall cause the Company to purchase and maintain insurance or other arrangements on behalf of the Indemnified Parties against any liability asserted against any Indemnified Party and incurred by any Indemnified Party in that capacity, or arising out of the Indemnified Party's status in that capacity, regardless of whether the Company would have the power to indemnify the Indemnified Party against that liability under this Section 4.9. The indemnification provided by this Section 4.9 shall be in addition to any other rights to which the Indemnified Parties may be entitled under any agreement, any vote of the Share Holders, as a matter of law, or otherwise, and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnified Party. 12 13 (e) An Indemnified Party shall not be denied indemnification in whole or in part under this Section 4.9 because the Indemnified Party had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. 4.10 OTHER ACTIVITIES. Nothing in this Agreement shall be deemed to restrict or affect the freedom of any Share Holder, any Manager, or any member of the Advisory Board (or any of their Affiliates) to conduct any business or activity whatsoever, including real estate activities, or to own any interest in any business or entity whatsoever without any liability or accountability arising on the part of any Person to the Company or to any Share Holder in respect of any income, profit, opportunity or other matter derived from such business or activity. Neither a Share Holder, a Manager, a member of the Advisory Board, nor any of their Affiliates shall be obligated to present any particular investment opportunity to the Company even if such opportunity is of a character which, if presented to the Company, could be exploited by the Company, and each Share Holder, Manager and member of the Advisory Board and any of their Affiliates shall have the right to take for his own account or to recommend to others any such particular investment opportunity. 4.11 CONFLICTS OF INTEREST. No contract or transaction between the Company and one or more of the members of the Advisory Board or an Affiliate of one or more of the members of the Advisory Board shall be void or voidable solely by reason of such contractual relationship, or solely because the interested member(s) of the Advisory Board is (are) present at or participate(s) in the meeting of the Advisory Board which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) The material facts as to his or their relationship and as to the contract or transaction are disclosed or are known to the Advisory Board and the Advisory Board in good faith authorizes the contract or transaction by the affirmative votes of a majority of disinterested members of the Advisory Board, even though the disinterested members be less than a quorum; or (b) The material facts as to his or their relationship and as to the contract or transaction are disclosed or are known to the Share Holders and the contract or transaction is specifically approved in good faith by a Majority Vote; or (c) The contract or transaction is fair to the Company as of the time it is authorized, approved or ratified by the Advisory Board. SECTION 5. INTERESTS OF SHARE HOLDERS 5.1 ADMISSION OF SHARE HOLDERS. (a) The Initial Members of the Company are the Persons executing this Agreement, each of whom is admitted to the Company as a Share Holder effective upon the execution by such Person of this Agreement. Upon completion of the Spinoff Distribution, Triad shall cease to be a Share Holder and shall have no further rights as a Share Holder under this Agreement or the Act. (b) Upon completion of the Spinoff Distribution and upon registration of their names in the records of the Company, the Persons who receive Shares from Triad shall be automatically admitted as Share Holders. 13 14 (c) Persons who acquire Shares or other membership interests pursuant to Section 2.3 of this Agreement shall become members upon execution of this Agreement and upon registration of their names in the records of the Company and such other conditions as the Manager may require for admission. 5.2 AUTHORITY OF SHARE HOLDERS. No Share Holder, acting solely in the capacity of a Share Holder, is an agent of the Company and no Share Holder (other than a Manager or an officer) can bind or execute any instrument on behalf of the Company. 5.3 VOTING RIGHTS OF SHARE HOLDERS. The Share Holders shall have the right to vote on the matters set forth in this Agreement, including the matters listed in this Section 5.3. Except as otherwise provided in this Agreement or in the Act, matters on which the Share Holders may vote shall require approval by Majority Vote. Share Holders shall have the right to vote on the following matters: (a) The election and removal of members of the Advisory Board, pursuant to Section 4.6; (b) Any amendment of this Agreement; provided, however, (i) no amendment may require a Share Holder to contribute additional capital to the Company unless the Share Holder has approved the amendment, and (ii) the Manager shall have the power to amend this Agreement without the vote of the Share Holders to the extent permitted under Section 10.10(b); (c) Any merger of the Company with or into another business entity; (d) The dissolution of the Company pursuant to Section 7.1(a); and (e) Such other matters as the Manager or the Advisory Board may from time to time elect to submit to the vote of the Share Holders, it being understood and agreed that the Manager and the Advisory Board shall not be obligated to submit any other matters to the vote of the Share Holders. 5.4 WITHDRAWAL. A Share Holder who withdraws or resigns from the Company, whether by assignment of his Shares or otherwise, shall not have the right to receive the fair value of his Shares from the Company. 5.5 REGISTRATION AND TRANSFERS OF SHARES. (a) The Company shall keep or cause to be kept on behalf of the Company a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 5.5(b), the Company will provide for the registration and transfer of Shares. The Transfer Agent is appointed registrar and transfer agent for the purpose of registering Shares and transfers of Shares as provided in this Agreement. The Company shall not recognize transfers of Shares unless such transfers are effected in the manner described in this Section 5.5. Upon surrender of a share certificate for registration and transfer, and subject to the provisions of Section 5.5(b), the appropriate officers of the Company or the Manager on behalf of the Company shall execute and deliver, and the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder's instructions, one or more new certificates evidencing the same aggregate number of Shares as was evidenced by the certificate surrendered. 14 15 (b) The Company shall not recognize any transfer of Shares until the certificates evidencing the Shares are surrendered for registration of transfer and the certificates are accompanied by a Transfer Application and such other instruments and documents as are reasonably required by the Manager duly executed by the transferee (or the transferee's attorney-in-fact duly authorized in writing). No charge shall be imposed by the Company for the transfer; provided, that as a condition to the issuance of any new certificate under this Section 5.5, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect to the issuance. (c) The Company and the Manager shall be entitled to treat the record owner (as reflected on the books of the Company) of any Shares as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to the record owner until such time as a Transfer Application has been received by the Company. The effective date of a transfer shall be (i) the date of receipt and acceptance by the Transfer Agent of the Transfer Application, or (ii) such later date as may be specified in the Transfer Application. (d) A transferee of Shares who has completed and delivered a Transfer Application shall be deemed to have (i) agreed to comply with and be bound by and to have executed this Agreement, and (ii) represented and warranted that the transferee has the right, power and authority and, if an individual, the capacity to enter into this Agreement. (e) The Manager may impose restrictions on the transfers of Shares if the Manager determines that restrictions are necessary to avoid a significant risk of the Company becoming taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes. The restrictions may be imposed by making such amendments to this Agreement as the Manager may determine to be necessary or appropriate to impose the restrictions; provided, however, that any amendment that the Manager believes, in the exercise of its reasonable discretion, could result in the delisting or suspension of trading of Shares on the principal national securities exchange on which the Shares are then traded must be approved, prior to the amendment being effected, by the Advisory Board. 5.6 DECEASED, INCOMPETENT OR DISSOLVED SHARE HOLDER. The death, incompetence, or dissolution of a Share Holder shall not cause dissolution of the Company. If a Share Holder who is an individual dies or is adjudged by a court of competent jurisdiction to be incompetent to manage the Share Holder's person or property, the Share Holder's executor, administrator, guardian, conservator, or other legal representative may exercise all of the Share Holder's rights for the purpose of settling the Share Holder's estate or administering the Share Holder's property. If a Share Holder is a corporation, trust, or other entity and is dissolved or terminated, the powers of that Share Holder may be exercised by its legal representative or successor. SECTION 6. ACCOUNTING MATTERS 6.1 MAINTENANCE OF RECORDS. The Company shall maintain the following records: (a) A current list of the full name and last known business, residence, or mailing address of each Share Holder and Manager. 15 16 (b) A copy of the Certificate and all amendments, together with any powers of attorney pursuant to which any amendment has been executed. (c) Copies of the Company's federal, state and local income tax or information returns for each Fiscal Year. (d) Copies of this Agreement and any amendments to this Agreement, together with any powers of attorney pursuant to which any amendment has been executed. (e) True and full information regarding the status of the business and financial condition of the Company. (f) True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each Share Holder and which each Share Holder has agreed to contribute in the future, and the date on which each became a Share Holder. 16 17 6.2 DELIVERY TO SHARE HOLDERS AND INSPECTION. (a) Except as provided in Section 6.2(b), any Company records are subject to inspection and copying for a proper purpose at the reasonable request, and at the expense, of any Share Holder during ordinary business hours. A Share Holder's agent or attorney has the same inspection and copying rights as the Share Holder. The right to copy records includes, if reasonable, the right to receive copies made by photographic, xerographic or other means. The Company may impose a reasonable charge, not to exceed the estimated cost of labor and material for production or reproduction, for copies of any documentation provided to a Share Holder. Any demand by a Share Holder under this Section shall be in writing and shall state the purpose of such demand. (b) The Manager shall have the right to keep confidential from the Share Holders, for such period of time as the Manager deems reasonable, any information which the Manager reasonably believes to be in the nature of trade secrets or other information the disclosure of which the Manager in good faith believes is not in the best interest of the Company or its business or which the Company is required by law or by agreement with a third party to keep confidential. 6.3 REPORTS. The Company shall send or cause to be sent to each Share Holder within 90 days after the end of each Fiscal Year such information as is necessary to complete federal and state income tax or information returns for the year. 6.4 TAX AND ACCOUNTING MATTERS. (a) All accounting matters shall be determined in accordance with generally accepted accounting practices and principles, consistently applied. The revenues and expenses and the operations of the Company shall be reported on the accrual method for both accounting and tax purposes. (b) The Manager shall be the "tax matters partner" for purposes of the Code. The tax matters partner shall act on behalf of the Company in the event of an audit of the Company by the Internal Revenue Service, and may make such decisions and take such actions in the course of any such audit as he deems necessary or desirable. (c) As soon as practicable after the end of each Fiscal Year, the Company's financial statements shall be audited by a firm of independent certified public accountants selected by the Manager and approved by the Advisory Board. (d) The Company shall elect to be taxed as a partnership for federal income tax purposes, but shall elect to be taxed as a corporation for California state income tax purposes. SECTION 7. DISSOLUTION AND LIQUIDATION 7.1 EVENTS OF DISSOLUTION. Except as otherwise provided in this Agreement, the Company shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: (a) Upon a Majority Vote to dissolve the Company. 17 18 (b) Upon the sale or other disposition of all or substantially all of the assets and properties of the Company and distribution to the Share Holders of the proceeds of the sale or other disposition. The Company shall not dissolve, but shall continue in the event of the death, retirement, resignation, expulsion, bankruptcy or dissolution of any Share Holder. 7.2 EFFECT OF DISSOLUTION. Upon any dissolution of the Company under this Agreement or the Act, except as otherwise provided in this Agreement, the continuing operation of the Company's business shall be confined to those activities reasonably necessary to wind up the Company's affairs, discharge its obligations, and liquidate its assets and properties in a businesslike manner. 7.3 LIQUIDATION AND TERMINATION. (a) If the Company is dissolved, then an accounting of the Company's assets, liabilities and operations through the last day of the month in which the dissolution occurs shall be made, and the affairs of the Company shall thereafter be promptly wound up and terminated. Unless the Manager has dissolved or entered into Bankruptcy, the Manager shall serve as the liquidating trustee of the Company. If the Manager has dissolved or entered into Bankruptcy, the Advisory Board shall appoint one or more Persons to serve as the liquidating trustee of the Company. The liquidating trustee will be responsible for winding up and terminating the affairs of the Company and will determine all related matters (including, without limitation, the arrangements to be made with creditors, to what extent and under what terms the assets of the Company are to be sold, and the amount or necessity of cash reserves to cover contingent liabilities) as the liquidating trustee deems advisable and proper. The liquidating trustee will liquidate the assets of the Company as promptly as is consistent with obtaining their fair market value, and the proceeds, to the extent sufficient, will be applied and distributed in the following order: (1) To the payment and discharge of all of the Company's debts and liabilities to creditors (including Share Holders) in the order of priority as provided by law, other than liabilities for distributions to Share Holders; and (2) The balance, if any, to the Share Holders in proportion to their ownership of Shares as of the date of distribution. All distributions shall be made by the end of the Fiscal Year in which the liquidation occurs or, if later, within ninety (90) days after the date of liquidation. (b) After all of the assets of the Company have been distributed, the Company's legal existence shall terminate; however, if at any time thereafter any funds in any cash reserve fund referred to in Section 7.3(a) are released because the need for the cash reserve fund has ended, the funds shall be distributed to the Share Holders in the same manner as if the distribution had been made pursuant to Sections 7.3(a)(1) and (2) above. (c) Notwithstanding anything to the contrary in this Agreement, upon a liquidation within the meaning of Treasury Regulation section 1.704-1(b)(2)(ii)(g), if any Share Holder has a deficit or negative balance in the Share Holder's capital account (after giving effect to all contributions, distributions, allocations, and other capital account adjustments for all taxable years, including the year during which such liquidation occurs), the Share Holder shall have no obligation to make any capital contribution to the Company, and the negative balance of the Share Holder's capital account 18 19 shall not be considered a debt owed by the Share Holder to the Company or to any other Person for any purpose whatsoever. 7.4 CERTIFICATE OF CANCELLATION. Upon the completion of the winding up of the affairs of the Company, the Manager shall prepare, execute and deliver to the Delaware Secretary of State a certificate of cancellation in accordance with Section 18-203 of the Act. 7.5 RECOURSE TO ASSETS. The Share Holders shall look solely to the assets of the Company for any profits or return of their capital contributions. If the assets remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return a Share Holder's capital contributions or profits, the Share Holder shall have no recourse against the Company or the other Share Holders. SECTION 8. DISPUTE RESOLUTION 8.1 DISPUTE RESOLUTION. Any controversy, dispute or claim ("CLAIM") between any Share Holder and the Company or between the Manager and the Company, arising out of or relating to this Agreement or the Company, whether arising in contract or tort, law or equity, shall be subject to a non-binding mediation, and if not then resolved, may be determined by litigation, both subject to the provisions of this Section 8. 8.2 MEDIATION. (a) Any Claim shall first be the subject of a non-binding mediation ("MEDIATION"), conducted in the County of Alameda, State of California, by a retired judge or other mediator who is a member of Judicial Arbitration & Mediation Services, Inc./Endispute ("JAMS") or other agreed upon mediator. Any Share Holder, Manager or the Company may initiate the Mediation by written notice to the Company, Manager or the Share Holder(s) involved in the Claim. The date the notice is given is referred to as the "MEDIATION INITIATION DATE." (b) The mediator ("MEDIATOR") shall be selected by mutual agreement to the parties to the Claim or, if they cannot agree within thirty (30) days after the Mediation Initiation Date, the Mediator shall be selected through such procedures as JAMS regularly follows. (c) The Mediation shall be held within thirty (30) days after the Mediator is selected, or such longer period as the parties to the Claim and the Mediator mutually decide. (d) The Company shall bear the cost of the Mediator's fees and expenses, but each party to the Claim shall pay its own attorneys' and expert witness fees and any other related costs. 8.3 LITIGATION. (a) If the Claim has not been resolved by Mediation as provided in this Section 8 within one hundred eighty (180) days of the Mediation Initiation Date, either party may initiate litigation upon ten (10) days written notice to the other party; provided, however, that if one party has requested the other to participate in the Mediation and the other has failed to participate, the requesting party may initiate litigation before the expiration of the above period. 19 20 (b) The procedures specified in this Section 8 shall be the sole and exclusive procedures for the resolution of Claims; provided, however, that a party, without prejudice to the procedures of this Section 8, may file a complaint for statute of limitations purposes or to seek a preliminary injunction or other provisional relief judicial relief if in its sole judgment such action is necessary to avoid irreparable damage or to preserve the status quo. Despite such action, the parties shall continue to participate in good faith in the procedures specified in this Section 8. (c) All applicable statutes of limitation and defenses based upon the passage of time shall be tolled while the procedures specified in this Section 8 are pending. The parties will take such action, if any, required to effectuate the tolling. (d) Each Share Holder, Manager and the Company irrevocably submit in any suit, action or proceeding arising out of a Claim to the jurisdiction of the Superior Court of County of Alameda, State of California or the United States District Court in the Northern District of California. (e) In any suit, action or proceeding arising out of a Claim, each party to the Claim shall pay its own attorneys' and expert witness fees and any other related costs. SECTION 9. RIGHTS AGREEMENT At the discretion of the Advisory Board, the Company may enter into the Rights Agreement in substantially the form attached to this Agreement as Exhibit B (the "RIGHTS AGREEMENT") and may perform such acts and make such elections as are required or permitted under the Rights Agreement. SECTION 10. GENERAL PROVISIONS 10.1 GOVERNING LAW. This Agreement and the rights of the parties under this Agreement will be governed by, interpreted, and enforced in accordance with the laws of the State of Delaware. 10.2 BINDING EFFECT. This Agreement will be binding upon and inure to the benefit of the Share Holders, and their respective distributees, successors and assigns; provided, however, nothing contained in this Section 10.2 shall limit the effectiveness of any restriction on transfers of Shares. 10.3 TERMS. Any reference to the Act, the Code or other statutes or laws will include all amendments, modifications, or replacements of the specific sections and provisions concerned. In cases of uncertainty this Agreement shall be construed without regard to which of the parties caused the uncertainty to exist. 10.4 HEADINGS. All headings are inserted only for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement. 10.5 SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under the present or future laws effective during the term of this Agreement, the provision will be fully severable; this Agreement will be construed and enforced as if the illegal, invalid, or unenforceable provision had never comprised a part of this Agreement; and the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of the illegal, invalid or unenforceable provision, there will be added automatically as a part of 20 21 this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 10.6 MULTIPLE COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and counterpart signature pages may be assembled to form a single original document. 10.7 ADDITIONAL DOCUMENTS AND ACTS. Each Share Holder agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement and the transactions contemplated by this Agreement. 10.8 NO THIRD PARTY BENEFICIARY. This Agreement is made solely and specifically among and for the benefit of the parties, and their respective successors and assigns subject to the express provisions relating to successors and assigns, and no other Person will have any rights, interest or claims or be entitled to any benefits under or on account of this Agreement as a third party beneficiary or otherwise. 10.9 NOTICES. All notices, consents, requests, demands or other communications to or upon the respective parties shall be in writing and shall be effective for all purposes upon receipt on any business day before 5:00 PM local time and on the next business day if received after 5:00 PM or on other than a business day, including without limitation, in the case of (i) personal delivery, (ii) delivery by messenger, express or air courier or similar courier, (iii) delivery by United States first class certified or registered mail, postage prepaid and (iv) transmittal by telecopier or facsimile. In this section "business days" means days other than Saturdays, Sundays, and federal and state legal holidays. Receipt of communications by United States first class or registered mail will be sufficiently evidenced by return receipt. Receipt of communications by facsimile shall be sufficiently evidenced by a machine generated report of transmission without notation of error. In the case of illegible or otherwise unreadable facsimile transmissions, the receiving party shall promptly notify the transmitting party of any transmission problem and the transmitting party shall promptly resend any affected pages. 10.10 AMENDMENTS. (a) AMENDMENTS TO AGREEMENT. Except to the extent the Manager has the authority to amend this Agreement, it may be amended in whole or in part only as provided in Section 5.3. Provided an amendment has been approved as required by this Agreement, the amendment may be signed by the Manager on behalf of the Share Holders. If any conflict arises between the provisions of the amendment, or amendments, and the terms of this Agreement, the most recent provisions shall govern and control. (b) AMENDMENTS BY MANAGER. This Agreement may be amended by the Manager without the consent of any of the Share Holders: (1) as provided in Sections 2.3 and 4.2(q); (2) as provided in Section 5.5(e); (3) to cure any ambiguity, to correct or supplement any provision of this Agreement which may be inconsistent with any other provisions of this Agreement, or to make any other provision with respect to matters or questions arising under this Agreement not inconsistent with the intent of this Agreement; and (4) to change any provision of this Agreement required to be 21 22 so changed by the staff of the Securities and Exchange Commission or other federal agency or a state "Blue Sky" commissioner, a listing agency, or similar official, which change is deemed by the commissioner, agency, or official to be for the benefit or protection of the Share Holders. (c) AMENDMENTS TO CERTIFICATE. The Certificate shall be amended whenever required by the provisions of this Agreement or by the Act. Any such amended Certificate shall be filed for record by the Manager as required by the Act, and this Agreement shall also be amended as necessary to reflect such change. 10.11 TITLE TO COMPANY PROPERTY. Legal title to all property of the Company will be held and conveyed in the name of the Company. 10.12 WAIVER. No waiver of any obligations under this Agreement will be enforceable or admissible unless set forth in a writing signed by the party against which enforcement or admission is sought. No delay or failure to require performance of any provision of this Agreement shall constitute a waiver of that provision as to that or any other instance. Any waiver granted shall apply solely to the specific instance expressly stated. 10.13 ENTIRE AGREEMENT. This Agreement contains the entire understanding between the Share Holders and supersedes any prior written or oral agreements between them regarding the same subject matter. There are no representations, agreements, arrangements or understandings, oral or written, between the Share Holders relating to the subject matter of this Agreement which are not fully expressed in this Agreement. 10.14 NO STATE LAW PARTNERSHIP. The Share Holders intend that the Company not be a partnership (including, without limitation, a limited partnership) or joint venture, and that no Share Holder be an agent, partner or joint venturer of any other Share Holder, for any purposes other than federal and state tax purposes, and this Agreement shall not be construed to suggest otherwise. The Initial Members have executed this Agreement as of the date set forth above. TRIAD SYSTEMS CORPORATION, a Delaware corporation 3055 MANAGEMENT CORP., a California corporation By /S/ JAMES R. PORTER By /s/ JAMES R. PORTER -------------------- -------------------- Title: President Title: Vice President, Secretary, & CFO
22 EX-2.2 3 BY-LAWS OF TRIAD PARK, LLC 1 BYLAWS OF TRIAD PARK, LLC A DELAWARE LIMITED LIABILITY COMPANY 2 TABLE OF CONTENTS
PAGE ARTICLE I MEETINGS OF MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.01 PLACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02. BIANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.03. MATTERS TO BE CONSIDERED AT BIANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.04. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.05. NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.06. SCOPE OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.07. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.08. VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.09. PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.10. CONDUCT OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.11. TABULATION OF VOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.12. INFORMAL ACTION BY SHARE HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.13. VOTING BY BALLOT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE II ADVISORY BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.01. GENERAL POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.02. NUMBER, TENURE, QUALIFICATION, NOMINATION AND ELECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.03. BIANNUAL AND REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.04. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.05. NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.06. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.07. VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.08. CONDUCT OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.09. RESIGNATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.10. REMOVAL OF ADVISORY BOARD MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.11. VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.01. NUMBER, TENURE AND QUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.02. DELEGATION OF POWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
i 3 TABLE OF CONTENTS (Continued)
PAGE 3.03. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.04. CONDUCT OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.05. INFORMAL ACTION BY COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.01. POWERS AND DUTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.02. REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.03. VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.04. CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.05. PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.06. VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.07. SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.08. TREASURER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.09. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.10. SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE V SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.01. SHARE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.02. SHARE REGISTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.03. RECORDING TRANSFERS OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.04. LOST CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.05. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE VI DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.01. AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.02. CONTINGENCIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE VII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.01. SECRETARY TO GIVE NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.02. WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ii 4 TABLE OF CONTENTS (Continued)
PAGE ARTICLE VIII AMENDMENT OF BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.01. BY ADVISORY BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
iii 5 BY LAWS OF TRIAD PARK, LLC A Delaware limited liability company ("Company") ARTICLE I MEETINGS OF MEMBERS 1.01. PLACE. All meetings of the holders of the issued and outstanding Shares of the Company (the "Share Holders") shall be held at 3055 Triad Drive, Livermore, California (or any subsequent address selected by the Advisory Board) or at such other place within the United States as shall be stated in the notice of the meeting. 1.02. BIANNUAL MEETING. Biannual meetings of the Share Holders for the election of Advisory Board members and the transaction of any business within the powers of the Company shall be held at 3055 Triad Drive, Livermore, California (or any subsequent address selected by the Advisory Board) on the last Thursday of March of each even numbered year, beginning with March 26, 1998, or at such other date and time during March of the even numbered years as may be fixed by the Advisory Board. If the day fixed for the biannual meeting shall be a legal holiday, such meeting shall be held at the same time on the next succeeding business day. 1.03. MATTERS TO BE CONSIDERED AT BIANNUAL MEETING. At a biannual meeting of Share Holders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the biannual meeting (a) by, or at the direction of, a majority of the Advisory Board or (b) by any Share Holder (both as of the time notice of such proposal is given by the Share Holder as set forth below and as of the record date for the biannual meeting in question) of the Company entitled to vote at such biannual meeting who complies with the procedures set forth in this Section 1.03. For a proposal to be properly brought before a biannual meeting by a Share Holder, the Share Holder must have given timely notice in writing to the Secretary of the Company, and the Share Holder or his representative must be present in person at the biannual meeting. For the first biannual meeting, a Share Holder's notice shall be timely if delivered to, or mailed and received at, the principal executive office of the Company not later than the close of business on the twentieth (20th) calendar day (or if that day is not a business day for the Company, on the next business day) following the date on which notice of the date of the first biannual meeting is mailed or otherwise transmitted to Share Holders. For all subsequent biannual meetings, notice shall be timely, if delivered to, or mailed and received at, the principal executive office of the Company (a) not less than thirty (30) days nor more than one hundred eighty (180) days prior to the second anniversary date of the immediately preceding biannual meeting of Share Holders or special meeting in lieu thereof (the "Anniversary Date") or (b) in the event that the biannual meeting of Share Holders is called for a date more than 10 calendar days prior to the 6 Anniversary Date, not later than the close of business on the 20th calendar day (or if that day is not a business day for the Company, on the next business day) following the date on which notice of the date of such meeting was mailed or otherwise transmitted to Share Holders. A Share Holder's notice to the Secretary shall set forth as to each matter the Share Holder proposes to bring before the biannual meeting (a) a brief description of the proposal desired to be brought before the biannual meeting and the reasons for conducting such business at the biannual meeting, (b) the name and address, as they appear on the Company's transfer books, of the Share Holder proposing such business and of the beneficial owners (if any) of the Shares registered in the Share Holder's name and the name and address of other Share Holders known by the Share Holder to be supporting the proposal on the date of the Share Holder's notice, (c) the number of shares of the Company which are beneficially owned by the Share Holder and such beneficial owners (if any) on the date of the Share Holder's notice and by any other Share Holders known by the Share Holder to be supporting such proposal on the date of such Share Holder's notice, and (d) any financial interest of the Share Holder or of any beneficial owner in the proposal. If the Advisory Board, or a designated committee, determines that any Share Holder proposal was not timely made in accordance with the terms of this Section 1.03, the proposal shall not be presented for action at the biannual meeting in question. If the Advisory Board, or a designated committee, determines that the information provided in a Share Holder's notice does not satisfy the informational requirements of this section in any material respect, the Secretary of the Company shall promptly notify the Share Holder of the deficiency in the notice. The Share Holder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such a period of time, not to exceed five (5) days from the date the deficiency notice is given to the Share Holder, as the Advisory Board or the committee shall reasonably determine. If the deficiency is not cured within the period, or if the Advisory Board or the committee determines that the additional information provided by the Share Holder, together with the information previously provided, does not satisfy the requirements of this Section 1.03 in any material respect, then the proposal shall not be presented for action at the biannual meeting in question. Notwithstanding the procedure set forth in the preceding paragraph, if neither the Advisory Board nor the committee makes a determination as to the validity of any Share Holder proposal as set forth above, the presiding officer of the biannual meeting shall determine and declare at the biannual meeting whether the Share Holder proposal was made in accordance with the terms of this Section 1.03. If the presiding officer determines that a Share Holder proposal was made in accordance with the terms of this Section 1.03, the presiding officer shall so declare at the biannual meeting. If the presiding officer determines that a Share Holder proposal was not made in accordance with the provisions of this Section 1.03, the presiding officer shall so declare at the biannual meeting and such proposal shall not be acted upon at the biannual meeting. This provision shall not prevent the consideration and approval or disapproval at the biannual meeting of reports of officers, Advisory Board members and committees of the Advisory Board, but in connection with those reports, no new business shall be acted upon at the biannual meeting except in accordance with the provisions of this Section 1.03. 2 7 1.04. SPECIAL MEETINGS. The Chairman of the Advisory Board or a majority of the Advisory Board members may call special meetings of the Share Holders. Special meetings of Share Holders shall also be called by the Secretary upon the written request of the holders of Shares entitled to cast not less than twenty-five percent (25%) of all the votes entitled to be cast at the meeting. Such request shall state the purpose or purposes of the meeting and the matters proposed to be acted upon. 1.05. NOTICE. Not less than ten (10) nor more than ninety (90) days before the date of every meeting of Share Holders, written or printed notice of the meeting shall be given, in accordance with the Limited Liability Company Agreement of the Company (the "LLC Agreement"), to each Share Holder entitled to vote or entitled to notice by statute, stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute, the purpose or purposes for which the meeting is called. 1.06. SCOPE OF NOTICE. No business shall be transacted at a special meeting of Share Holders except that specifically designated in the notice. Any business of the Company may be transacted at the biannual meeting without being specifically designated in the notice, except such business as is required by statute to be stated in such notice. 1.07. QUORUM. At any meeting of Share Holders, the presence in person or by proxy of Share Holders entitled to cast a majority of the votes shall constitute a quorum; but this Section shall not affect any requirement under any statute or the LLC Agreement, for the vote necessary for the adoption of any measure. If, however, a quorum is not present at any meeting of the Share Holders, the Share Holders present in person or by proxy shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum is present and the meeting so adjourned may be reconvened without further notice. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally notified. The Share Holders present at a meeting which has been duly called and convened and at which a quorum is present at the time counted may continue to transact business until adjournment, notwithstanding the withdrawal of enough Share Holders to leave less than a quorum. 1.08. VOTING. A majority of the votes cast at a meeting of Share Holders duly called and at which a quorum is present shall be sufficient to take or authorize action upon any matter which may properly come before the meeting, unless more than a majority of the votes cast is specifically required by statute, by the LLC Agreement or by these Bylaws. Unless otherwise provided in the LLC Agreement, each outstanding share of the Company (a "Share"), regardless of class, shall be entitled to one vote upon each matter submitted to a vote at a meeting of Share Holders. 1.09. PROXIES. A Share Holder may vote the Shares owned of record by him or her, either in person or by proxy executed in writing by the Share Holder or by his or her duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 3 8 1.10. CONDUCT OF MEETINGS. The Chairman of the Advisory Board or, in the absence of the Chairman, the President or a Vice President, or, in the absence of the Chairman and the President and Vice Presidents, a presiding officer elected at the meeting, shall preside over meetings of the Share Holders (the "Presiding Officer"). The Secretary of the Company, or, in the absence of the Secretary and Assistant Secretaries, the person appointed by the Presiding Officer of the meeting shall act as secretary of the meeting. 1.11. TABULATION OF VOTES. At any biannual or special meeting of Share Holders, the Presiding Officer shall be authorized to appoint a Teller for such meeting. The Teller may, but need not, be an officer, employee or agent of the Company. The Teller shall be responsible for tabulating or causing to be tabulated shares voted at the meeting and reviewing or causing to be reviewed all proxies. In tabulating votes, the Teller shall be entitled to rely in whole or in part on tabulations and analyses made by personnel of the Company, its counsel, its transfer agent, its registrar or such other organizations that are customarily employed to provide such services. The Teller shall be authorized to determine the legality and sufficiency of all votes cast and proxies delivered under both the LLC Agreement and these Bylaws and applicable law. The Presiding Officer may review all determinations made by the Teller hereunder, and in doing so the Presiding Officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determinations made by the Teller. 1.12. INFORMAL ACTION BY SHARE HOLDERS. An action required or permitted to be taken at a meeting of Share Holders may be taken without a meeting if a consent in writing, setting forth such action, is signed by the owners of two thirds of the Shares. The consents may be signed by different Share Holders on separate counterparts. 1.13. VOTING BY BALLOT. Voting on any question or in any election may be by voice vote unless the Presiding Officer shall order or any Share Holder shall demand that voting be by ballot. ARTICLE II ADVISORY BOARD 2.01. GENERAL POWERS. The Advisory Board shall have the powers and duties set forth in the LLC Agreement. 2.02. NUMBER, TENURE, QUALIFICATION, NOMINATION AND ELECTION. (a) The number of Advisory Board members shall be within the minimum and maximum numbers set forth in the LLC Agreement, but the exact number may be increased or decreased by a unanimous vote of the Advisory Board then in office, with the nomination and election of additional Advisory Board members to take place in accordance with the provisions below. (b) The Share Holders shall, subject to the provisions of Section 4.6 of the LLC Agreement, elect the number of Advisory Board members fixed pursuant to Section 4.6 of the LLC Agreement or the number as may be increased or decreased from time to time by the 4 9 Advisory Board as provided in Section 2.02(a) above, if and to the extent there are nominees duly nominated in accordance with these Bylaws. Ballots bearing the names of all the persons who have been duly nominated for election as Advisory Board members at a biannual meeting of Share Holders in accordance with the procedures set forth in this Section 2.02 shall be provided for use at the biannual meeting. (c) Nominations of candidates for election as Advisory Board members at any biannual meeting of Share Holders at which Advisory Board members are to be elected may be made (i) by, or at the direction of, a majority of the Advisory Board or a duly authorized committee or (ii) by any holder of record (both as of the time notice of such nomination is given by the Share Holder as set forth below and as of the record date for the biannual meeting in question) of any Shares entitled to vote at the biannual meeting who complies with the notice procedures of this Section 2.02. Any Share Holder who seeks to make such a nomination, or his representative, must be present in person at the biannual meeting. Only persons nominated in accordance with the procedures set forth in this Section 2.02 shall be eligible for election as Advisory Board members at a biannual meeting. Nominations, other than those made by, or at the direction of, the Advisory Board or a duly authorized committee, shall be made pursuant to timely notice in writing to the Secretary of the Company as set forth in this Section 2.02. For the first biannual meeting of the Company, notice shall be timely if delivered to, or mailed and received at, the principal executive office of the Company not later than the close of business on the twentieth (20th) calendar day (or if that day is not a business day for the Company, the next business day) following the date on which notice of the first biannual meeting is mailed or otherwise transmitted to Share Holders. For all subsequent biannual meetings of the Company at which Advisory Board members are to be elected, notice shall be timely if delivered to, or mailed and received at, the principal executive offices of the Company not less than sixty (60) days nor more than one hundred fifty (150) days prior to the second anniversary of the last biannual meeting of Share Holders. Each Share Holder notice shall set forth (i) as to each person whom the Share Holder proposes to nominate for election or reelection as an Advisory Board member and as to the Share Holder giving the notice (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the person, (c) the number of Shares which are beneficially owned by the person on the date of the Share Holder notice and (d) any other information relating to the person that is required to be disclosed in solicitations of proxies with respect to nominees for election as may be deemed necessary or desirable by the Company's counsel, in the exercise of his or her discretion; and (ii) as to the Share Holder giving the notice (a) the name and address, as they appear on the Company's books, of the Share Holder and any other Share Holders known by the Share Holder to be supporting such nominees and (b) the number of Shares which are beneficially owned by the Share Holder on the date of the Share Holder notice and by any other Share Holders known by such Share Holder to be supporting such nominees on the date of the Share Holder notice. At the request of the Advisory Board or a committee appointed by it, any persons nominated by, or at the direction of, the Advisory Board or the committee for election as an Advisory Board member at a biannual meeting shall furnish to the Secretary of the Company that information required to be set forth in a Share Holder's notice of nomination which pertains to the nominee. 5 10 (d) If the Advisory Board, or a designated committee, determines that any Share Holder nomination was not timely made in accordance with the terms of this Section 2.02, or the information provided in a Share Holder's notice does not satisfy the informational requirements of this Section 2.04 in any material respect, then the Advisory Board or the committee, as the case may be, shall reject the Share Holder nomination and the nomination shall not be considered at the biannual meeting in question; provided, however, if the Share Holder's notice was duly received at least fifteen (15) days in advance of the last date on which such notice could have been timely made, then the Secretary of the Company shall, within ten (10) days after the Secretary's receipt of such notice, notify such Share Holder of the deficiency in the notice. The Share Holder receiving the notice from the Secretary shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such a period of time, not to exceed five (5) days from the date such deficiency notice is given to the Share Holder, as the Advisory Board or such committee shall reasonably determine. If the deficiency is not cured within the period, or if the Advisory Board or the committee reasonably determines that the additional information provided by the Share Holder, together with information previously provided, does not satisfy the requirements of this Section 2.02 in any material respect, then the Advisory Board shall reject the Share Holder's nomination and the nomination shall not be considered at the biannual meeting in question. (e) If neither the Advisory Board nor such committee makes a determination as to the validity of any nominations by a Share Holder as set forth above, the Presiding Officer of the biannual meeting shall determine and declare at the biannual meeting whether a nomination was made in accordance with the terms of this Section 2.02. If the Presiding Officer determines that a nomination was made in accordance with the terms of this Section 2.02, he shall so declare at the biannual meeting and ballots shall be provided for use at the meeting with respect to such nominee. If the Presiding Officer determines that a nomination was not made in accordance with the terms of this Section 2.02, he shall so declare at the biannual meeting and the nomination shall be disregarded. 2.03. BIANNUAL AND REGULAR MEETINGS. A biannual meeting of the Advisory Board may be held immediately after and at the same place as the biannual meeting of Share Holders, or such other time and place, either within or without the States of Delaware or California, as is selected by resolution of the Advisory Board, and no notice other than these Bylaws or such resolution shall be necessary. The Advisory Board may provide, by resolution, the time and place, either within or without the States of Delaware or California, for the holding of regular meetings of the Advisory Board without other notice than such resolutions. 2.04. SPECIAL MEETINGS. Special meetings of the Advisory Board may be called as provided in the LLC Agreement. The person or persons authorized to call special meetings of the Advisory Board may fix any place, either within or without the States of Delaware or California, as the place for holding any special meeting of the Advisory Board called by them. 2.05. NOTICE. Notice of any special meeting to be provided herein shall be given, in accordance with the LLC Agreement. Neither the business to be transacted at, nor the purpose of, any biannual, regular or special meeting of the Advisory Board need be specified in the notice, unless specifically required by statute or these Bylaws. 6 11 2.06. QUORUM. One half of the Advisory Board members then in office shall constitute a quorum for transaction of business at any meeting of the Advisory Board. 2.07. VOTING. The action of the number of Advisory Board members set forth in the LLC Agreement shall be the act of the Advisory Board. 2.08. CONDUCT OF MEETINGS. All meetings of the Advisory Board shall be called to order and presided over by the Chairman of the Board, or in the absence of the Chairman of the Board by the President (if a Share Holder of the Advisory Board), or, in the absence of the Chairman of the Board and the President, by a Share Holder of the Advisory Board selected by the members present. The Secretary of the Company shall act as secretary at all meetings of the Advisory Board, and in the absence of the Secretary and Assistant Secretaries, the presiding officer of the meeting shall designate any person to act as secretary of the meeting. Members of the Advisory Board may participate in meetings of the Advisory Board by conference telephone or similar communications equipment by means of which all Advisory Board members participating in the meeting can hear each other at the same time, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for all purposes. 2.09. RESIGNATIONS. Any Advisory Board member may resign from the Advisory Board or any committee thereof at any time. Such resignation shall be made in writing and shall take effect at the time specified herein, or if no time be specified, at the time of the receipt of notice of such resignation by the President or the Secretary. 2.10. REMOVAL OF ADVISORY BOARD MEMBERS. Any Advisory Board member may be removed from office only in the manner set forth in the LLC Agreement. 2.11. VACANCIES. Vacancies on the Advisory Board shall be filled in the manner set forth in the LLC Agreement. ARTICLE III COMMITTEES 3.01. NUMBER, TENURE AND QUALIFICATION. The Advisory Board may appoint from among its members one or more committees, composed of two or more Advisory Board members, to serve at the pleasure of the Advisory Board. 3.02. DELEGATION OF POWER. The Advisory Board may delegate to these committees in the intervals between meetings of the Advisory Board any of the powers of the Advisory Board to manage the business and affairs of the Company, except those powers which pursuant to the LLC Agreement require action by the Advisory Board. 3.03. QUORUM. All of the members of any committee shall be present in person at any meeting of the committee in order to constitute a quorum for the transaction of business at the meeting, and the act of a majority of those present shall be the act of the committee. 3.04. CONDUCT OF MEETINGS. Each committee shall designate a presiding officer of the committee, and if not present at a particular meeting, the committee shall select a presiding 7 12 officer for the meeting. Members of any committee may participate in meetings of the committee by conference telephone or similar communications equipment by means of which all committee members participating in the meeting can hear each other at the same time, and participation in a meeting in this manner shall constitute presence in person at the meeting for all purposes. Each committee shall keep minutes of its meetings, and report the results of any proceedings at the next succeeding biannual or regular meeting of the Advisory Board. 3.05. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Advisory Board may be taken without a meeting, if a written consent to such action is signed by all members of the committee and the written consent is filed with the minutes of proceedings of the committee. Consents may be signed by different members on separate counterparts. ARTICLE IV OFFICERS 4.01. POWERS AND DUTIES. The officers of the Company shall be elected biannually by the Advisory Board at the first meeting of the Advisory Board held after each biannual meeting of Share Holders. If the election of officers shall not be held at this meeting the election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is duly elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except President and Vice President may be held by the same person. Election or appointment of an officer or agent shall not of itself create contract rights between the Company and the officer or agent. The officers shall have such powers and duties as are set forth in these Bylaws or as delegated by the Advisory Board, provided, however, that the powers and duties of the officers shall be subject and subordinate to the powers and duties of the manager of the Company (the "Manager") as set forth in the LLC Agreement or in any written agreement between the Manager and the Company. If the Advisory Board elects not to appoint the officers authorized by these Bylaws, the duties delegated to the officers in these Bylaws shall be performed by the Manager. 4.02. REMOVAL. Any officer or agent elected or appointed by the Advisory Board may be removed by the Advisory Board whenever in its judgment the best interests of the Company would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. The fact that a person is elected to an office, whether or not for a specified term, shall not by itself constitute any undertaking or evidence of any employment obligation of the Company to that person. 4.03. VACANCIES. A vacancy in any office may be filled by the Advisory Board for the unexpired portion of the term. 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Advisory Board shall preside at all meetings of the Share Holders and of the Advisory Board. The Chairman of the Advisory Board may sign and execute all authorized bonds, contracts or other obligations in the name of the Company. 8 13 4.05. PRESIDENT. Unless the Advisory Board shall otherwise determine in favor of the Chairman of the Advisory Board or any other officer of the Company, the President shall be the Chief Executive Officer of the Company and, subject to the powers and duties of the Manager, shall in general supervise and control all of the business and affairs of the Company. In the absence of the Chairman of the Advisory Board, the President shall preside at all meetings of the Share Holders and of the Advisory Board (if a Share Holder of the Advisory Board). The President may sign any deed, mortgage, bond, contract or other instruments on behalf of the Company except in cases where the execution shall be expressly delegated by the Advisory Board or by these Bylaws to some other officer or agent of the Company or shall be required by law to be otherwise signed or executed. In general, the President shall perform all duties incident to the office of President and such other duties as may be prescribed by the Advisory Board from time to time. 4.06. VICE PRESIDENTS. The Advisory Board may appoint one or more Vice Presidents. In the absence of the President or in the event of a vacancy in that office, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their election) shall perform 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. Every Vice President shall perform such other duties as from time to time may be assigned to him or her by the President or the Advisory Board. 4.07. SECRETARY. The Secretary shall (i) keep the minutes of the proceedings of the Share Holders and Advisory Board in one or more books provided for that purpose; (ii) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (iii) be custodian of the records of the Company; (iv) unless a transfer agent is appointed, keep a register of the post office address of each Share Holder that shall be furnished to the Secretary by the Share Holder and have general charge of the Share Registry of the Company; (v) when authorized by the Advisory Board or the President, attest to or witness all documents as necessary; (vi) perform all duties as from time to time may be assigned to him or her by the President or by the Advisory Board; and (vii) perform all the duties generally incident to the office of secretary of a corporation. 4.08. TREASURER. Subject to the powers and duties of the Manager, the Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositaries as may be designated by the Advisory Board. The Treasurer shall disburse the funds of the Company as may be ordered by the Advisory Board, taking proper vouchers for any disbursements, and shall render to the President and the Advisory Board, at the regular meetings of the Advisory Board or whenever they may require it, an account of all his or her transactions as Treasurer and of the financial condition of the Company. The Advisory Board may engage a Custodian to perform some or all of the duties of the Treasurer, and if a Custodian is so engaged then the Treasurer shall be relieved of the responsibilities set forth herein to the extent delegated to such Custodian and, unless the Advisory Board otherwise determines, shall have general supervision over the activities of such Custodian. The Custodian shall not be an officer of the Company. 4.09. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Advisory Board may appoint one or more Assistant Secretaries or Assistant Treasurers. The Assistant 9 14 Secretaries and Assistant Treasurers (i) shall have the power to perform and shall perform all the duties of the Secretary and the Treasurer, respectively, in such respective officer's absence and (ii) shall perform such duties as shall be assigned to him or her by the Secretary or Treasurer, respectively, or by the President or the Advisory Board. 4.10. SUBORDINATE OFFICERS. The Company shall have such subordinate officers as the Advisory Board may from time to time elect. Each such officer shall hold office for such period and perform such duties as the Advisory Board, the President or any designated committee or officer may prescribe. ARTICLE V SHARES 5.01. SHARE CERTIFICATES. Each Share Holder shall be entitled to a Share certificate in such form as may from time to time be prescribed by the Advisory Board. The certificate shall be signed by the Chairman or the President and by the Treasurer or the Secretary. The signatures by Company officers may be facsimile if the certificate is manually countersigned by an authorized person on behalf of a transfer agent or registrar other than the Company or its employee. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent or registrar before the certificate is issued, it may be issued by the Company with the same effect as if he were such officer, transfer agent or registrar at the time of its issue. Every certificate for Shares which are subject to any restriction on transfer and every certificate issued when the Company is authorized to issue more than one class or series of interests shall contain any legend as is required by law. 5.02. SHARE REGISTRY. The Company shall maintain at 3055 Triad Drive, Livermore, California (or any subsequent address selected by the Advisory Board) or at the office of its counsel, accountants or transfer agent, an original or duplicate Share Registry containing the names and addresses of all the Share Holders and the number of shares of each class held by each of them. The Share Registry shall be maintained pursuant to a system that the Company shall adopt allowing for the issuance, recordation and transfer of its Shares by electronic or other means that can be readily converted into written form for visual inspection. The Company shall be entitled to treat the holder of record of any Share or Shares as the holder in fact and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in any Share on the part of any other person, whether or not it shall have express or other notice, except as otherwise provided in the LLC Agreement. Until a transfer is duly effected in accordance with the LLC Agreement, the Company shall not be affected by any notice of any transfer, either actual or constructive. Nothing herein shall impose upon the Company, the Advisory Board or officers or their agents and representatives a duty, or limit their rights, to inquire as to the actual ownership of Shares. 5.03. RECORDING TRANSFERS OF SHARES. If transferred in accordance with any restrictions on transfer contained in the LLC Agreement, these Bylaws or otherwise, Shares shall be recorded as transferred in the Share Registry upon provision to the Company or the transfer agent of the Company of an executed stock power duly guaranteed and any other documents reasonably requested by the Company, and the surrender of the certificate or certificates, if any, representing 10 15 the Shares. Upon receipt of these documents, the Company shall issue as needed a new certificate or certificates (if the transferred Shares were certificated) to the persons entitled, cancel any old certificates and record the transaction upon its books. 5.04. LOST CERTIFICATE. The Advisory Board may direct a new certificate to be issued in the place of any certificate previously issued by the Company alleged to have been stolen, lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be stolen, lost or destroyed. When authorizing the issue of a new certificate, the Advisory Board may, in its discretion and as a condition precedent to the issuance, require the owner of the stolen, lost or destroyed certificate or his legal representative to advertise the same in such manner as it shall require and/or to give bond, with sufficient surety, to the Company to indemnify it against any loss or claim which may arise by reason of the issuance of a new certificate. 5.05. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. (a) The Advisory Board may fix, in advance, a date as the record date for the purpose of determining Share Holders entitled to notice of, or to vote at, any meeting of Share Holders, or Share Holders entitled to receive payment of any distribution or the allotment of any rights, or in order to make a determination of Share Holders for any other proper purpose. Such date, in any case, shall be not more than sixty (60) days, and in case of a meeting of Share Holders not less than ten (10) days, prior to the date on which the meeting or particular action requiring such determination of Share Holders is to be held or taken. (b) If, in lieu of fixing a record date, the Share Registry is closed by the Advisory Board for the purpose of determining Share Holders entitled to notice of or to vote at a meeting of Share Holders, the Share Registry shall be closed for at least ten (10) days immediately preceding such meeting. (c) If no record date is fixed and the Share Registry is not closed for the determination of Share Holders, (i) the record date for the determination of Share Holders entitled to notice of, or to vote at, a meeting of Share Holders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (ii) the record date for the determination of Share Holders entitled to receive payment of a distribution or an allotment of any rights shall be at the close of business on the day on which the resolution of the Advisory Board, declaring the distribution or allotment of rights, is adopted. (d) When a determination of Share Holders entitled to vote at any meeting of Share Holders has been made as provided in this section, such determination shall apply to any adjournment of its meeting, except where the determination has been made through the closing of the Share Registry and the stated period of closing has expired. 11 16 ARTICLE VI DISTRIBUTIONS 6.01. AUTHORIZATION. Distributions upon the Shares may be authorized and declared by the Advisory Board as set forth in the applicable provisions of the LLC Agreement and any applicable law, at any meeting, limited only to the extent of Section 18-607 of the Delaware Limited Liability Company Act. Distributions upon the Shares may be paid in cash or property, subject to the provisions of law and of the LLC Agreement. 6.02. CONTINGENCIES. Before payment of any distributions upon the Shares, there may be set aside (but there is no duty to set aside) out of any assets of the Company available for distributions such sum or sums as the Advisory Board may from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, for repairing or maintaining any property of the Company or for such other purpose as the Advisory Board shall determine to be in the best interest of the Company, and the Advisory Board may modify or abolish any such reserve in the manner in which it was created. ARTICLE VII NOTICES 7.01. SECRETARY TO GIVE NOTICE. All notices required by law or these Bylaws to be given by the Company shall be given by the Secretary of the Company. If the Secretary and Assistant Secretary are absent or refuse or neglect to act, the notice may be given by any person directed to do so by the President or, with respect to any meeting called pursuant to these Bylaws upon the request of any Share Holder or Advisory Board member, by any person directed to do so by the Share Holder or Advisory Board member upon whose request the meeting is called. 7.02. WAIVER OF NOTICE. Whenever any notice is required to be given pursuant to the LLC Agreement or Bylaws of the Company or pursuant to applicable law, a waiver of notice in writing, signed by the person or persons entitled to notice, whether before or after the time for notice, shall be deemed equivalent to the giving of notice. The waiver shall be filed with the records of the meeting. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE VIII AMENDMENT OF BYLAWS 8.01. BY ADVISORY BOARD. The Advisory Board shall have the power, at any biannual or regular meeting, or at any special meeting if notice thereof be included in the notice of such special meeting, to alter or repeal any Bylaws of the Company and to make new Bylaws, provided, however, the Advisory Board may not alter, repeal or amend the Bylaws in any way in 12 17 which the Share Holders would be deprived of their right to grant consent or approval under the terms of the LLC Agreement. The foregoing are certified as the Bylaws of the Company adopted by the Advisory Board on __________, 1997. ___________________________________________ _________________, Secretary 13 EX-3.3 4 FORM OF RIGHTS PLAN OF TRIAD PARK, LLC 1 FORM OF RIGHTS AGREEMENT TRIAD PARK, LLC AND [INSERT NAME OF RIGHTS AGENT], RIGHTS AGENT ___________________________________ RIGHTS AGREEMENT Dated as of [DATE], 1997 2 TABLE OF CONTENTS
PAGE ---- 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . 5 3. Issuance of Right Certificates . . . . . . . . . . . . . . . . . . . . 6 4. Form of Right Certificates . . . . . . . . . . . . . . . . . . . . . 7 5. Countersignature and Registration. . . . . . . . . . . . . . . . . . . 8 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. . . . . . . . . . . . . . . . . . . . . . . . . 9 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. . . . . 10 8. Cancellation and Destruction of Right Certificates . . . . . . . . . . 12 9. Reservation and Availability of Shares . . . . . . . . . . . . . . . . 12 10. Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 11. Adjustments to Number and Kind of Shares, Number of Rights or Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . 14 12. Certification of Adjustments. . . . . . . . . . . . . . . . . . . . . 24 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. . . . . . . . . . . . . . . . . . . . . . . . . . 24 14. Fractional Rights and Fractional Shares. . . . . . . . . . . . . . . . 29 15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . 30 16. Agreement of Right Holders. . . . . . . . . . . . . . . . . . . . . . 30 17. Right Certificate Holder Not Deemed a Share Holder. . . . . . . . . . 31 18. Concerning the Rights Agent. . . . . . . . . . . . . . . . . . . . . . 32 19. Merger or Consolidation or Change of Name of Rights Agent. . . . . . . 32 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . 33 21. Change of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . 36 22. Issuance of New Right Certificates. . . . . . . . . . . . . . . . . . 37 23. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
i 3 TABLE OF CONTENTS
PAGE ---- 24. Notice of Proposed Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 25. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 26. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 27. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 28. Benefits of this Rights Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 29. Delaware Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 30. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 31. Descriptive Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 32. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 EXHIBIT A EXHIBIT B
ii 4 RIGHTS AGREEMENT This RIGHTS AGREEMENT ("Rights Agreement"), dated as of [DATE], 1997, between Triad Park, LLC, a Delaware limited liability company (the "Company"), and [INSERT NAME OF RIGHTS AGENT] (the "Rights Agent"). W I T N E S S E T H: WHEREAS, the Advisory Board of the Company on [DATE], 1997 (i) authorized the issuance and declared a distribution of one right (a "Right") for each Share (as defined herein) of the Company outstanding as of the Close of Business on [DATE], 1997 (the "Record Date"), each Right representing the right to purchase one Share of the Company upon the terms and subject to the conditions hereinafter set forth, and (ii) further authorized the issuance of one Right with respect to each Share of the Company that shall become outstanding between the Record Date and the earlier of the Distribution Date (as defined herein) and the Expiration Date (as defined herein); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the Company and the Rights Agent hereby agree as follows: 1. Certain Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates (as such term is hereinafter defined) and Associates (as such term is hereinafter defined) of such Person, without the prior approval of the Advisory Board, shall be the Beneficial Owner (as such term is hereinafter defined) of 24% or more of the outstanding Shares; provided, however, that in no event shall a Person who or which, together with all Affiliates and Associates of such Person, is the Beneficial Owner of less than 24% of the Company's outstanding Shares, become an Acquiring Person solely as a result of a reduction of the number of outstanding Shares, including repurchases of outstanding Shares by 1 5 the Company, which reduction increases the percentage of outstanding Shares beneficially owned by such person, provided, however, that any subsequent direct or indirect acquisition or receipt of Shares by such Person or any Affiliate or Associate of such Person shall cause such Person to become an Acquiring Person if, after giving effect to such acquisition or receipt of Shares, such Person (together with all Affiliates and Associates of such Person) shall be the Beneficial Owner of 24% or more of the Shares then outstanding and provided further, that an Acquiring Person shall not include an Exempt Person (as such term is hereinafter defined). (b) "Adjustment Shares" shall have the meaning set forth in Section 11(a)(ii) hereof. (c) "Advisory Board" shall have the meaning given such term in the Company's LLC Agreement. (d) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as in effect on [DATE], 1997. (e) A Person shall be deemed the "Beneficial Owner" of any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights (other than these Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own", securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own", any securities if the 2 6 agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except as described in clause (B) of subparagraph (ii) of Section 1(d)) or disposing of any securities of the Company. (f) "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close. (g) "Close of Business" on any given date shall mean 5:00 p.m., San Francisco time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 p.m., San Francisco time, on the next succeeding Business Day. (h) "Common Stock" when used with reference to any Person which is organized in corporate form shall mean the capital stock or other equity security with the greatest per share voting power of such Person or, if such Person is a Subsidiary of or is controlled by another Person, the Person which ultimately controls such first-mentioned Person. "Common Stock" when used with reference to any Person which is not organized in corporate form shall mean units of beneficial interest which shall represent the right to participate in profits, losses, deductions and credits of such Person and which shall be entitled to exercise the greatest voting power per unit of such Person. (i) "Current Market Price" shall have the meaning set forth in Section 11(d) hereof. (j) "Distribution Date" shall have the meaning set forth in Section 3(a) hereof. 3 7 (k) "Equivalent Securities" shall have the meaning set forth in Section 11(b) hereof. (l) "Exchange Act" shall have the meaning set forth in Section 1(d) hereof. (m) "Exempt Person" shall mean the Company, any employee benefit plan or employee equity plan of the Company, or any Person, organized, appointed, established or holding Shares for or pursuant to the terms of any such plan. (n) "Expiration Date" shall have the meaning set forth in Section 7(a) hereof. (o) "Final Expiration Date" shall have the meaning set forth in Section 7(a) hereof. (p) "LLC Agreement" shall mean the Limited Liability Company Agreement of Triad Park, LLC, as amended, modified, supplemented or restated from time to time. (q) "Manager" shall mean the Person appointed as the manager of the Company. (r) "NASDAQ" shall have the meaning set forth in Section 9(b) hereof. (s) "Person" shall mean any individual, firm, corporation, partnership, limited liability company or other entity. (t) "Principal Party" shall have the meaning set forth in Section 13(b) hereof. (u) "Purchase Price" shall have the meaning set forth in Section 4(a) hereof. (v) "Redemption Price" shall have the meaning set forth in Section 23(a) hereof. (w) "Right Certificate" shall have the meaning set forth in Section 3(a) hereof. (x) "Section 11(a)(ii) Event" shall mean any event described in Section 11(a)(ii) (A), (B) or (C) hereof. (y) "Section 13 Event" shall mean any event described in clause (x), (y) or (z) of Section 13(a) hereof. (z) "Securities Act" shall mean the Securities Act of 1933, as amended. 4 8 (aa) "Share" shall mean a right to share in the income, gains, losses, deductions, credit, or similar items of, and to receive distributions from, the Company. (bb) "Share Acquisition Date" shall mean the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such or such earlier date as a majority of the members of the Advisory Board shall become aware of the existence of an Acquiring Person. (cc) "Share Holder" shall mean a Person who holds one or more Shares. (dd) "Subsidiary" of a Person shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect a majority of the board of directors or other persons performing similar functions are beneficially owned, directly or indirectly, by such Person and any corporation or other entity that is otherwise controlled by such Person. (ee) "Summary of Rights" shall have the meaning set forth in Section 3(b) hereof. (ff) "Trading Day" shall have the meaning set forth in Section 11(d) hereof. (gg) "Triggering Event" shall mean any event described in Section 11(a)(ii)(A), (B), or (C) or Section 13 hereof. (hh) "Voting Power" shall mean the voting power of all securities of the Company then outstanding and generally entitled to vote for the election of members of the Advisory Board. Any determination required by the definitions contained in this Section 1 shall be made by the Advisory Board in its good faith judgment, which determination shall be binding on the Rights Agent and the holders of the Rights. 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such 5 9 appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. 3. Issuance of Right Certificates. (a) Until the earlier of (i) the Share Acquisition Date or (ii) the tenth day (or such later date as may be determined by action of the Advisory Board prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than an Exempt Person) of, or of the first public announcement of the intent of any Person (other than an Exempt Person) to commence (which intention to commence remains in effect for five business days after such announcement), a tender or exchange offer upon the successful consummation of which such Person, together with its Affiliates and Associates, would be the Beneficial Owner of 24% or more of the outstanding Shares (irrespective of whether any Shares are actually purchased pursuant to any such offer) (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(c) hereof) by the certificates for the Shares registered in the names of the holders of the Shares (which certificates shall be deemed also to be certificates for Rights) and not by separate Right certificates, and (y) each Right will be transferable only in connection with the transfer of the underlying Shares. As soon as practicable after the Distribution Date, the Rights Agent will mail, by first-class, postage prepaid mail, to each record holder of the Shares, as of the Close of Business on the Distribution Date, as shown by the records of the Company, at the address of such holder shown on such records, a Right certificate in substantially the form of Exhibit A hereto ("Right Certificate") evidencing one Right for each Share so held, subject to adjustment as provided herein. As of and after the Distribution Date the Rights will be evidenced solely by such Right Certificates. (b) Until the Distribution Date (or, if earlier, the "Expiration Date" or the "Final Expiration Date"), the surrender for transfer of any certificate representing Shares, with or 6 10 without a copy of the Summary of Rights attached thereto, shall also constitute the surrender for transfer of the Rights associated with the Shares represented thereby. (c) Rights shall be issued in respect of all Shares issued after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date. Certificates representing such Shares (and certificates representing Shares which are transferred after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date) shall also be deemed to be certificates for Rights and shall bear the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between Triad Park, LLC and [INSERT NAME OF RIGHTS AGENT], as Rights Agent, dated as of [DATE], 1997 (as amended from time to time in accordance with its terms, the "Rights Agreement"), the terms of which are incorporated herein by reference and a copy of which is on file at the principal executive office of Triad Park, LLC. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Triad Park, LLC will mail to the holder of this certificate a copy of the Rights Agreement without charge within five days after receipt by it of a written request therefor. Under certain circumstances as provided in the Rights Agreement, Rights issued to or beneficially owned by Acquiring Persons or their Associates or Affiliates (as defined in the Rights Agreement) or any subsequent holder of such Rights may be limited as provided in Section 11(a)(ii) of the Rights Agreement. With respect to such certificates containing the foregoing legend, the Rights associated with the Shares shall, until the Distribution Date, be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the surrender for transfer of the Rights associated with the Shares represented thereby. 4. Form of Right Certificates. (a) The Right Certificates (and the forms of election to purchase shares and of assignment to be printed on the reverse thereof), when, as and if issued, shall be substantially in the form set forth in Exhibit A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem 7 11 appropriate and as are not inconsistent with the provisions of this Rights Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Sections 11 and 22 hereof, the Right Certificates evidencing the Rights issued on [DATE], 1997, whenever issued, shall be dated as of [DATE], 1997 and the Right Certificates evidencing Rights to holders of record of Shares issued after [DATE], 1997 shall be dated as of [DATE], 1997 but also be dated to reflect the date of issuance of such Right Certificate and on their face Right Certificates shall entitle the holders thereof to purchase one Share, or other securities or property as provided herein, as the same may from time to time be adjusted as provided herein, at the price of $0.63 set forth therein, as the same may from time to time be adjusted as provided herein (the "Purchase Price"). (b) Notwithstanding any other provision of this Rights Agreement, any Right Certificate that represents Rights that are or were at any time on or after the earlier of the Share Acquisition Date or the Distribution Date beneficially owned by an Acquiring Person or any Affiliate or Associate thereof (or any transferee of such Rights) shall have impressed on, printed on, written on or otherwise affixed to it (if the Company or the Rights Agent has knowledge that such Person is an Acquiring Person or an Associate or Affiliate thereof or transferee of such Persons or a nominee of any of the foregoing) the following legend: The beneficial owner of the Rights represented by this Right Certificate is an Acquiring Person or an Affiliate or Associate (as defined in the Rights Agreement) of an Acquiring Person or a subsequent holder of such Right Certificates beneficially owned by such Persons. Accordingly, under certain circumstances as provided in the Rights Agreement, this Right Certificate and the Rights represented hereby may be limited as provided in Section 11(a)(ii) of the Rights Agreement. 5. Countersignature and Registration. (a) The Right Certificates may be executed on behalf of the Company by its President or any Vice President, either manually or by 8 12 facsimile signature, which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. In the alternative, the Right Certificates may be executed in the same manner by the corresponding officers of the Manager. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent, issued and delivered with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at one of its offices designated for such purposes, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates, the date of each of the Right Certificates, and the certificate numbers for each of the Right Certificates. 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. (a) Subject to the provisions of Section 14(b) hereof, at any time after the Close of Business on the Distribution Date and at or prior to the Close of Business on the earlier of the Expiration Date or the Final Expiration Date, any Right Certificate or Certificates may be (i) transferred or (ii) split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of Shares as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer any Right Certificate shall surrender the Right Certificate at 9 13 the office of the Rights Agent designated for such purposes with the form of assignment on the reverse side thereof duly endorsed (or enclose with such Right Certificate a written instrument of transfer in form satisfactory to the Company and the Rights Agent), duly executed by the registered holder thereof or his attorney duly authorized in writing, and with such signature duly guaranteed. Any registered holder desiring to split up, combine or exchange any Right Certificate shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be split up, combined or exchanged at the principal office of the Rights Agent. Thereupon the Rights Agent shall countersign (by manual signature) and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, if requested by the Company, reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will execute and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) The Rights shall become exercisable, and may be exercised to purchase Shares, except as otherwise provided herein, in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed (with such signature duly guaranteed), to the Rights Agent at the principal office of the Rights Agent in [INSERT CITY AND STATE] together with payment of the Purchase Price with respect to each Right exercised, subject to adjustment as hereinafter 10 14 provided, at or prior to the Close of Business on the earlier of (i) [DATE], 2007 ("Final Expiration Date"), or (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (such date being herein referred to as the "Expiration Date"). (b) The Purchase Price shall initially be $0.63 for each Share issued pursuant to the exercise of a Right. The Purchase Price and the number of Shares or other securities or consideration to be acquired upon exercise of a Right shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof. The Purchase Price shall be payable in lawful money of the United States of America, in accordance with Section 7(c) hereof. (c) Except as provided in Section (d) hereof, upon receipt of a Right Certificate with the form of election to purchase duly executed, accompanied by payment of the Purchase Price or so much thereof as is necessary for the Shares to be purchased and an amount equal to any applicable transfer tax, by cash, certified check or official bank check payable to the order of the Company or the Rights Agent, the Rights Agent shall thereupon promptly (i) requisition from any transfer agent of the Shares certificates for the number of Shares so elected to be purchased and the Company will comply and hereby authorizes and directs such transfer agent to comply with all such requests, (ii) requisition from the Company the amount of cash to be paid in lieu of issuance of fractional Shares in accordance with Section 14(b) hereof, and (iii) promptly after receipt of such Share certificates cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder, and, when appropriate, after receipt promptly deliver such cash to or upon the order of the registered holder of such Right Certificate; provided, however, that in the case of a purchase of securities, other than Shares, pursuant to Section 13 hereof, the Rights Agent shall promptly take the appropriate actions corresponding to the foregoing clauses (i) through (iii). In the event that the Company is obligated to issue other securities of the Company, pay cash and/or distribute other property the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. 11 15 (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Rights Agent or the Company shall reasonably request. 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. 9. Reservation and Availability of Shares. (a) [INTENTIONALLY OMITTED] 12 16 (b) The Company shall (i) use its best efforts to cause, from and after such time as the Rights become exercisable, the Rights and all Shares issued or reserved for issuance upon exercise thereof to be reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, and if the Shares shall become listed on any national securities exchange, to cause, from and after such time as the Rights become exercisable, the Rights and all Shares issued or reserved for issuance upon exercise thereof to be listed on such exchange upon official notice of issuance upon such exercise and (ii) if then necessary to permit the offer and issuance of such Shares, register and qualify such Shares under the Securities Act and any applicable state securities or "blue sky" laws (to the extent exemption therefrom are not available), cause such registration statement and qualifications to become effective as soon as possible after such filing and keep such registration and qualifications effective until the earlier of the Expiration Date or the Final Expiration Date of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days, the exercisability of the Rights in order to prepare and file a registration statement under the Securities Act and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction unless the requisite qualification in such jurisdiction shall have been obtained and until a registration statement under the Securities Act (if required) shall have been declared effective. (c) The Company covenants and agrees that it will take all such action as may be necessary to insure that all Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Shares (subject to payment of the Purchase Price in respect thereof), be duly and validly authorized and issued and fully paid and non-assessable Shares in accordance with applicable law. 13 17 (d) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any Shares upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of certificates for Shares upon exercise of Rights in a name other than that of, the registered holder of the Right Certificate, and the Company shall not be required to issue or deliver a Right Certificate or certificate for Shares to a person other than such registered holder until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. 10. Record Date. Each person in whose name any certificate for Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made. 11. Adjustments to Number and Kind of Shares, Number of Rights or Purchase Price. The number and kind of Shares subject to purchase upon the exercise of each Right, the number of Rights outstanding and the Purchase Price are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Rights Agreement (A) declare or pay any dividend on Shares payable in Shares, (B) subdivide or split the outstanding Shares into a greater number of Shares, (C) combine or consolidate the outstanding Shares into a small number of Shares or effect a reverse split of the outstanding Shares, or (D) issue any equity securities in a reclassification of the Shares (including any such 14 18 reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving entity), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or on the effective date of such subdivision, combination or reclassification, and the number and kind of Shares or equity securities, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of Shares or equity securities, as the case may be, which, if such Right had been exercised immediately prior to such date, the holder thereof would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii). (ii) In the event (A) any Acquiring Person or any Associate or Affiliate of and any Acquiring Person, at any time after the date of this Agreement, directly or indirectly, (1) shall consolidate with or merge with and into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving entity of such consolidation, merger or combination and the Shares shall remain outstanding and no Shares shall be changed into or exchanged for equity securities of the Company or of any other Person or cash or any other property, or (2) shall, in one or more transactions, other than in connection with the exercise of a Right or Rights and other than in connection with the exercise or conversion of securities exercisable for or convertible into securities of the Company, transfer any assets or property to the Company in exchange (in whole or in part) for any shares of any class of equity securities of the Company or any securities exercisable for or convertible into shares of any class of equity securities of the Company, or otherwise obtain from the Company, with or without consideration, any 15 19 additional shares of any class of equity securities of the Company or any securities exercisable for or convertible into shares of any class of equity securities of the Company (other than as part of a pro rata offer or distribution by the Company to all holders of such shares), or (3) shall sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire (other than as a pro rata dividend) or dispose, to, from or with, as the case may be, in one transaction or a series of transactions, the Company, assets (including securities) on terms and conditions less favorable to the Company than the Company would be able to obtain in arm's-length negotiation with an unaffiliated third party, or (4) shall receive any compensation from the Company for services other than compensation for employment as a regular or part-time employee, or fees for serving as a director, at rates in accordance with the Company's past practices, or (5) shall receive the benefit, directly or indirectly (except proportionately as a Share Holder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or tax advantage provided by the Company or (6) shall engage in any transaction with the Company involving the sale, license, transfer or grant of any right in, or disclosure of, any patents, copyrights, trade secrets, trademarks or know how (or any other intellectual or industrial property rights recognized under any country's intellectual property laws) which the Company owns or has the right to use on terms and conditions not approved by the Advisory Board; or (B) any Person, alone or together with its Affiliates and Associates, shall become an Acquiring Person other than pursuant to (1) any transaction set forth in Section 13(a) hereof, or (2) a tender or exchange offer for all outstanding Shares at a price and on terms determined by the Advisory Board to be both adequate and otherwise in the best interests of the Company and its Share Holders other than the Acquiring Person or an Affiliate or Associate thereof on whose behalf the offer is being made (a "Permitted Offer"); or 16 20 (C) during such time as there in an Acquiring Person, there shall be any reclassification of securities (including any reverse split), or any recapitalization of the Company, or any other transaction or series of transactions involving the Company (whether or not with or into or otherwise involving an Acquiring Person or any Affiliate or Associate of such Acquiring Person) which has the effect, directly or indirectly, of increasing by more than 1% the proportionate share of the outstanding shares of any class of equity securities of the Company, or securities exercisable for or convertible into equity securities of the Company, which is directly or indirectly beneficially owned by any Acquiring Person or any Affiliate or Associate of any Acquiring Person, then except as otherwise provided in this Section 11, each holder of a Right shall thereafter have a right to receive for each Right, upon exercise thereof in accordance with the terms of this Rights Agreement and payment of the Purchase Price, such number of Shares as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of Shares for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, and (y) dividing that product (such product, following such first occurrence, shall be referred to as the "Purchase Price" with respect to each Right for all purposes of this Agreement) by 50% of the Current Market Price per Share on the date of such first occurrence (such number of Shares is herein called the "Adjustment Shares"); provided that the Purchase Price and the number of Adjustment Shares shall be further adjusted as provided in this Agreement to reflect any events occurring after the date of such first occurrence; and provided further that if the transaction that would otherwise give rise to the foregoing adjustment is also subject to the provisions of Section 13 hereof, then only the provisions of Section 13 hereof shall apply and no adjustment shall be made pursuant to this Section 11(a)(i). Notwithstanding the foregoing, the adjustment pursuant to this Section 11(a)(ii) shall not occur with respect to any Rights that are or were at any time on or after the earlier of the Share Acquisition Date or the Distribution Date beneficially owned by the Acquiring Person or any Associate or Affiliate of the Acquiring Person which is or was involved in or which caused or facilitated, directly or indirectly, the event 17 21 or transaction or transactions listed above in this Section 11(a)(ii) in respect of which such adjustment occurs (or any subsequent transferee of such Rights), and upon exercise of such Rights, the holders thereof shall continue to receive upon exercise the number of Shares otherwise provided for herein without giving effect to such adjustment. (b) In case the Company shall fix a record date for the issuance of rights (other than the Rights), options or warrants to all holders of Shares entitling them to subscribe for or purchase (for a period expiring within forty-five calendar days after such record date) Shares, shares having the same rights, privileges and preferences as the Shares ("equivalent securities") or securities convertible into Shares or equivalent securities at a price per Share or equivalent securities (or having conversion price per Share, if a security convertible into Shares or equivalent securities) less than the Current Market Price per Share on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Shares outstanding on such record date, plus the number of Shares which the aggregate offering price of the total number of Shares and/or equivalent securities (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Current Market Price, and the denominator of which shall be the number of Shares outstanding on such record date, plus the number of additional Shares and/or equivalent securities to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration part or all of which may be in a form other than cash, the value of such non-cash consideration shall be as determined in good faith by the Advisory Board, whose determination shall be described in a statement filed with the Rights Agent. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. 18 22 (c) In case the Company shall fix a record date for a distribution to all holders of Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness, cash, assets (other than a dividend payable in Shares, but including any dividend payable in securities other than Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Price per Share on such record date, less the fair market value (as determined in good faith by the Advisory Board, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a Share and the denominator of which shall be such Current Market Price per Share. Such adjustments shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price which would have been in effect if such record date had not been fixed. (d) For the purpose of any computation hereunder, the "Current Market Price" per Share on any date shall be deemed to be the average of the daily closing prices per Share for the thirty consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the Current Market Price per Share is determined during a period following the announcement of (i) any dividend or distribution on the Shares (other than the Rights), (ii) any subdivision, combination or reclassification of the Shares, and prior to the expiration of the requisite thirty Trading Day period, as set forth above, after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification occurs, then, and in each such case, the Current Market Price shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the 19 23 principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange, or, if the Shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Shares are listed or admitted to trading or, if the Shares are not listed or admitted to trading on any national securities exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use, or, if on any such date the Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Shares selected by the Advisory Board. If on any such date no market maker is making a market in the Shares, the fair value of such shares on such date as determined in good faith by the Advisory Board shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Shares are listed or admitted to trading is open for the transaction of business or, if the Shares are not listed or admitted to trading on any national securities exchange, a Business Day. If the Shares are not publicly held or not so listed or traded, "Current Market Price" per share shall mean the fair value per share as determined in good faith by the Advisory Board, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least one percent in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a Share, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which mandates such adjustment, or (ii) the Expiration Date. 20 24 (f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of equity securities other than Shares, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m) hereof, and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Shares purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Shares (calculated to the nearest ten-thousandth) obtained by (i) multiplying (x) the number of Shares covered by a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price or any adjustment to the number of Shares for which a Right may be exercised, to adjust the number of Rights, in lieu of any adjustment in the number of Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the 21 25 number of Rights shall become that number of Rights (calculated to the nearest ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Shares issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price per share and the number of shares which were expressed in the initial Right Certificates issued hereunder. (k) [INTENTIONALLY OMITTED] (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised 22 26 after such record date the Shares and other securities of the Company, if any, issuable upon such exercise over and above the Shares and other securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional Shares and other securities upon the occurrence of the event requiring such adjustment. (m) Anything in this Section to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as to the extent that in their good faith judgment the Advisory Board shall determine to be advisable in order that any (i) consolidation or subdivision of the Shares, (ii) issuance for cash of any Shares at less than the current market price, (iii) issuance for cash of Shares or securities which by their terms are convertible into or exchangeable for Shares, (iv) share dividends or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the company to holders of its Shares shall not be taxable to such holders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person, or (ii) merge with or into any other Person, if (x) at the time of or immediately after such consolidation or merger there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation or merger, the shareholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 23 or Section 26 hereof, take any action if at the time 23 27 such action is taken it is reasonably foreseeable that such action will diminish substantially or eliminate the benefits intended to be afforded by the Rights. 12. Certification of Adjustments. Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts giving rise to such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing Shares) in accordance with Section 25 hereof. Notwithstanding the foregoing sentence, the failure of the Company to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. The Rights Agent shall be fully protected in relying on any certificate prepared by the Company pursuant to Sections 11 and 13 and on any adjustment therein contained. Any adjustment to be made pursuant to Sections 11 and 13 of this Rights Agreement shall be effective as of the date of the event giving rise to such adjustment. 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. (a) In the event that, at any time on or after the Distribution Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person or Persons and the Company shall not be the surviving or continuing corporation of such consolidation or merger, or (y) any Person or Persons shall consolidate with, or merge with and into, the Company, and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the outstanding Shares shall be changed into or exchanged for stock or other securities of any other Person or of the Company or cash or any other property (other than in the case of the transactions described in subparagraphs (x) or (y), a merger or consolidation which would result in all of the Voting Power represented by the securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into 24 28 securities of the surviving entity) all of the Voting Power represented by the securities of the Company or such surviving entity outstanding immediately after such merger or consolidation and the holders of such securities not having changed as a result of such transactions), then, on the first occurrence of any such event, proper provision shall be made so that (i) each holder of record of a Right shall thereafter have the right to receive, upon the exercise thereof and payment of the Purchase Price in accordance with the terms of this Rights Agreement, such number of shares of validly issued, fully paid and nonassessable Common Stock of the Principal Party (as defined herein) not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of Shares for which a Right was exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event hereof has occurred prior to the first occurrence of a Section 13 Event, multiplying the Purchase Price in effect immediately prior to the first occurrence of a Section 11(a)(ii) Event by the number of Shares for which a Right was exercisable immediately prior to such first occurrence of a Section 11(a)(ii) Event) and (2) dividing that product (such product, following the first occurrence of a Section 13 Event, shall be referred to as the "Purchase Price" for all purposes of this Agreement) by 50% of the Current Market Price (determined as provided in Section 11(d) hereof with respect to the Shares) per share of the Common Stock of such Principal Party on the date of consummation of such Section 13 Event (or the fair market value on such date of other securities or property of the Principal Party, as provided for herein); provided that the Purchase Price and the number of shares of Common Stock of such Principal Party issuable upon exercise of each Right shall be further adjusted as provided in this Agreement to reflect any events occurring after the date of the first occurrence of a Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Rights Agreement; (iii) the term "Company" for all purposes of this Rights Agreement shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall only apply to such Principal Party 25 29 following the first occurrence of a Section 13 Event; and (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; provided, however, that, upon the subsequent occurrence of any merger, consolidation, sale of all or substantially all assets, recapitalization, reclassification of shares, reorganization or other extraordinary transaction in respect of such Principal Party, each holder of a Right shall thereupon be entitled to receive, upon exercise of a Right and payment of the Purchase Price, such cash, shares, rights, warrants and other property which such holder would have been entitled to receive had he, at the time of such transaction, owned the shares of Common Stock of the Principal Party purchasable upon the exercise of a Right, and such Principal Party shall take such steps (including, but not limited to, reservation of shares of stock) as may be necessary to permit the subsequent exercise of the Rights in accordance with the terms hereof for such cash, shares, rights, warrants and other property. (b) "Principal Party" shall mean (i) the Person that is the issuer of the securities into which Shares are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer of Common Stock of which has the greatest market value or (ii) if no securities are so issued, (A) the Person that is the other party to the merger or consolidation and that survives said merger or consolidation, or, if there is more than one such Person, the Person the Common Stock of which has the greatest market value or (B) if the Person that is the other party to the merger or consolidation does not survive the merger or consolidation, the Person that does survive the merger or consolidation (including the Company if it survives); provided, however, that in any such case described in the foregoing (A) or (B), if the Common Stock of such Person is not at such time and has not been continuously over the preceding 12- 26 30 month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, the term "Principal Party" shall refer to such other Person, or if such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stock of all of which are and have been so registered, the term "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Stock having the greatest market value of shares outstanding. (c) The Company shall not consummate any consolidation, merger, sale or transfer referred to in Section 13(a) unless prior thereto the Company and the Principal Party involved therein shall have executed and delivered to the Rights Agent an agreement confirming that the requirements of Sections 13(a) and (b) hereof shall promptly be performed in accordance with their terms and that such consolidation, merger, sale or transfer of assets shall not result in a default by the Principal Party under this Rights Agreement as the same shall have been assumed by the Principal Party pursuant to Sections 13(a) and (b) hereof and further providing that, as soon as practicable after executing such agreement pursuant to this Section 13, the Principal Party at its own expense shall: (i) prepare and file a registration statement under the Securities Act, if necessary, with respect to the Rights and the Securities purchasable upon exercise of the Rights on an appropriate form, use its best efforts to cause such registration statement to become effective as soon as practicable after such filing and use its best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the date of expiration of the Rights, and similarly comply with applicable state securities laws; (ii) use its best efforts, if the Common Stock of the Principal Party shall become listed on a national securities exchange, to list (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on such securities exchange and, if the Common Stock of the Principal Party shall not be listed on a national 27 31 securities exchange, to cause the Rights and the securities purchasable upon exercise of the Rights to be reported by NASDAQ or such other system in use; (iii) deliver to holders of the Rights historical financial statements for the Principal Party which comply in all respects with the requirements for registration on Form 10 (or any successor form) under the Exchange Act; and (iv) obtain waivers of any rights of first refusal or preemptive rights in respect of the shares of Common Stock of the Principal Party subject to purchase upon exercise of outstanding Rights. In the event that any of the transactions described in Section 13(a) hereof shall occur at any time after the occurrence of a transaction described in Section 11(a)(ii) hereof, the Rights which have not theretofore been exercised shall thereafter be exercisable in the manner described in Section 13(a). The provisions of this Section 13 shall similarly apply to all successive Section 13 Events. (d) Furthermore, in case the Principal Party which is to be a party to a transaction referred to in this Section 13 has a provision in any of its authorized securities or in its Certificate of Incorporation or By-laws or other instrument governing its corporate affairs, which provision would have the effect of (i) causing such Principal Party to issue, in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such Principal Party at less than the then Current Market Price per share (determined pursuant to Section 11(d) hereof) or securities exercisable for, or convertible into, Common Stock of such Principal Party at less than such then current market price (other than to holders of Rights pursuant to this Section 13) or (ii) providing for any special payment, tax or similar provisions in connection with the issuance of the Common Stock of such Principal Party pursuant to the provisions of Section 13; then, in such event, the Company hereby agrees with each holder of Rights that it shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall 28 32 have been cancelled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with, or as a consequence of, the consummation of the proposed transaction. (e) Notwithstanding anything in this Agreement to the contrary, Section 13 shall not be applicable to a transaction described in subparagraphs (x) or (y) of Section 13(a) if (i) such transaction is consummated with a Person or Persons (or a wholly owned subsidiary of any such Person) who acquired Shares pursuant to a Permitted Offer, (ii) the price per Share offered in such transaction is not less than the price per Share paid to all holders of Shares whose Shares were purchased pursuant to such Permitted Offer and (iii) the form of consideration being offered to the remaining holders of Shares pursuant to such transaction is the same as the form of consideration paid pursuant to such Permitted Offer. Upon consummation of any such transaction contemplated by this subsection (e), all Rights hereunder shall expire. 14. Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the holders of record of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the then current market value of a whole Right. For the purposes of this Section 14(a), the then current market value of a Right shall be determined in the same manner as the Current Market Price of a Share shall be determined pursuant to Section 11(d) hereof. (b) The Company shall not be required to issue fractions of Shares upon exercise of the Rights or to distribute certificates which evidence fractional Shares. In lieu of issuing fractions of Shares, there shall be paid to the holders of record of Right Certificates at the time such Right Certificates are exercised as herein provided an amount in cash equal to the same fraction of the then current market value of a Share. For purposes of this Section 14(b), the then current market value of a Share shall be the Current Market Price thereof as determined pursuant to Section 11(d) hereof. 29 33 (c) The holder of a Right by the acceptance of a Right expressly waives his right to receive any fractional Right or any fractional Shares upon exercise of a Right. 15. Rights of Action. All rights of action in respect of this Agreement are vested in the respective holders of record of the Right Certificates (and, prior to the Distribution Date, the holders of record of Shares); and any holder of record of any Right Certificate (or, prior to the Distribution Date, of the Shares), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Shares), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company or any other Person to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificates and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and, accordingly, that they will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. Holders of Rights shall be entitled to recover the reasonable costs and expenses, including attorneys' fees, incurred by them in any action to enforce the provisions of this Agreement. 16. Agreement of Right Holders. Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will not be evidenced by a Right Certificate and will be transferable only in connection with the transfer of Shares; (b) after the Distribution Date, the Right Certificates will be transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer; 30 34 (c) the Company and the Rights Agent may deem and treat the person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Shares) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificate or the associated Share certificate made by anyone other than the Company or the Rights Agent or the transfer agent of the Shares) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided, however, the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. 17. Right Certificate Holder Not Deemed a Share Holder. No holder of a Right, as such, shall be entitled to vote, receive dividends in respect of or be deemed for any purpose to be the holder of Shares or any other securities of the Company which may at any time be issuable upon the exercise of the Rights, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a Share Holder or any right to vote for the election of the Advisory Board or upon any matter submitted to Share Holders at any meeting thereof, or to give or withhold consent to any Company action, or to receive notice of meetings or other actions affecting Share Holders, or to receive dividends or subscription rights in respect of any such Shares or securities, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. 31 35 18. Concerning the Rights Agent. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Rights Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent for anything done or omitted to be done by the Rights Agent in connection with the acceptance and administration of this Rights Agreement, including the cost and expenses of defending against any claim of liability in the premises. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Rights Agreement in reliance upon any Right Certificate, certificate for Shares or other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, guaranteed, verified or acknowledged, by the proper Person or Persons. 19. Merger or Consolidation or Change of Name of Rights Agent. (a) Any entity into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any entity resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any entity succeeding to the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Rights Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such entity would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Rights Agreement, any of the Right Certificates shall have 32 36 been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Rights Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name, and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in the Rights Agreement. 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Rights Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted to be taken by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Rights Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person) be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and 33 37 established by a certificate signed by the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of the Company (or the corresponding officers of the Manager, on behalf of the Company) and delivered to the Rights Agent, and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Rights Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Rights Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Rights Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Rights Agreement or in any Right Certificate; nor shall it be responsible for any adjustment required under the provisions of Section 11 or 13 hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Shares to be issued pursuant to this Rights Agreement or any Right Certificate or as to whether any Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and 34 38 other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Rights Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President or any Vice President or Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the Company (or the corresponding officers of the Manager, on behalf of the Company), and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not the Rights Agent under this Rights Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. 35 39 (k) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate contained in the form of assignment or the form of election to purchase set forth on the reverse thereof, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise of transfer without first consulting with the Company. 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Rights Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent (with or without cause) upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. Notwithstanding the foregoing provisions of this Section 21, in no event shall the resignation or removal of a Rights Agent be effective until a successor Rights Agent shall have been appointed and have accepted such appointment. If the Company shall fail to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the incumbent Rights Agent or the holder of record of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or any State thereof, in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers 36 40 and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000 or (b) an Affiliate controlled by a corporation described in clause (a) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Rights Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by the Advisory Board to reflect any adjustment or change in the purchase price per share and the number or kind or class of shares of stock or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Rights Agreement. In addition, in connection with the issuance or sale of Shares following the Distribution Date and prior to the redemption or expiration of the Rights, the Company, (a) shall, with respect to Shares so issued or sold pursuant to the exercise of options or under any employee plan or arrangement, or upon the exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Advisory Board, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Right 37 41 Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued, and (ii) no such Right Certificate shall be issued, if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. 23. Redemption. (a) (i) The Advisory Board may, at its option, at any time prior to the earlier of (x) the time that any person becomes an Acquiring Person or (y) the Close of Business on the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $0.01 per Right, as such amount may be appropriately adjusted to reflect any Share split, Share dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). (ii) Notwithstanding anything contained in this Agreement to the contrary, the Advisory Board may redeem all but not less than all of the then outstanding Rights at the Redemption Price following the occurrence of a Share Acquisition Date but prior to any Section 13 Event in connection with a Section 13 Event in which all holders of Shares are treated alike and not involving (other than as a holder of Shares being treated like all other such holders) an Acquiring Person or an Affiliate or Associate of an Acquiring Person or any other Person in which such Acquiring Person, Affiliate or Associate has an interest, or any other Person or Persons acting directly or indirectly on behalf of or in association with any such Acquiring Person, Affiliate or Associate. (b) Immediately upon the action of the Advisory Board ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price, without any interest thereon. Within 10 days after the action of the Advisory Board ordering the redemption of the Rights, the Company will give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such 38 42 notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent(s) of the Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. The failure to give notice required by this Section 23(b) or any defect therein shall not affect the legality or validity of the action taken by the Company. (c) In the case of a redemption permitted under Section 23(a), the Company may, at its option, discharge all of its obligations with respect to the Rights by (i) issuing a press release announcing the manner of redemption of the Rights and (ii) mailing payment of the Redemption Price to the registered holders of the Rights at their last addresses as they appear on the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent(s) of the Shares, and upon such action, all outstanding Right Certificates shall be null and void without any further action by the Company. 24. Notice of Proposed Actions. (a) In case the Company, after the Distribution Date, shall propose (i) to effect any of the transactions referred to in Section 11(a)(i) or to pay any dividend to the holders of record of its Shares payable in securities of any class or to make any other distribution to the holders of record of its Shares (other than a regular periodic cash dividend), or (ii) to offer to the holders of record of its Shares options, warrants, or other rights to subscribe for or to purchase Shares (including any security convertible into or exchangeable for Shares) or shares of any class or any other securities, options, warrants, convertible or exchangeable securities or other rights, or (iii) to effect any reclassification of its Shares or any recapitalization or reorganization of the Company, or (iv) to effect any consolidation or merger with or into any other Person or Persons, or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of record of a Right Certificate, in accordance with Section 25 hereof, notice of such proposed action, which shall specify the record date for the 39 43 purposes of such transaction referred to in Section 11(a)(i), or such dividend or distribution, or the date on which such reclassification, recapitalization, reorganization, consolidation, merger, sale or transfer of assets, liquidation, dissolution, or winding up is to take place and the record date for determining participation therein by the holders of record of Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of record of the Shares for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of record of Shares, whichever shall be the earlier. The failure to give notice required by this Section 24 or any defect therein shall not affect the legality or validity of the action taken by the Company or the vote upon any such action. (b) In case any of the transactions referred to in Section 11(a)(ii) or Section 13 of this Rights Agreement are proposed, then, in any such case, the Company shall give to each holder of Rights, in accordance with Section 25 hereof, notice of the proposal of such transaction at least 10 days prior to consummating such transaction, which notice shall specify the proposed event and the consequences of the event to holders of Rights under Section 11(a)(ii) or Section 13 hereof, as the case may be, and, upon consummating such transaction, shall similarly give notice thereof to each holder of Rights. 25. Notices. Notices or demands authorized by this Rights Agreement to be given or made by the Rights Agent or by the holder of record of any Right Certificate or Right to or on behalf of the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: 40 44 Triad Park, LLC 3055 Triad Drive Livermore, California 94550 Attention: Chief Financial Officer Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Rights Agreement to be given or made by the Company or by the holder of record of any Right Certificate or Right to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: [INSERT NAME OF RIGHTS AGENT] ___________________________________________________ ___________________________________________________ Attention: _______________________________________ Notices or demands authorized by this Rights Agreement to be given or made by the Company or the Rights Agent to the holder of record of any Right Certificate or Right shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent. 26. Supplements and Amendments. The Company and the Rights Agent may from time to time supplement or amend this Agreement without approval of any holders of Rights in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, (iii) prior to the time a Person becomes an Acquiring Person, to change or supplement any of the provisions herein which the Company may deem necessary or desirable (including, but not limited to, an amendment that provides that the Rights shall become exercisable for Equivalent Securities) or (iv) following the time a Person becomes an Acquiring Person, to change or supplement the provisions hereunder in any manner which the company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Right Certificates. Upon the delivery of a certificate from an 41 45 appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 26, the Rights Agent shall execute such supplement or amendment unless the Rights Agent shall have determined in good faith that such supplement or amendment would adversely affect its interests under this Agreement. Notwithstanding anything contained in this Rights Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Shares. 27. Successors. All of the covenants and provisions of this Rights Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 28. Benefits of this Rights Agreement. Nothing in this Rights Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Shares) any legal or equitable right, remedy or claim under this Rights Agreement; but this Rights Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the holders of record of the Right Certificates (and, prior to the Distribution Date, the Shares). 29. Delaware Contract. The Rights Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state; provided, however, that the rights and obligations of the Rights Agent shall be governed by the laws of the State of __________________(or state of incorporation of any successor Rights Agent). 42 46 30. Counterparts. This Rights Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 31. Descriptive Headings. Descriptive headings of the several sections of this Rights Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 32. Severability. If any term, provision, covenant or restriction of this Rights Agreement is held by a court of competent jurisdiction or other authority to be invalid, illegal, or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Rights Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. IN WITNESS WHEREOF, the parties hereto have caused this Rights Agreement to be duly executed, all as of the day and year first above written. ATTEST: TRIAD PARK, LLC By 3055 Management Corp., a California corporation, Its Manager By By ---------------------------------------- --------------------------------------- Its Its ------------------------------------- ----------------------------------- ATTEST: [INSERT NAME OF RIGHTS AGENT] By By ---------------------------------------- --------------------------------------- Its Its -----------------------------------
43 47 EXHIBIT A [Form of Right Certificate] Certificate No. W - ____________ Rights NOT EXERCISABLE AFTER [DATE], 2007 OR EARLIER IF REDEEMED. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. IN THE EVENT THAT THE RIGHTS REPRESENTED BY THIS CERTIFICATE ARE ISSUED TO A PERSON WHO IS AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN ACQUIRING PERSON OR A TRANSFEREE OF THE RIGHTS PREVIOUSLY OWNED BY SUCH PERSONS, THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BE SUBJECT TO CERTAIN LIMITATIONS IN THE CIRCUMSTANCES SPECIFIED IN SECTION 11(a)(ii) OF THE RIGHTS AGREEMENT. RIGHT CERTIFICATE TRIAD PARK, LLC This certifies that ____________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement dated as of [DATE], 1997 ("Rights Agreement") between Triad Park, LLC, a Delaware limited liability company ("Company"), and [INSERT NAME OF RIGHTS AGENT] ("Rights Agent") to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 p.m. (San Francisco time) on [DATE], 2007 at the office of the Exhibit A 48 Rights Agent, or its successors as Rights Agent, designated for such purpose one fully paid and nonassessable share ("Share"), of the Company at a purchase price of $0.63 as the same may from time to time be adjusted in accordance with the Rights Agreement ("Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. As provided in the Rights Agreement, the Purchase Price and the number of Shares which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events and, upon the happening of certain events, securities other than Shares, or other property, may be acquired upon exercise of the Rights evidenced by this Right Certificate, as provided by the Rights Agreement. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities of the Rights Agent, the Company and the holders of record of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive office of the Company. This Right Certificate, with or without other Right Certificates, upon surrender at the office of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder of record to purchase a like aggregate number of Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this 2 49 Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof, another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at its option at a redemption price of $0.01 per Right at any time prior to the earlier of (i) the date on which a Person becomes an Acquiring Person (as such term is defined in the Rights Agreement), or (ii) the Final Expiration Date. No fractional Shares shall be issued upon the exercise of any Right or Rights evidenced hereby, and in lieu thereof, as provided in the Rights Agreement, fractions of Shares shall receive an amount in cash equal to the same fraction of the then current market value of a Share. No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a Shareholder of the Company or any right to vote for the Advisory Board, or upon any matter submitted to Shareholders at any meeting thereof, or to give or withhold consent to any company action or to receive notice of meetings or other actions affecting Shareholders or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. 3 50 WITNESS the facsimile signature of the proper officers of the Company. Dated as of ____________________, _____. ATTEST: TRIAD PARK, LLC _________________________________ _________________________________ Secretary Title: COUNTERSIGNED: By:_____________________________ Authorized Signature
4 51 Form of Reverse Side of Right Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer any or all of the Rights represented by this Right Certificate) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _____________________________________________________________________________ (Name, address and social security or other identifying number of transferee) _______________________________________ (___________________) of the Rights represented by this Right Certificate, together with all right, title and interest in and to said Rights, and hereby irrevocably constitutes and appoints ________________________ attorney to transfer said Rights on the books of the within-named Company with full power of substitution. Dated:______________, _____ ___________________________________ (Signature) Signature Guaranteed: CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the rights evidenced by this Right Certificate [ ] are [ ] are not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person (as such capitalized terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any Person who is or was an Acquiring Person or an Affiliate or Associate of an Acquiring Person or any transferee of such Persons. Dated:______________, _____ ___________________________________ (Signature) Signature Guaranteed: 5 52 Form of Reverse Side of Right Certificate (continued) NOTICE The signatures to the foregoing Assignment and the foregoing Certificate, if applicable, must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever, and must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. In the event that the foregoing Certificate is not duly executed, with signature guaranteed, the Company may deem the Rights represented by this Right Certificate to be Beneficially Owned by an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such capitalized terms are defined in the Rights Agreement), and not issue any Right Certificate or Right Certificates in exchange for this Right Certificate. 6 53 Form of Reverse of Right Certificate (continued) FORM OF ELECTION TO PURCHASE (To be executed by the registered holder if such holder desires to exercise any or all of the Rights represented by this Right Certificate) To Triad Park, LLC: The undersigned hereby irrevocably elects to exercise ______________________ (_________) of the Rights represented by this Right Certificate to purchase the Shares of the Company, or other securities or property issuable upon the exercise of said number of Rights pursuant to the Rights Agreement. The undersigned hereby requests that a certificate for any such securities and any such property be issued in the name of and delivered to: _____________________________________________________________________________ (Name, address and social security or other identifying number of issuee) The undersigned hereby further requests that if said number of Rights shall not be all the Rights represented by this Right Certificate, a new Right Certificate for the remaining balance of such Rights be issued in the name of and delivered to: _____________________________________________________________________________ (Name, address and social security or other identifying number of issuee) Dated:______________, _____ _____________________________ (Signature) Signature Guaranteed: 7 54 Form of Reverse Side of Right Certificate (continued) CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any Person who is or was an Acquiring Person or an Affiliate or Associate of an Acquiring Person or any transferee of such Persons. Dated:______________, _____ _________________________ Signature Guaranteed: NOTICE The signature to the foregoing Election to Purchase and the foregoing Certificate, if applicable, must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever, and must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. In the event that the foregoing Certificate is not executed, with signature guaranteed, the Company may deem the Rights represented by this Right Certificate to be Beneficially Owned by an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such capitalized terms are defined in the Rights Agreement), and not issue any Right Certificate or Right Certificates in exchange for this Right Certificate. 8 55 EXHIBIT B TRIAD PARK, LLC SUMMARY OF RIGHTS TO PURCHASE SHARES On [DATE], 1997, the Advisory Board of Triad Park, LLC (the "Company") declared a dividend distribution of one Share Purchase Right (collectively, the "Rights") for each outstanding Share ("Share") of the Company. The distribution was payable as of [DATE], 1997 to Shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one Share at a price of $0.63 per share (the "Purchase Price"). The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and [INSERT NAME OF RIGHTS AGENT], as Rights Agent (the "Rights Agent"). As discussed below, initially the Rights will not be exercisable, certificates will not be sent to Shareholders and the Rights will automatically trade with the Shares. Until the earlier to occur of (i) a public announcement that a person or group of affiliated or associated persons ("Acquiring Person"), other than the Company, or any employee benefit plan or employee equity plan of the Company ("Exempt Person") has acquired, or obtained the right to acquire, without approval of the Advisory Board, beneficial ownership of securities of the Company representing 24% or more of the outstanding Shares of the Company (other than solely as a result of a reduction in the outstanding Shares of the Company) or such earlier date as a majority of the Advisory Board shall become aware of such acquisition of the Shares (the "Share Acquisition Date") or (ii) the tenth day (subject to extension by the Board prior to the time a person becomes an Acquiring Person) following the commencement of, or public announcement of an intention to commence, a tender or exchange offer (other than a tender or exchange offer by an Exempt Person), the consummation of which would result in the ownership of 24% or more of the outstanding Shares (the earlier of such dates being called the Exhibit B 56 "Distribution Date"), the Rights will be evidenced, with respect to the Shares by Share certificates with a copy of this Summary of Rights attached thereto. Rights shall be issued in respect of all Shares issued after [DATE], 1997 but prior to the earlier of the Distribution Date or the Expiration Date. The Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be represented by and transferred with, and only with, the certificates of Shares registered in the names of the holders thereof. Until the Distribution Date (or earlier redemption or expiration of the Rights), new certificates issued for Shares (including, without limitation, certificates issued upon transfer or exchange of Shares) after [DATE], 1997 will contain a legend incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any of the Company's Share certificates, with or without the aforesaid legend or a copy of this Summary of Rights attached thereto, will also constitute the transfer of the Rights associated with the Shares represented thereby. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Company's Shares, as of the close of business on the Distribution Date, and such separate certificates alone will evidence the Rights from and after the Distribution Date. The Rights are not exercisable until the Distribution Date. The Rights will expire at the close of business on [DATE], 2007, unless earlier redeemed by the Company as described below. The Purchase Price payable, and the number of Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a Share dividend on, or a subdivision, combination or reclassification of the Shares, (ii) upon the grant to holders of the Shares of certain rights or warrants to subscribe for Shares or convertible securities at less than the current market price of the Shares or (iii) upon the distribution to holders of the Shares of evidences of indebtedness or assets (excluding dividends payable in Shares) or of subscription rights or warrants (other than those referred to above). ii 57 Unless the Rights are earlier redeemed, in the event that, after the Rights have become exercisable, the Company were to be acquired in a merger or other business combination (in which any of the Company's Shares are changed into or exchanged for other securities or assets) (other than a merger or other business combination in which the voting power represented by the Company's securities outstanding immediately prior thereto continues to represent all of the voting power represented by the securities of the Company thereafter and the holders of such securities have not changed as a result of such transaction) (such transactions are collectively referred to herein as the "Section 13 Events"), the Rights Agreement provides that proper provision shall be made so that each holder of record of a Right will from and after such date have the right to receive, upon payment of the Purchase Price, that number of shares of common stock of the acquiring company having a market value at the time of such transaction equal to two times the Purchase Price. This provision would not apply to a Section 13 Event consummated with a person who acquired shares pursuant to a Permitted Offer (as defined below) if the price per share paid in such transaction is not less than that paid pursuant to the Permitted Offer and the consideration paid is the same paid pursuant to the Permitted Offer. In the event (i) any Person (other than an Exempt Person) becomes the beneficial owner of 24% or more of the then outstanding Shares other than pursuant to a tender or exchange offer for all outstanding Shares at a price and on terms determined by the Advisory Board to be both adequate and otherwise in the best interests of the Company and its Shareholders other than the Acquiring Person or an Affiliate or Associate thereof on whose behalf the offer is being made (a "Permitted Offer"), or (ii) any Acquiring Person or any of its Affiliates or Associates, directly or indirectly, (1) merges into the Company or otherwise combines with the Company in a transaction in which the Company is the continuing or surviving corporation of such merger or combination and the Shares remain outstanding and no Shares shall be changed into or exchanged for stock or other securities of any other person or of the Company or cash or any other property, (2) transfers, in one or more transactions, any assets to the Company in exchange for equity securities of the Company or for securities exercisable for or convertible into equity iii 58 securities of the Company or otherwise obtains from the Company, with or without consideration, any equity securities of the Company or securities exercisable for or convertible into equity securities of the Company (other than as part of a pro rata offer or distribution to all holders of such securities), (3) sells, purchases, leases, exchanges, mortgages, pledges, transfers or otherwise disposes to, from or with the Company, assets on terms and conditions less favorable to the Company than the Company would be able to obtain in arm's-length negotiation with an unaffiliated third party, (4) receives any compensation from the Company for serving other than compensation for employment as a regular or part-time employee, or fees for servicing as a director at rates in accordance with the Company's past practice, (5) receives the benefit (except proportionately as a Shareholder) of any loans, advances, guarantees, pledges or other financial assistance or tax credit or advantage, or (6) engages in any transaction with the Company involving the sale, license, transfer or grant of any right in, or disclosure of, any patents, copyrights, trade secrets, trademarks or knowhow (or any other intellectual or industrial property rights recognized under any country's intellectual property rights laws) which the Company owns or has the right to use on terms and conditions not approved by the Advisory Board then, and in each such case, each holder of record of a Right, other than the Acquiring Person, will thereafter have the right to receive, upon payment of the Purchase Price, that number of Shares having a market value at the time of the transaction equal to twice the Purchase Price. This same right shall be available to each holder of record of a Right, other than the Acquiring Person, if, while there is an Acquiring Person, there shall occur any reclassification of securities (including any reverse split), any recapitalization of the Company, or any merger or consolidation of the Company or any other transaction or transactions involving the Company (whether or not involving the Acquiring Person) which have the effect of increasing by more than 1% of the proportionate share of the outstanding shares of any class of equity securities of the Company which is directly or indirectly owned or controlled by the Acquiring Person. Rights are not exercisable following the occurrence of the events set forth in this paragraph until the expiration of the period during which the Rights may be redeemed as described below. The iv 59 holder of any Rights that are or were at any time, on or after the earlier of the Share Acquisition Date or the Distribution Date, beneficially owned by an Acquiring Person which is or was involved in or which caused or facilitated, directly or indirectly, the event or transaction or transactions described in this paragraph shall not be entitled to the benefit of the adjustment described in this paragraph. No fractional Shares will be issued upon exercise of the Rights and, in lieu thereof, a payment in cash will be made to the holder of such Rights equal to the same fraction of the current market value of a Share. At any time until the time that any person becomes an Acquiring Person, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right. The Company may also redeem the Rights in whole, but not in part, at a price of $.01 per Right after the Share Acquisition Date but prior to any Section 13 Event in connection with a Section 13 Event in which all holders of Shares are treated alike and not involving (other than as a holder of Shares being treated like all other holders) an Acquiring Person or an Affiliate or Associate of an Acquiring Person or any other Person in which such Acquiring Person, Affiliate or Associate has an interest or any other Person or Persons acting directly or indirectly on behalf of or in association with any such Acquiring Person, Affiliate or Associate. Immediately upon the action of the Advisory Board of the Company authorizing redemption of the Rights, the right to exercise the Rights will terminate, and the only right of the holders of Rights will be to receive the Redemption Price without any interest thereon. The Company may, except with respect to the redemption price, amend the Rights in any manner (including an amendment that provides that the Rights shall become exercisable for shares or fractions of shares of securities of the Company that are economically equivalents). After a person becomes an Acquiring Person, the Company may amend the Rights in any manner that does not adversely affect the interests of holders of the Rights. Until a Right is exercised, the holder, as such, will have no rights as a Shareholder of the Company, including, without limitation, the right to vote or to receive dividends. v 60 The issuance of the rights is not taxable to the Company or to Shareholders under presently existing federal income tax law, and will not change the way in which Shareholders can presently trade the Company's Shares. If the Rights should become exercisable, Shareholders, depending on then existing circumstances, may recognize taxable income. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Current Report on Form 8-K. A copy of the Rights Agreement is available free of charge from either [INSERT NAME OF RIGHTS AGENT], _, Attention: , or the Company, 3055 Triad Drive, Livermore, California 94550, Attention: Secretary. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement which is incorporated in this summary description herein by reference. vi EX-6.1 5 REAL ESTATE DISTRIBUTION AGREEMENT, DTD 02/26/97 1 TRIAD SYSTEMS CORPORATION REAL ESTATE DISTRIBUTION AGREEMENT This Real Estate Distribution Agreement (this "AGREEMENT") is entered into as of February 26, 1997 (the "EFFECTIVE DATE") among Triad Systems Corporation, a Delaware corporation ("TRIAD"), 3055 Triad Dr. Corp., a California corporation and a wholly-owned subsidiary of Triad ("3055"), 3055 Management Corp., a California corporation ("3055 MANAGEMENT"), and Triad Park, LLC, a Delaware limited liability company ("PARK"), in the following factual context: A. Triad owns certain land located in Triad Park, Livermore, California; B. 3055 owns three (3) buildings (comprising 220,000 square feet) and certain land situated in Triad Park, Livermore, California, which are leased to Triad for use as its headquarters in Livermore, California; C. Cooperative Computing, Inc., a Texas corporation ("CCI"), CCI Acquisition Corp., a Delaware corporation ("CCI ACQUISITION"), and Triad are parties to an Agreement and Plan of Merger, dated as of October 17, 1996 (as the same may be amended from time to time, the "MERGER AGREEMENT"), pursuant to which the parties thereto, among other things, agreed that, subject to the terms and conditions specified therein, Triad would declare and pay a dividend consisting of interests in an entity owning certain real property then held by Triad, certain real property then owned by 3055, and certain related assets; THE PARTIES NOW AGREE AS FOLLOWS: SECTION 1: CERTAIN DEFINITIONS As used herein, the following terms shall have the indicated meanings: 1.1 "AAA" shall mean the American Arbitration Association. 1.2 "After-tax basis" shall have the meaning given to such term in Section 11.4 of this Agreement. 1.3 "American General Consent" shall mean the letter agreement among 3055, Park and The Variable Annuity Life Insurance Company, an affiliate of American General Insurance Company, in the form of Exhibit 1.3 to this Agreement, relating to the termination of certain obligations under the 3055 Note and the 3055 Deed of Trust. 2 1.4 "Assignment and Assumption Agreement" shall mean the Assignment and Assumption Agreement, to be dated as of the Contribution Date, among Triad, 3055 and Park, in the form attached as Exhibit 1.4 to this Agreement. 1.5 "Assumed Obligations" shall mean all liabilities or obligations of Triad or any of its subsidiaries (including, without limitation, 3055, but excluding Park) under the following: (i) the Specified Secured Debt; (ii) the 3055 Note; (iii) the 3055 Deed of Trust; (iv) the Dividend Expenses; and (v) the Real Property Agreements. In addition, "Assumed Obligations" shall mean all obligations of 3055 under the Lease Agreement, as amended by the Lease Amendment. 1.6 "Code" shall have the meaning given to such term in Section 11.1 of this Agreement. 1.7 "Commission" shall mean the Securities and Exchange Commission. 1.8 "Contribution Date" shall mean the date on which shares of Triad Common Stock are purchased pursuant to the Offer to Purchase. 1.9 "Damages" shall mean any and all losses, liabilities, claims, damages, obligations, payments, costs and expenses, including, without limitation, costs and expenses of investigation and reasonable fees and disbursements of counsel. 1.10 "Deemed Sales" shall have the meaning given to such term in Section 11.1 of this Agreement. 1.11 "Designated Park Employees" shall have the meaning given to such term in Section 9.1 of this Agreement. 1.12 "Distribution Agent" shall mean the existing transfer agent and registrar for the Triad Common Stock or such other person as may be selected by Park prior to the distribution of the Dividend, which will serve as the distribution agent for the Dividend. 1.13 "Dividend" shall have the meaning set forth in Section 2 of this Agreement. 1.14 "Dividend Expenses" shall mean all costs and expenses solely attributable to the transactions contemplated hereby, whether incurred before or after consummation of the Offer to Purchase, and including, without limitation, any and all 2 3 (i) necessary and reasonable fees and expenses of counsel, accountants and advisors, (ii) filing fees, (iii) escrow fees charges by any title company engaged in connection with the consummation of any of the transactions contemplated hereby, (iv) costs and expenses of obtaining current tax certificates for any of the Triad Designated Assets and of recording the Triad Deed in the County Records of Alameda County, California, (v) costs and expenses of any title examination, (vi) costs and expenses of obtaining a current, as-built survey of the real property included in the Triad Designated Assets, and (vii) costs and expenses of issuance of an Owner's Title Policy, if any, insuring title in accordance with the terms of this Agreement. 1.15 "Environmental Costs and Liabilities" shall have the meaning given to such term in the Merger Agreement. 1.16 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. 1.17 "Indemnified Party" and "Indemnified Parties" shall have the respective meanings given to such terms in Section 9.1 of this Agreement. 1.18 "Information Statement" shall mean the definitive information statement, as amended or supplemented, mailed to the Record Holders in connection with the Dividend. 1.19 "Lease Agreement" shall mean that certain Project Lease Agreement, dated as of August 1, 1988, between Triad and 3055. 1.20 "Lease Amendment" shall mean that certain First Amendment to Project Lease Agreement, to be dated as of the Contribution Date, among Triad, 3055 and Park. 1.21 "Mailing Date" shall mean the date the Information Statement is first mailed to the stockholders of Triad. 3 4 1.22 "Merger" shall have the meaning given to such term in Section 4 of this Agreement. 1.23 "Net Proceeds" shall mean, with respect to the sale, transfer, assignment or conveyance of any Triad Designated Asset, the net proceeds received by Triad or 3055, as applicable, after deduction for all costs incurred by Triad, 3055 or any of their respective subsidiaries, whether or not at such time such costs have been paid, in connection with such sale, transfer, assignment or conveyance. 1.24 "Offer to Purchase" shall mean the Offer to Purchase for Cash all Outstanding Shares of Common Stock (Including the Associated Rights) of Triad, dated October 23, 1996, by CCI Acquisition. 1.25 "Partnership Item Tax Contest" shall have the meaning given to such term in Section 11.2 of this Agreement. 1.26 "Real Property" means all of the approximately 206 acres owned by Triad or 3055 in Livermore, California, commonly known as Triad Park, and which is particularly described upon SCHEDULE 1.26, including the three buildings containing approximately 220,000 square feet (excluding cubicles, furniture and office equipment). 1.27 "Real Property Agreements" means the agreements listed on SCHEDULE 1.27. 1.28 "Record Holders" shall mean the record holders of Triad Common Stock immediately preceding the acceptance of shares pursuant to the Offer of Purchase. 1.29 "Registration Statement" shall mean the registration statement on Form 10SB, if available, or Form 10 to be filed with the Commission under the Exchange Act in connection with the Dividend, in the form declared effective by the Commission, as amended or supplemented. 1.30 "Rules" shall have the meaning given to such term in Section 13.1 of this Agreement. 1.31 "Securities Act" shall mean the Securities Act of 1933, as amended. 1.32 "Specified Claim" shall have the meaning given to such term in Section 13.8 of this Agreement. 1.33 "Specified Secured Debt" shall mean any indebtedness of Triad or any of its subsidiaries (other than the Triad Revolving Credit Agreement) that is secured, in whole or in part, by any of the Triad Designated Assets, including, without limitation, the 3055 Note. 4 5 1.34 "Spin-Off Tax Contest" shall have the meaning given to such term in Section 11.2 of this Agreement. 1.35 "Statement" shall have the meaning given to such term in Section 11.6 of this Agreement. 1.36 "Taxes" shall have the meaning given to such term in the Merger Agreement. 1.37 "Tax Returns" shall have the meaning given to such term in the Merger Agreement. 1.38 "Third Party Claim" shall have the meaning given to such term in Section 10.2 of this Agreement. 1.39 "3055 Deed of Trust" shall mean that certain First Deed of Trust and Assignment of Rents, Security Agreement and Fixture Filing, by and between 3055, as Trustor, Mason-McDuffie Financial Corporation, as Trustee, and The Variable Annuity Life Insurance Company, as Beneficiary. 1.40 "3055 Management" shall mean 3055 Management Corp., a California corporation. 1.41 "3055 Management Contribution Note" shall have the meaning set out in Section 5.4. 1.42 "3055 Management Membership Interest" shall mean the limited liability company interest (as defined in the Delaware Limited Liability Company Act, as amended) in Park received by 3055 Management in exchange for the contribution to Park of the 3055 Management Contribution Note pursuant to Section 5.4 of this Agreement. 1.43 "3055 Note" shall mean that certain Promissory Note, dated as of August 23, 1988, in the original principal amount of $15,500,000, by 3055, as Maker, and The Variable Annuity Life Insurance Company, a Texas corporation, as Payee. 1.44 "Transaction Documents" shall mean, collectively, this Agreement and each other document, agreement or instrument contemplated by, or otherwise executed and delivered in connection with, this Agreement. 1.45 "Triad Common Stock" shall mean shares of common stock, $.01 par value per share, of Triad. 1.46 "Triad Deed" shall have the meaning given to such term in Section 5.3 of this Agreement. 5 6 1.47 "Triad Designated Assets" shall mean all of the Real Property and all related rights, privileges, easements, improvements, fixtures and appurtenances, including but not limited to the following: (i) All rights, subject to all obligations, under the Real Property Agreements; (ii) the Net Proceeds received by Triad upon the consummation of any sale of any Triad Designated Asset from and after October 17, 1996 and prior to the conveyance of the Triad Designated Assets to Park as described in Section 5.3 of this Agreement; (iii) all Triad Sales Agreements; (iv) all of the landlord's interest under the Lease Agreement, as amended by the Lease Amendment; (v) all rights to Triad Park on and off site improvements and to any reimbursements to be paid by the City of Livermore, any utility company or any other property owner within the improvement district; and (vi) Copies of all books and records related to any of the foregoing or related to the 3055 Note and the 3055 Deed of Trust or the Assumed Liabilities. 1.48 "Triad Excluded Assets" shall mean those Triad Designated Assets sold, assigned, transferred or conveyed by Triad prior to the conveyance of the Triad Designated Assets to Park as described in Section 5.3 of this Agreement. 1.49 "Triad Membership Interest" shall mean the limited liability company interest (as defined in the Delaware Limited Liability Company Act, as amended) in Park received by Triad in exchange for the conveyance by Triad to Park of the Triad Designated Assets pursuant to Section 5.3 of this Agreement. 1.50 "Triad Revolving Credit Agreement" shall mean that certain Revolving Credit Loan Agreement, dated as of June 30, 1992, by and between Triad and Comerica Bank-California. 1.51 "Triad Sales Agreement" shall mean any agreement to which Triad is a party pursuant to which Triad has agreed or agrees to sell, assign, transfer or convey any Triad Designated Asset. 1.52 "Waiver of Conflicts" shall mean the Conflict Agreement among Triad, CCI, 3055, 3055 Management, Park and McCutchen, Doyle, Brown & Enersen, LLP, dated as of the Contribution Date, in the form of Exhibit 1.51 to this Agreement. 6 7 SECTION 2: DECLARATION OF DIVIDEND Subject to the terms and conditions of this Agreement, the Board of Directors of Triad will declare a dividend of the Triad Membership Interest (the "DIVIDEND") payable to the Record Holders on a pro rata basis upon the satisfaction of the conditions set forth herein. Following the satisfaction of the conditions to the payment of the Dividend, Triad shall deliver to the Distribution Agent a certificate representing the Triad Membership Interest and instruct the Distribution Agent to distribute, as soon as practicable, such membership interest to the Record Holders. SECTION 3: CONDITION PRECEDENT The payment of the Dividend by Triad is conditioned in all respects upon the following: (a) The Triad Board of Directors shall have declared such Dividend as provided in Section 2 of this Agreement. (b) The transactions contemplated by Section 4 and Section 5 of this Agreement, and the deliveries contemplated by Section 7 of this Agreement, all to occur on the Contribution Date, shall have been consummated in all respects and the Lease Amendment shall be in full force and effect. (c) The Registration Statement shall have become effective under the Exchange Act and shall continue to be effective as of the payment date for the Dividend, and no stop order shall have been issued and no proceeding by the Commission shall have been instituted to suspend the use of the Registration Statement or the Information Statement. (d) The Information Statement is ready to be distributed to the holders of Triad Common Stock in accordance with the requirements of the Exchange Act and the Commission. (e) All authorizations, consents, approvals and clearances of all federal, state, local and foreign governmental agencies or authorities required to permit the valid consummation by the parties hereto of the transactions contemplated hereby shall have been obtained and shall be in full force and effect. (f) No preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or authority, and no statute, rule, regulation, or executive order promulgated or enacted by any governmental agency or authority, shall be in effect preventing the payment of the Dividend. (g) The Dividend shall be payable in accordance with applicable law. 7 8 (h) Coopers & Lybrand shall have issued to Triad a "cold comfort" letter consistent in form and content with applicable professional standards, regarding the historical financial information contained in the Registration Statement and the Information Statement. (i) Triad shall have received an opinion, dated as of the Mailing Date and otherwise in form and substance reasonably acceptable to Triad, from McCutchen, Doyle, Brown & Enersen, LLP, counsel to Park, as to the matters set forth on Exhibit 3(i) to this Agreement. SECTION 4: MERGER OF 3055 Upon the Contribution Date and immediately prior to the contributions to Park under Section 5, Triad shall cause 3055 to be merged with and into Triad. SECTION 5: FORMATION OF TRIAD PARK, LLC 5.1 FORMATION OF PARK. Immediately prior to the execution and delivery hereof, Triad and 3055 Management have formed Park. The limited liability company agreement of Park and the Certificate of Formation of Park are attached hereto as Exhibit 5.1A and Exhibit 5.1B, respectively. Each such document is in full force and effect in the form attached hereto. 5.2 RELEASE OF CERTAIN LIENS, CONSENT. On or before the Contribution Date, and without the payment or delivery of any consideration, or the incurrence of any obligation to pay or deliver any consideration, by Triad or any of its subsidiaries (other than Park), Triad shall obtain the American General Consent. 5.3 CONVEYANCE BY TRIAD. Upon the Contribution Date, subject to the terms and conditions hereof, Triad will sell, assign, transfer and convey to Park all of Triad's right, title and interest in the Triad Designated Assets (other than the Triad Excluded Assets) in exchange for the issuance to Triad of the Triad Membership Interest, equal to 99% of the capital, profits and losses of Park, and the assumption by Park of the Assumed Obligations. The conveyance of the real property included in the Triad Designated Assets (other than the Triad Excluded Assets) shall be effected through the execution and delivery by Triad of a grant deed in the form of Exhibit 5.3 to this Agreement (the "TRIAD DEED"). The conveyance of the remaining property included in the Triad Designated Assets (other than the Triad Excluded Assets), and the assumption of the Assumed Obligations, shall be effected through the execution and delivery of the Assignment and Assumption Agreement by Triad and Park. The real property included in the Triad Designated Assets shall be free and clear of monetary liens and encumbrances granted or created under the Tender Facility or the Interim Facility (as defined in the Offer to Purchase); otherwise the recourse for breach of title 8 9 warranties of Triad under the Triad Deed will be strictly limited to the extent that Triad is insured therefor under its title insurance in effect prior to the Effective Date. 5.4 CONTRIBUTION OF 3055 MANAGEMENT. Upon the Contribution Date, 3055 Management will contribute its recourse promissory note due in 120 days, without interest, equal to 1.01 percent of the total value of the contributions to Park by Triad (the "3055 MANAGEMENT CONTRIBUTION NOTE") in exchange for a one percent (1%) interest in the capital, profits and losses of Park. 5.5 CONDITIONS TO CONVEYANCES. The conveyances described in Section 5.3 and Section 5.4 of this Agreement are conditioned in all respects upon the occurrence of the actions described in Section 4. 5.6 NO REPRESENTATIONS OR WARRANTIES. Park understands and agrees that, except as specifically provided in Section 5.3, neither Triad nor 3055 is, in any Transaction Document, nor shall Triad or 3055 be deemed or implied to be, making any representation or warranty as to the value of any Triad Designated Asset, the absence of any encumbrance on any Triad Designated Asset, the title to any Triad Designated Asset, the legal sufficiency to convey title to any Triad Designated Asset, or as to any other matter regarding any Triad Designated Asset, it being understood and agreed that each of Triad and 3055 is merely conveying such person's right, title and interest, if any, in the Triad Designated Assets to Park and that all such Triad Designated Assets are being conveyed "AS IS, WHERE IS" and that Park shall bear the economic and legal risk that any conveyances of any Triad Designated Assets shall prove to be insufficient or that Triad's or 3055's title to any such assets shall be other than good and marketable title free from encumbrances. Similarly, Park understands and agrees that neither Triad nor 3055 is, in any Transaction Document, nor shall Triad or 3055 be deemed or implied to be, making any representation or warranty as to whether any consents, authorizations, approvals, waivers, applications, filings or amendments are necessary in connection with the execution, delivery or performance of, or the consummation of the transactions contemplated by, any Transaction Document to satisfy the requirements of any applicable agreements, laws, rules, regulations, judgments, orders or decrees, it being understood and agreed that Park shall bear the economic and legal risk that any necessary consents, authorizations, approvals, waivers, applications, filings or amendments are not obtained or that the requirements of any law, rule, regulation, judgment, order or decree are not complied with. 5.7 SALE AGREEMENTS. Each Triad Sale Agreement entered into by Triad from and after the date of this Agreement shall provide that, upon the conveyance by Triad of the Triad Designated Assets to Park pursuant to this Agreement, the purchaser agrees to an automatic novation substituting Park for Triad in the Triad Sale Agreement. 5.8 LOAN BY TRIAD. Immediately prior to the payment of the Dividend, Park shall deliver to Triad a balance sheet as of that time, certified by a duly authorized 9 10 officer of Park. In the event that, upon the payment of the Dividend, Park shall not have cash and/or cash equivalent assets totaling at least $100,000, Triad shall make a loan to Park in an amount equal to the difference between $100,000 and total amount of cash and cash equivalent assets of Park, such loan to be evidenced and governed by a promissory note which shall be due in one year, shall bear interest at nine percent (9%) per annum, payable at maturity. 5.9 INSURANCE. Effective upon the Contribution Date, the participation by Park in any insurance coverage of Triad or any of its subsidiaries (including, without limitation, 3055) shall cease. Park shall retain any claims under the pre-existing insurance coverage arising out of events occurring before the Contribution Date. 5.10 APPRAISAL. Triad has commissioned Carneghi-Bautovich & Partners, Inc., an independent qualified real estate valuation expert, to prepare an appraisal of the real property included in the Triad Designated Assets (the "APPRAISAL"). The Carneghi-Bautovich appraisal is the agreed-upon appraisal to be used for the purposes described in Section 6.10 of the Merger Agreement. The Appraisal shall also be used to determine the size of the capital accounts of Triad and 3055 Management as follows: (a) The capital account of Triad in Park shall be equal to the value of the Triad Designated Assets and the value of the real property included shall be determined by the Appraisal, less any indebtedness assumed by Park; (b) The capital account of 3055 Management in Park shall be equal to the face amount of the 3055 Management Note. SECTION 6: [INTENTIONALLY LEFT BLANK] SECTION 7: CLOSING DELIVERIES 7.1 DELIVERIES BY TRIAD. On the Contribution Date, Triad shall deliver the following: (a) The Triad Deed; (b) A counterpart of the Assignment and Assumption Agreement; (c) A counterpart of the Lease Amendment fully executed by Triad; (d) A copy of the resolutions of Triad's Board of Directors, certified by its Secretary, declaring the Dividend, authorizing or ratifying its execution and delivery of this Agreement, the Lease Amendment, the actions of 3055 in connection with this 10 11 Agreement and the Lease Amendment, and the consummation of the transactions contemplated by this Agreement and the Lease Amendment; (e) The American General Consent; and (f) A counterpart of the Waiver of Conflicts. 7.2 DELIVERIES BY 3055. On the Contribution Date, 3055 shall deliver the following: (a) A copy of the resolutions of the Board of Directors, certified by 3055's Secretary, authorizing or ratifying its execution and delivery of this Agreement, the Merger and the consummation of the transactions contemplated by this Agreement; (b) A copy of the resolutions by Triad, as the sole stockholder of 3055, certified by 3055's Secretary, authorizing or ratifying the Merger; (c) A counterpart of the Waiver of Conflicts. 7.3 DELIVERIES BY PARK. On the Contribution Date, Park shall deliver the following: (a) A counterpart of the Lease Amendment fully executed by Park; (b) Evidence of the Triad Membership Interests and the 3055 Management Membership Interests; (c) A counterpart of the Assignment and Assumption Agreement; (d) A counterpart of the Waiver of Conflicts; (e) Confirmation that 3055 Management is the sole manager of Park and is authorized to execute and deliver this Agreement, the Lease Amendment, the Assignment and Assumption Agreement and the Consummation of the transactions contemplated by this Agreement. 7.4 DELIVERIES BY MANAGEMENT. On the Contribution Date, Management shall deliver the following: (a) A copy of the resolutions of the Board of Directors, certified by Management's' Secretary, authorizing or ratifying Management's execution and delivery of this Agreement, and as Manager of Park of the Lease Amendment and the consummation of the transactions contemplated by this Agreement and the Lease Amendment; 11 12 (b) A counterpart of the Waiver of Conflicts. SECTION 8: SECURITIES EXCHANGE ACT OF 1934 UNDERTAKING Promptly following the Contribution Date, Park shall prepare and file with the Commission the Registration Statement and Triad shall prepare and file with the Commission the Information Statement. SECTION 9: CERTAIN COVENANTS 9.1 SUPPORT. In order to facilitate the orderly management of Park following the Spin-Off Transaction, for a period of one year following the Contribution Date, Triad shall provide to Park at Triad's Livermore corporate offices (at no cost to Park) the following: (a) Two cubicles of office space, reasonable filing space, and two telephones (provided, however, that all telephone service charges for such telephones (including, without limitation, fees for basic service, long distance charges, and repair and maintenance services) shall be paid by Park); and (b) During normal business hours, (i) reasonable access to the cubicles and filing space referenced in clause (a) above by two Park employees that may be designated from time to time by Park (the "DESIGNATED PARK EMPLOYEES"), (ii) reasonable light and heating and air conditioning for the immediate area in which the cubicles referenced in clause (a) above are located, (iii) secretarial support for the Designated Park Employees, (iv) reasonable access by the Designated Park Employees to two word processing computers and such other office equipment and facilities as is reasonably necessary for the performance of their duties. Notwithstanding the foregoing, Park shall be liable for all damages to any equipment or improvements provided by Triad in accordance with the foregoing provisions to the extent such damages result from the conduct of any employees or representatives of Park. 9.2 FURTHER ASSURANCES. From time to time after the Contribution Date, each party to this Agreement shall, without further consideration, take such actions as any other party hereto may reasonably request in order to more effectively consummate the transactions contemplated hereby. Should any claim be made against Triad by the holders of Specified Secured Debt, Park shall obtain the complete and unconditional release of Triad from those claims. 9.3 CONTRACT SERVICES AGREEMENT. In order for Park to meet its reporting requirements under the Securities Exchange Act of 1934 and to conduct its real estate operations, Triad shall provide Park for a period of two years after the Contribution Date, with administrative assistance from such members of Triad's in-house legal staff 12 13 and accounting staff who have experience with the particular matters as Triad may reasonably designate from time to time with sales contracts, regulatory filings, tax returns, and information management. Park shall reimburse Triad for its fully burdened hourly cost of providing these services . Triad shall have no liability to Park whatsoever arising out of the provision of services by its employees pursuant to this Section 9.3. 9.4 PROPERTY MANAGERS. Following the Contribution Date, Triad and Park shall jointly agree to the selection and/or replacement of property managers who will act as the facilities managers for Triad and the development mangers for Park as described in SCHEDULE 9.4 (the "PROPERTY MANAGERS"). On the Contribution Date, the Property Managers shall be actively employed by Triad for fifty percent (50%) of their time and by Park for fifty percent (50%) of their time. Park shall reimburse Triad for fifty percent (50%) of the Property Managers' salary and benefits listed on SCHEDULE 9.4. Triad shall have no liability to Park whatsoever arising out of the provision of services by its employees pursuant to this Section 9.4. 9.5 LIMITED LICENSE. Effective upon payment of the Dividend, Triad grants Park a perpetual license, free of any royalty payments, to use the name "Triad Park" or Triad Business Park in references to the real property included in the Triad Designated Assets in connection with the operations of Park related to the disposition of the Triad Designated Assets. 9.6 PARK NET WORTH REQUIREMENT. At all times following the Contribution Date until the expiration of Park's indemnity obligations under Section 11 in accordance with Section 11.8, Park shall not, directly or indirectly, without the prior written consent of Triad, declare or pay any dividend or distribution (whether in cash, property, securities or otherwise) which after giving effect to the dividend or distribution would result in Park have a Specified Net Worth less than the Minimum Worth. If at any time the Specified Net Worth of Park drops below the Trigger Amount, then Triad may elect to require the remaining Real Property of Park to be appraised with the costs of appraisal shared equally by Triad and Park. In addition, Triad may request an appraisal at any time at its sole cost. Any appraisal shall be conducted by an independent appraiser mutually acceptable to Triad and Park. The results of the appraisal shall be used to recalculate Park's Specified Net Worth for the purposes of this Section. As used in this Section 9.6, the following terms shall have the following meanings: "Specified Net Worth" is the net worth of Park determined in accordance with generally accepted accounting principles consistently applied, except that for the purposes of this calculation: (i) the value of the remaining Real Property shall be included at the value determined by the Appraisal, or if a subsequent appraisal has been performed in accordance with this Section, by that more recent appraisal, each as adjusted by depreciation since the appraisal date; and (ii) there shall be no liability 13 14 attributable to Park's obligations under Section 11 included in the calculation of Specified Net Worth. "Minimum Worth" shall mean the greater of: (i) an amount equal to $2,350,000 plus interest on $2,350,000 at the Interest Rate computed from the 75th day following the Contribution Date; or (ii) the amount of any deficiency proposed in writing by the Internal Revenue Service which would be subject to indemnification under Section 11 plus interest on that amount at the Interest Rate computed from the date of the writing stating the proposed deficiency. "Trigger Amount" shall mean $4,000,000 plus interest on $4,000,000 at the Interest Rate from the Contribution Date. "Interest Rate" shall mean ten percent (10%) per annum, compounded annually. SECTION 10. CERTAIN INDEMNIFICATION PROVISIONS 10.1 INDEMNIFICATION FOR CERTAIN MATTERS. From and after the Contribution Date, Park shall indemnify, defend and hold harmless each of Triad and 3055 and their respective officers, directors and affiliates, and each person, if any, who controls any of the foregoing within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and each of the heirs, executors, successors and assigns of any of the foregoing (each an "INDEMNIFIED PARTY" and, collectively, the "INDEMNIFIED PARTIES") from and against any and all Damages arising out of, related to or based upon: (a) Any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement as of the effective date thereof, the Mailing Date or the payment date of the Dividend, or in the Information Statement as of the Mailing Date or the payment date of the Dividend; (b) Any omission (or alleged omission) to state in the Registration Statement, as of the effective date thereof, the Mailing Date or the payment date of the Dividend, or in the Information Statement, as of the Mailing Date or the payment date of the Dividend, a material fact required to be stated therein or necessary to make the statements therein not misleading; (c) The failure to register all or any portion of the Triad Membership Interest under the Securities Act or any state securities or "blue sky" laws; (d) The Assumed Obligations; (e) All Environmental Costs and Liabilities with respect to any of the Triad Designated Assets; (f) The Dividend Expenses; and 14 15 (g) The breach by Park of any of its representations or warranties under this Agreement or the failure by Park to perform any of its covenants, agreements or obligations under this Agreement. 10.2 CERTAIN PROCEDURES. Any Indemnified Party will (i) give prompt written notice to Park of any claim with respect to which it seeks indemnification under this Section 10 (but the failure to so notify shall not relieve Park from any liability which it may have under this Agreement except to the extent such failure materially prejudices Park), and (ii) permit Park to assume the defense of any claim made against such Indemnified Party by any person other than Park or any affiliate or controlling person of Park (a "THIRD PARTY CLAIM") with counsel reasonably satisfactory to the Indemnified Party. Any Indemnified Party hereunder shall have the right to employ separate counsel and to participate in the defense of such Third Party Claim, but the fees and expenses of such separate counsel shall be at the expense of such Indemnified Party unless (X) Park has agreed to pay such fees or expenses, (Y) Park shall have failed to assume the defense of such Third Party Claim and employ counsel reasonably satisfactory to such Indemnified Party, or (Z) the parties to such action include both the Indemnified Party and Park and, in the reasonable judgment of the Indemnified Party, a conflict of interest may exist between the Indemnified Party and Park (in which case Park shall not have the right to assume the defense of such action on behalf of the Indemnified Party). Park shall not settle any pending or threatened claim in respect of which any Indemnified Party is or could have been a party and in respect of which indemnification could have been sought hereunder unless such settlement shall provide for a complete and unconditional release of each of the Indemnified Parties hereunder. If the defense of a Third Party Claim is not assumed by Park as permitted hereunder, Park will not be subject to any liability for any settlement made by the Indemnified Party without its consent (but such consent will not be unreasonably withheld). 10.3 CONTRIBUTION. If the indemnification provided for in clause (a), (b) or (c) of Section 10.1 is unavailable to an Indemnified Party in respect of any Damages referred to therein, then Park, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Damages in such proportion as shall be appropriate to reflect the relative fault of Park, on the one hand, and the Indemnified Party, on the other hand, with respect to the facts and circumstances that resulted in such Damages, as well as any other equitable considerations. With respect to the indemnification provided in clauses (a) and (b) of Section 10.1, the relative fault shall be determined by reference to whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by Park or persons acting on behalf of Park, on the one hand, or the Indemnified Party, on the other hand, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to Triad's ownership interest in Park. With respect to the indemnification provided in clause (c) of Section 10.1, because Park is being advised by counsel with respect to the legal 15 16 requirements of the transactions contemplated hereby, Park shall be deemed to be solely at fault. SECTION 11: TAX INDEMNITY 11.1 REPORTING. For income Tax purposes, Triad and Park shall report the transactions contemplated by this Agreement based upon the following principles: (i) Park is a partnership; (ii) the Liquidation is a liquidation described in Section 332 of the Code; (iii) the conveyances of the Triad Designated Assets by Triad and of the 3055 Management Contribution Note in exchange for the Triad Membership Interest and the 3055 Management Membership Interest, respectively, are transactions described in Section 721 of the Internal Revenue Code of 1986, as amended (the "CODE"); (iv) the Dividend gives rise to a sale or exchange of the Membership Interest pursuant to Section 311 of the Code (the "DEEMED SALES"); (v) the amount realized in the Deemed Sales and the amount distributed to the stockholders of Triad shall be equal to the appraised value of the Triad Designated Assets as set forth in the Appraisal (adjusted as appropriate to reflect Park's liabilities and taking into account any adjustments pursuant to Section 752 of the Code); (vi) the adjusted basis of the Triad Membership Interest shall be equal to the adjusted basis of the Triad Designated Assets on the date of contribution to Park as determined by the accounting firm selected under the terms of Section 6.10 of the Merger Agreement, adjusted in accordance with Sections 705, 722, 733 and 752 of the Code; and (vii) the Dividend gives rise to a termination and reconstitution of Park for purposes of Section 708(b)(1)(B) of the Code. Triad and Park shall file all Tax Returns in a manner consistent with this Section 11.1 and neither Triad nor Park shall amend its Tax Returns or file a claim for refund of Taxes in a manner which is inconsistent with this Section 11.1 without the prior written consent of Park or Triad, as the case may be, which consent shall not be unreasonably withheld. For purposes of this Section 11, the term "Triad" shall include all corporations which join with Triad in the filing of consolidated or combined tax returns. 11.2 TAX CONTEST. (a) Upon receipt of a formal written notification from a taxing authority of an audit of any Tax Returns relating to the transactions contemplated by this Agreement or of a proposed adjustment to the Tax reporting of the transactions contemplated by this Agreement, Triad or Park, as the case shall be, shall promptly notify Park or Triad, as applicable, of the audit or the proposed adjustment. (b) In the case of an audit of or proposed adjustment to a Tax Return of Triad relating to the transactions contemplated by this Agreement, Park shall be permitted to participate in and conduct, at Park's expense and subject to Triad's right of supervision and review, those aspects of an audit, examination or proceeding relating to Taxes for which Park would be responsible under this Section 11 (a "SPIN-OFF TAX CONTEST"). Triad will deliver to Park any limited power of attorney required to enable Park and its representatives to participate in a Spin-Off Tax Contest. With respect to a 16 17 Spin-Off Tax Contest, Park shall have the right to determine, subject to Triad's consent which shall not be unreasonably withheld, (i) the attorneys, accountants and/or experts to represent Triad in connection with the Spin-Off Tax Contest, (ii) whether or not to protest or appeal any decision of any administrative or judicial body, and (iii) whether or not to settle the Spin-Off Tax Contest. Triad will not agree, without Park's written consent, to any extension of the applicable statute of limitations with respect to taxable periods which include the Tax consequences of transactions subject to indemnification by Park hereunder, which consent will not be unreasonably withheld; provided that such consent of Park will not be required if the failure to agree to such extension may reasonably be expected to result in the proposed assessment of a deficiency for material Taxes unrelated to the transactions contemplated by this Agreement. (c) In the case of an audit of or a proposed adjustment with respect to Park pursuant to Sections 6221 to 6233 of the Code and relating to the transactions contemplated by this Agreement (a "PARTNERSHIP ITEM TAX CONTEST"), Park shall keep Triad fully informed of the progress of such Partnership Item Tax Contest and shall permit the participation, supervision and review of Triad in such matter, and Park shall not settle the Partnership Item Tax Contest without the prior written consent of Triad, which consent shall not be unreasonably withheld. 11.3 TAX INDEMNITY. Park shall indemnify and hold Triad harmless from and against any Taxes (and any fees, costs, expenses and other damages with respect to such Taxes or any dispute thereof) attributable to, arising out of or relating to (i) any sale, exchange, dividend, distribution or other disposition of Triad Designated Assets after October 17, 1996, (ii) Park, (iii) the formation of Park, (iv) the transfer by Triad or any affiliate of the Triad Designated Assets to Park, (v) the assumption or refinancing of any liabilities (including the Assumed Obligations) with respect to the Triad Designated Assets, (vi) the sale, exchange, distribution or other disposition of any assets by Park, (vii) the sale, exchange, distribution, dividend or other disposition of the Triad Membership Interest by Triad or any affiliate, (viii) the Liquidation, and (ix) any steps which are attendant to or necessary in connection with any of the foregoing transactions. Park's indemnification obligations under this Section 11.3 shall be computed without reduction, offset or credit for (i) any net operating loss carryforwards, capital loss carryforwards, or tax credit carryforwards of Triad from taxable periods ending before the date of the Dividend, or (ii) any net operating losses, capital losses, or tax credits for the taxable period which includes the date of the Dividend. 11.4 AFTER-TAX BASIS. Any indemnity payment under this Agreement shall be made on an "after-tax basis." The term "after-tax basis" means any indemnity payment shall be (i) decreased by any Tax reductions (net of any Tax increases) actually realized by the indemnified party or any affiliate as a result of the indemnified loss, and (ii) increased by any increase in Taxes actually realized by the indemnified party or any affiliate as a result of the receipt or accrual of an indemnity payment (including any additional payments pursuant to this sentence). 17 18 11.5 LIMITATIONS. Notwithstanding Section 11.3, Park shall not be required to indemnify Triad for any interest or penalties caused by Triad's failure to timely file any Tax Return. 11.6 DEMAND AND PAYMENT. In connection with each payment of estimated Taxes, the filing of Tax Returns, the payment of any additional Taxes due in connection with an audit, administrative or judicial proceeding, and at the time any other indemnified matters relating to Taxes are due and payable, Triad shall provide Park with a written statement setting forth the amount of Taxes and other indemnified items due from Park under this Section 11 (the "STATEMENT"). Unless Park disagrees with the calculation of the amount of its indemnity obligation under this Section 11 reflected in the Statement, Park shall pay to Triad the amount shown as due in the Statement within ten days after receipt of such notice, but in no event, in the case of current period and estimated Taxes, shall Park be required to pay any Taxes earlier than three business days prior to the due date of such Taxes. Any payment which is not timely paid by Park shall bear interest at the rate of 9 percent (9%) per annum. If Park disagrees with the amount set forth in the Statement, Park and Triad shall attempt to resolve such disagreement over a period of seven days. If Park and Triad fail to resolve any dispute within such period, then any computational disagreement shall be submitted to arbitration in accordance with this Agreement, except that the arbitrator shall be a tax partner from a big six accounting firm with offices in the San Francisco Bay Area agreed upon by the parties or, if they cannot agree, selected by the AAA. Park shall pay to Triad the amount determined to be due pursuant to such arbitration within five business days of the arbitrator's written resolution thereof. 11.7 COOPERATION. Triad and Park agree to cooperate in regard to the filing of all Tax Returns relating to this Agreement and any audit or administrative or judicial proceeding with respect thereto, and each party shall provide the other party with reasonable access to Tax and accounting records which relate to such Taxes and Tax Returns. 11.8 SURVIVAL. Any indemnification pursuant to this Section 11 shall survive and remain in full force and effect thereafter until sixty days after the expiration of all applicable statutes of limitations for the assessment or collection of Taxes (including all periods of extension, whether automatic or permissive). SECTION 12: AMOUNTS TO BE PRORATED 12.1 On the Contribution Date, the following items shall be prorated between Triad and Park as of the Contribution Date: (i) property taxes for the year during which the Contribution Date occurs, (ii) interest on the 3055 Note for the month in which the Contribution Date occurs, (iii) rentals paid under the Lease Agreement attributable to the month in which the Contribution Date occurs, including, without limitation, fixed or minimum rent, additional rent and expense pass-throughs, (iv) utility expenses, and 18 19 other costs and expenses attributable to the Property, and (v) any other items listed on SCHEDULE 12.1 attached hereto. 12.2 If any of the prorations are based upon estimates as of the Contribution Date, it is mutually agreed as a covenant to survive the closing that an accurate adjustment shall be made by cash settlement between Triad and Park within thirty (30) days after the estimated item is known for certain. In the event that on the Contribution Date Triad shall not have received tax statements for the calendar year during which the closing occurs, estimated tax figures for that year based upon tax receipts for the immediately preceding calendar year shall, by mutual consent, be used for the purpose of prorating taxes at the closing. It is mutually agreed, as a covenant expressly to survive the closing, that upon receipt of tax statements for the calendar year during which the closing occurs, an accurate adjustment of such tax proration shall be made by cash settlement between Triad and Park within thirty (30) days after receipt of all such tax invoices. SECTION 13: ARBITRATION OF DISPUTES 13.1 AGREEMENT TO ARBITRATE. (a) The parties specifically agree that any controversy, claim or dispute arising out of or relating in any way to this Agreement or any of the other Transaction Documents, or any alleged breach thereof, shall be settled exclusively by arbitration. Subject to the modifications set forth herein, any arbitration shall be administered by the San Francisco, California office of the AAA in accordance with its Commercial Arbitration Rules and the Supplementary Procedures for Large, Complex Disputes in effect at the time the arbitration is initiated (collectively, the "RULES"), unless all parties to the dispute agree in writing that the total amount in controversy is less than one million dollars, in which case, the Commercial Arbitration Rules in effect at the time the arbitration is initiated alone shall govern. 13.2 NUMBER, SELECTION AND AUTHORITY OF ARBITRATORS. (a) As soon as a demand for arbitration shall be made by any party to this Agreement, the AAA shall proceed to provide a list of the Large, Complex Case Panel (unless the agreement to use the Commercial Rules has been made by all of the parties to the dispute as provided for in the preceding paragraph, in which case arbitrators from the Commercial Panel shall be used) from which the parties shall select a panel of three arbitrators in accordance with the Rules and normal procedures of the San Francisco, California office of the AAA. If necessary, the AAA shall select some or all of the arbitrators when it is authorized to do so under the Rules. (b) The arbitration panel shall be empowered to render full and complete resolution of the dispute. The panel shall also have the authority and discretion to order, as it sees fit, the payment of the parties' attorneys' fees and any and all expenses of the arbitration, including payment of the arbitrators' compensation. In the event the arbitration panel finds that any party has abused or failed to comply with the 19 20 applicable arbitration or discovery provisions in this contract or in the Rules, the panel shall be empowered to render any sanction that would otherwise be available under the Federal Rules of Civil Procedure, including without limitation rendition of an award for complete relief (including attorneys' fees and all arbitration expenses), in favor of the non-offending parties and against the offending party. All arbitrations shall take place in San Francisco, California. 13.3 SCHEDULE FOR ARBITRATION. The parties agree that the expeditious conclusion of the arbitration is critical to all parties, and they direct and agree that the arbitration panel shall so allocate time and impose deadlines that the complete proceeding from the initial demand for arbitration to the decision of the panel shall be completed within one hundred and eighty (180) calendar days. In order to promote this expeditious resolution, the following procedural sequence shall be followed by the parties and shall be enforced by the panel: (a) Any party who makes demand for arbitration (whether an initial demand or by counterclaim or cross claim) shall specify and quantify the remedies that it seeks, including all amounts of money claimed to be payable, transfers of property, or undertakings of obligations (including, without limitation, indemnity and assumption of the defense of litigation). (b) Within ten calendar days after receipt (by fax, telecopy, express delivery, certified mail, or otherwise) of a demand for arbitration, each responding party shall deliver to the opposing party a written response that states with specificity the portions of the relief that it does not contest and that provides a narrative summary of all grounds for contesting each claim for relief that is contested. (c) Any relief that is not contested shall be provided (including, without limitation, the payment of money admitted to be due or the performance of other contractual obligations) within ten calendar days after a responding party admits that it does not contest some aspect of an arbitration demand, and the presence of continuing controversy about other requests for relief shall not be the basis for failure to provide the relief that is not contested during the pendency of the arbitration. (d) The panel shall establish a schedule for discovery, conferences, any written submissions, the hearing, and other matters that permits it to hold a hearing and return its award within the one hundred eighty-day period specified, and all parties agree to abide by directions of the panel with regard to scheduling. (e) If the panel finds that any party has failed to cooperate in good faith with these scheduling provisions, or if any party fails to comply with a scheduling order of the panel, the panel may award damages and impose sanctions for all injuries caused by this delay or failure to comply with these provisions, including, but not limited to, attorneys fees. If the panel finds that actual damages arising from delay are impractical to estimate with reasonable certainty, the parties agree that reasonable 20 21 liquidated damages for delay shall be $5,000 per day, which may be assessed by the panel as a part of its award. 13.4 CONSOLIDATION OF PENDING ARBITRATIONS. (a) In the event that any subsequent or further controversy, claim or dispute arising out of or relating in any way to this Agreement or any of the other Transaction Documents, or any alleged breach thereof, arises while any arbitration demand under any such document is pending but before the arbitration panel appointed as a result thereof has rendered its final decision, such panel shall have exclusive jurisdiction over the resolution of such subsequent or further controversies, claims or disputes and shall consolidate all such controversies, claims or disputes before the panel. (b) In the event any arbitration panel created to resolve any controversies, claims and disputes under this Agreement has already rendered a final decision on the controversies, claims and disputes pending before it prior to the initiation of arbitration for any subsequent or further controversy, claim or dispute, such subsequent or further controversy, claim or dispute shall be resolved by a new panel of arbitrators appointed pursuant to the provisions of this Section. No arbitrator who previously served on an arbitration panel appointed pursuant to an arbitration provision set forth in the Agreement, shall be appointed to any subsequent arbitration panel without the express agreement of all parties to the dispute. 13.5 DISCOVERY PROCEDURES. Unless otherwise agreed to by all parties or ordered by the arbitration panel, discovery shall be limited in the arbitration to the following: (a) The number of depositions concerning any single or consolidated arbitration shall be limited to four (4) depositions by each side to the dispute, regardless of whether more than one party is allied on one side of the dispute; (b) Each deposition shall last no more than one business day and may commence no earlier than 9:00 a.m. and continue no later than 5:00 p.m., as measured at the location of the deposition; (c) The parties may exchange three (3) sets of requests for documents, but the documents called for in each request shall be limited so as not to exceed 100 pages unless a greater page limit is directed by the Panel; (d) Unless a different time is specified by the arbitration panel, production of requested documents for inspection and copying by all other parties to the dispute shall occur within thirty days of actual receipt of the request, whether served by U.S. mail, telecopy, fax, hand delivery or overnight delivery; 21 22 (e) Subject to other provisions hereof and the Rules, the scheduling and conduct of depositions and document requests and production shall be governed by the Federal Rules of Civil Procedure, as modified by the local rules for the United States District Court for Northern District of California; and (f) All testimony, whether by deposition, at a hearing, or in written submissions, must be submitted under oath or under penalty of perjury. 13.6 JUDICIAL DETERMINATION. With regard to this arbitration provision, the parties intend that the proceeding may be initiated and continue under the guidance of the AAA and the appointed arbitrators without the need for judicial intervention, but, to the extent any party seeks a judicial determination of the meaning of this arbitration provision or seeks to compel, prevent, or limit a pending arbitration, all parties consent to exclusive jurisdiction for any such controversy in any court of competent jurisdiction in San Francisco, California. 13.7 ENFORCEMENT OF ARBITRATION AWARD. Any award or decision of an arbitration panel appointed pursuant to this Section may be confirmed by any court of competent jurisdiction. 13.8 THIRD PARTY CLAIMS. Notwithstanding any provision of this Agreement or any of the other Transaction Documents to the contrary, in the event a claim otherwise subject to arbitration hereunder (a "SPECIFIED CLAIM") arises as a result of a Third Party Claim and such Third Party Claim is asserted in a proceeding before a court or other governmental tribunal, the party to this Agreement in whose favor such Specified Claim arises may, at its option, assert such Specified Claim against a party hereto in such proceeding. SECTION 14: REPRESENTATIONS AND WARRANTIES Triad, Park, 3055 Management and 3055 each have the corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement, which have been duly authorized by the Board of Directors of Triad, Park, 3055 Management and 3055; no other corporate proceedings on the part of Triad, Park, 3055 Management or 3055 are necessary to authorize Triad, Park, 3055 Management or 3055 to enter into this Agreement or to consummate the transactions contemplated by this Agreement; and this Agreement is the legal, valid, and binding obligation of Triad, Park, 3055 Management and 3055. SECTION 15: MISCELLANEOUS PROVISIONS 15.1 ATTORNEYS' FEES. If any legal action or other proceeding is commenced to enforce or interpret any provision of, or otherwise relating to, this Agreement, the losing party shall pay the prevailing party's actual expenses incurred in the investigation 22 23 of any claim leading to the proceeding, preparation for and participation in the proceeding, any appeal or other post judgment motion, and any action to enforce or collect the judgment including contempt, garnishment, levy, discovery and bankruptcy. For this purpose "expenses" include, without limitation, court or other proceeding costs and experts' and attorneys' fees and their expenses. The phrase "prevailing party" shall mean the party who is determined in the proceeding to have prevailed or who prevails by dismissal, default or otherwise. 15.2 CHOICE OF LAW. This Agreement shall be construed in accordance with, and governed by, the internal laws of the State of Delaware, without giving effect to the principle of conflicts of laws thereof. 15.3 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and counterpart signature pages may be assembled to form a single original document. 15.4 NOTICES. All notices, consents, requests, demands or other communications to or upon the respective parties shall be in writing and shall be effective for all purposes upon receipt on any business day before 5:00 PM local time and on the next business day if received after 5:00 PM or on other than a business day, including without limitation, in the case of (i) personal delivery, (ii) delivery by messenger, express or air courier or similar courier, (iii) delivery by United States first class certified or registered mail, postage prepaid and (iv) transmittal by telecopier or facsimile, addressed as follows: If to Triad or 3055, to: Triad Systems Corporation 6207 Bee Cave Road Austin, Texas 78746-5146 Attn: Glenn Staats Telephone: (512) 328-2300 Telecopy: (512) 329-6461 With a copy to: Triad Systems Corporation 3055 Triad Drive Livermore, California 94550 Attn: Glenn Staats Telephone: (510) 449-0606 Telecopy: (510) 455-6917 23 24 Weil, Gotshal & Manges, LLP 100 Crescent Court Suite 1300 Dallas, Texas 75201-6950 Attn: Thomas A. Roberts Telephone: (214) 746-7748 Telecopy: (214) 746-7777 and Hicks, Muse, Tate & Furst Incorporated 200 Crescent Court Suite 1600 Dallas, Texas 75201-6950 Attn: Lawrence D. Stuart, Jr. Telephone: (214) 740-7365 Telecopy: (214) 740-7313 If to Park or to 3055 Management, to: Triad Park, LLC 3055 Triad Drive Livermore, California 94550 Attn: James Porter Telephone: (510) 499-0606 Telecopy: (510) 455-6917 With a copy to: McCutchen, Doyle, Brown & Enersen, LLP Three Embarcadero Center, 18th Floor San Francisco, CA 94111-4066 Attn: Edward S. Merrill Telephone: (415) 393-2112 Telecopy: (415) 393-2286 In this section "business days" means days other than Saturdays, Sundays, and federal and state legal holidays. Either party may change its address by written notice to the other in the manner set forth above. Receipt of communications by United States first class or registered mail will be sufficiently evidenced by return receipt. Receipt of communications by facsimile will be sufficiently evidenced by a machine generated confirmation of transmission without an error message. In the case of illegible or otherwise unreadable facsimile transmissions, the receiving party shall promptly notify 24 25 the transmitting party of any transmission problem and the transmitting party shall promptly re-send any affected pages. 15.5 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No rights of any party under this Agreement are assignable without the written consent of all other parties, which any other party may withhold in its absolute discretion. 15.6 THIRD PARTIES. Except as expressly provided herein, nothing in this Agreement shall be construed to give any person other than the express parties to this Agreement any benefits, rights or remedies. 15.7 TERMS. Undefined capitalized terms used in this Agreement have the meaning attributed to those terms as set forth in the Merger Agreement. 15.8 WAIVER/MODIFICATION/AMENDMENT. No amendment of, or waiver of any obligation under, this Agreement will be enforceable unless set forth in a writing signed by the party against which enforcement is sought. The parties have executed this Agreement as of the Effective Date. Triad Systems Corporation By: /s/ JAMES R. PORTER ------------------- Its: President 3055 Triad Dr. Corp. By: /s/ JAMES R. PORTER ------------------- Its: President Triad Park, LLC By: Triad Systems Corporation By: /s/ JAMES R. PORTER ------------------- Its: President 25 26 By: 3055 Management Corp. By: /s/ JAMES R. PORTER ------------------- Its: Vice President, Secretary, & CFO 3055 Management Corp. By: /s/ JAMES R. PORTER ------------------- Its: Vice President, Secretary, & CFO 26 EX-6.2 6 PROJECT LEASE AGREEMENT, DTD 08/01/88 1 PROJECT LEASE AGREEMENT BETWEEN 3055 TRIAD DR. CORP. AS LANDLORD AND TRIAD SYSTEMS CORPORATION AS TENANT DATED AS OF AUGUST 1, 1988 2 TABLE OF CONTENTS
PAGE ARTICLE 1 Lease of Property - Term of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 3 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 4 Payment of Impositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 5 Alterations and Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 6 Use, Maintenance, and Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 8 Damage or Destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 9 Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 10 Assignment and Sublease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 11 Mortgage of the Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 12 Default Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 13 Landlord's Right To Perform; Cumulative Remedies; Waivers . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 14 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 15 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 16 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 17 Impairment of Landlord's Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 18 Tenant's Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 19 Estoppel Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 20 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 21 Invalidity of Particular Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 22 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE 23 Non-Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
i 3 TABLE OF CONTENTS (Continued)
PAGE ARTICLE 24 Warranty of Peaceful Possession; Limitation of Landlord's Liability . . . . . . . . . . . . . . . . . . . . 26 ARTICLE 25 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ii 4 PROJECT LEASE AGREEMENT STATE OF CALIFORNIA Section COUNTY OF ALAMEDA Section THIS PROJECT LEASE AGREEMENT is made and entered into as of the 1st day of August, 1988, by and between 3055 TRIAD DR. CORP., a California corporation with its principal office in Livermore, Alameda County, California (hereinafter called "Landlord"), and TRIAD SYSTEMS CORPORATION, a Delaware corporation authorized to do business in California (hereinafter called "Tenant"). W I T N E S S E T H: ARTICLE 1 LEASE OF PROPERTY - TERM OF LEASE SECTION 1.01. Landlord, in consideration of the rents, covenants, agreements, and conditions herein set forth which Tenant hereby agrees shall be paid, kept, and performed by Tenant, does hereby lease, let, demise, and rent exclusively unto Tenant, and Tenant does hereby rent and lease from Landlord, the following described premises: A tract of land containing 15.0633 acres, and being Parcel Two of Parcel Map 5112, filed September 29, 1987 in Book 122 of Parcel Maps, Pages 11 through 14, inclusive, Alameda County Records. SECTION 1.02. This Lease is subject to: (a) All present and future laws, ordinances, resolutions, regulations and orders of all municipal, county, state, federal or other governmental bodies, boards, agencies, or other authority now or hereafter having jurisdiction; and (b) The matters set forth in Exhibit "A" attached hereto and incorporated by reference herein for all purposes, to the extent, and only to the extent, that same may validly affect the above described premises. SECTION 1.03. TO HAVE AND TO HOLD the hereinabove described tract of land subject to the matters as aforesaid, together with all and singular the rights, privileges, and appurtenances thereunto attaching or in anywise belong, unto Tenant, its legal representatives, successors and assigns, for a term commencing August 1, 1988 and ending at midnight on August 31, 2003, subject to earlier termination as herein provided, and upon and subject to the covenants, agreements, terms, 5 provisions and limitations hereinafter set forth, all of which Tenant covenants and agrees to perform and observe. ARTICLE 2 DEFINITIONS SECTION 2.01. The terms defined in this Section shall, for all purposes of this Lease, and all agreements supplemental hereto, have the meanings herein specified, unless the context otherwise requires. (a) The terms "Agreement," "Lease Agreement," and "this Lease" shall mean and refer to this instrument. (b) The term "Default Rate" shall mean the lesser of (a) the Prime Rate plus five percent (5%) per annum or (b) the maximum non- usurious rate permitted by law. (c) The term "Demised Land" shall mean the tract of land described in Section 1.01 hereof. (d) The term "Demised Premises" shall mean the Demised Land and the Improvements. (e) The term "Event of Default" shall have the same meaning as ascribed to it in Section 12.01 of this Agreement. (f) The term "Impositions" shall mean all taxes, assessments, use and occupancy taxes, transit taxes, water and sewer charges, rates and rents, charges for public utilities, excises, levies, license and permit fees and other charges, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever, which shall or may during the term of this Lease be assessed, levied, charged, confirmed or imposed upon or accrue or become due or payable out of or on account of or become a lien on the Demised Premises or any part thereof, the appurtenances thereto or the sidewalks or streets adjacent thereto, or the rent and income received by or for the account of Tenant from any subtenants or for any use or occupation of the Demised Premises, and such franchises, licenses and permits as may be appurtenant to the use of the Demised Premises, or any documents to which Tenant is a party, creating or transferring an interest or estate in the Demised Premises payable to any governmental body; but shall not include any income taxes, capital levy, estate, succession, inheritance or transfer taxes or similar tax of Landlord, or any franchise taxes imposed upon any owner of the fee of the Demised Premises, or any income, profits or revenue tax, assessment or charge imposed upon the rent or other benefit received by Landlord under this Lease, by any municipality, county or state, the United States of America or any governmental body; provided, however, that if at any time during the term of this Lease, the present method of taxation or assessment shall be so changed that the whole or any part of the taxes, assessments, levies, impositions or charges now levied, assessed or imposed on real estate and improvements thereon shall be discontinued and, as a substitute therefor, taxes, assessments, levies, impositions, or charges shall be levied, assessed and/or imposed wholly or partially as a capital levy or otherwise on the rents received from 2 6 said real estate or the rents reserved herein or any part thereof, then such substitute taxes, assessments, levies, impositions or charges, to the extent so levied, assessed and/or imposed, shall be deemed to be included within the term "Impositions" to the extent that such substitute tax would be payable if the Demised Premises were the only property of Landlord subject to such tax. (g) The term "Improvements" shall mean the improvements presently erected on the Demised Land which are owned by Landlord, consisting of three (3) buildings containing approximately 219,818 square feet of rentable area with on-site parking for 710 automobiles, as well as any additions thereto or alterations thereof installed by Tenant pursuant to the terms of this Lease but excluding any personal property, furnishings, and trade fixtures owned by Tenant. (h) The term "Landlord's Mortgagee" shall mean the holder of any "Landlord's Mortgage" (as defined in Section 11.01 hereof). (i) The term "Prime Rate" shall mean the average of the annual rates of interest announced or published, at the applicable time, by the three largest (considering the capital and surplus of such banks) national banks then doing business in Livermore, Alameda County, California, as their "prime rate" regardless of whether such rate is actually the lowest rate actually charged by any such banks. (j) The phrases "term of this Lease," "Lease term," "term" or similar phrases shall mean the period of time set forth in Section 1.03 hereof. (k) The term "Tenant" shall mean Triad Systems Corporation or any other corporation resulting from the merger, acquisition, consolidation, or dissolution of Triad Systems Corporation or an entity which acquires all or substantially all of the assets of Triad Systems Corporation. (l) The term "unavoidable delays" shall mean delays due to strikes, lock-outs, acts of God, inability to obtain labor or materials, governmental restrictions, enemy action, war, civil commotion, fire, unavoidable casualty, construction delays due to unusual weather, or other similar causes beyond the reasonable control of Tenant. SECTION 2.02. The captions and the Article numbers of this Lease are for convenience and reference only and in no way define, limit, or describe the scope or intent of this Lease nor in any way affect this Lease. SECTION 2.03. The table of contents preceding this Lease, although under the same cover, is for the purpose of convenience and reference only and is not to be deemed or construed in any way as part of this Lease, nor as supplemental thereto or amendatory thereof. ARTICLE 3 RENT SECTION 3.01. Tenant, in consideration of the leasing of the Demised Premises to it by Landlord, hereby covenants and agrees to pay to Landlord at the times and as and in the manner 3 7 herein provided and subject to the terms, provisions, and conditions herein set forth, without notice or demand and (except as referred to in Section 3.07 hereof) without any setoff or deduction whatsoever, the rental provided for in this Article 3. SECTION 3.02. The annual base rental (herein called "Annual Base Rental") due hereunder shall be $2,505,720.00. The Annual Base Rental shall be paid monthly in advance in twelve (12) equal installments, one such installment to be payable on the first day of each month during the term hereof. SECTION 3.03. All payments of Annual Base Rental, additional rent and other payments required to be made to Landlord shall be in funds which are legal tender at the place of payment at the time of payment and shall be made to Landlord, at the office of Landlord at 3055 Triad Drive, Livermore, Alameda County, California, or to such other person and/or at such other place as Landlord may designate from time to time in writing to Tenant; provided, however, for purposes of establishing or laying venue in any proceeding relating to this Lease, all such amounts shall be deemed payable in Livermore, Alameda County, California, where exclusive venue shall lie. In addition to other proper methods of payment, all payments of Annual Base Rental, additional rent, and other sums payable to Landlord by Tenant under this Lease may be made, and shall be deemed to have been properly made, by the mailing or delivery to Landlord of Tenant's good and sufficient check or draft in the amount of such payment, and shall be deemed timely made if received by Landlord on or before the due date thereof; provided that if such check or draft be not paid and honored upon presentation thereof, duly endorsed, for any reason whatsoever, such check or draft shall not constitute payment. No sale or transfer of ownership of Landlord's interest in the Demised Premises shall be binding upon Tenant until Tenant shall have received written notice from Landlord (or the successor assignor) of such sale or transfer, together with a certified copy of the recorded deed or other instrument of conveyance. SECTION 3.04. This Lease shall be deemed and construed to be a "net lease," and Tenant shall pay to Landlord, net throughout the term of this Lease, the Annual Base Rental, additional rent and other payments due hereunder, free of any Impositions and without abatement, deduction or set-off; and under no circumstances or conditions, whether now existing or hereafter arising, or whether or not beyond the present contemplation of the parties, shall Landlord or Tenant be expected or required to make any payment of any kind whatsoever or be under any other obligation or liability hereunder except as herein otherwise expressly set forth. SECTION 3.05. All additional rent and other charges and payments provided for under this Lease shall constitute rent payable hereunder with the same effect as if the same were the Annual Base Rental reserved and provided for herein and, in the event of the non-payment by Tenant of any such additional rent or other payments when due according to the terms of this Lease, Landlord shall have the same rights and remedies in respect thereof as Landlord shall or may have in respect of the Annual Base Rental herein reserved and provided for. When used in this Lease the term "rent" means and includes Annual Base Rent, additional rent and all other sums payable under this Lease. 4 8 SECTION 3.06. No happening, event, occurrence or situation during the term of this Lease, whether foreseen or unforeseen, and however extraordinary, shall relieve Tenant from its liability to pay the Annual Base Rental, additional rent and other charges and payments under this Lease, or shall relieve Tenant from any of its other obligations under this Lease, and Tenant waives any rights now or hereafter conferred upon it by statute, proclamation, decree or order, or otherwise, to any abatement, diminution, reduction or suspension of rent on account of any such event, happening, occurrence or situation. ARTICLE 4 PAYMENT OF IMPOSITIONS SECTION 4.01. As additional rent during the term of this Lease Tenant will pay or cause to be paid, as and when the same shall become due, all Impositions as defined in Section 2.01(c), except that: (a) All Impositions for the fiscal year or tax year in which this Lease begins as well as during the year in which the term of this Lease expires shall be apportioned so that Tenant shall pay its proportionate share of the Impositions which are payable in the year in which the term of this Lease begins and in the year in which the term of this Lease expires, and Landlord shall pay its proportionate part of such amounts. (b) Where any Imposition is permitted by law to be paid in installments, Tenant may pay such Imposition in installments as and when such installments become due or the day any fine, penalty, interest or costs may be added thereto or imposed, or the day any lien may be filed, whichever is later; provided, however, that the amount of all installments of any such Impositions which are to become due and payable after the expiration of the term of this Lease shall not be apportioned (except as provided in subsection (a) hereof) but shall be and become due and payable to Landlord or the taxing authority six (6) months before the date of the expiration of the term of this Lease. SECTION 4.02. Tenant shall pay all such Impositions directly to the taxing authority, and shall exhibit and deliver to Landlord photostatic copies of the receipted bills or other evidence satisfactory to Landlord showing such payment promptly after such receipts shall have been received by Tenant but in all events at least thirty (30) days prior to the date of delinquency (subject to Tenant's rights to contest such Impositions as set forth in Section 4.03, below). SECTION 4.03. Tenant may, if Tenant shall so desire, contest the validity or amount of any Imposition, in which event, Tenant may defer the payment thereof during the pendency of such contest; provided that, no later than the date the same shall have become due, Tenant shall have deposited with Landlord's Mortgagee (referred to in this Section 4.03 as the "Imposition Trustee") an amount sufficient to pay such contested item together with the interest and penalties thereon (as reasonably estimated by Landlord or the Imposition Trustee if said amount be deposited with it), which amount shall be applied to the payment of such item when the amount thereof shall be finally fixed and determined. In lieu of such cash deposit, Tenant may deliver to Landlord, a surety company bond in form and substance reasonably satisfactory to Landlord, issued by a company reasonably acceptable to Landlord. Nothing herein contained, however, shall be so construed, as to 5 9 allow such items to remain unpaid for such length of time as shall permit the Demised Premises, or any part thereof, to be sold by any governmental, city or municipal authority for the non-payment of the same; and if at any time, in the judgment of Landlord, reasonably exercised, it shall become necessary so to do, Landlord, after written notice to Tenant, may, under protest if so requested by Tenant, direct the application of the said moneys so deposited or so much thereof as may be required to prevent the sale of the Demised Premises or any part thereof, or foreclosure of the lien created thereon by such item. If the amount so deposited as aforesaid shall exceed the amount of such payment, the excess shall be paid to Tenant or, in case there shall be any deficiency, the amount of such deficiency shall be promptly paid on demand by Tenant to Landlord, or, at the election of Tenant, to the Imposition Trustee, and, if not paid, shall be payable as additional rent with interest at the Default Rate contemporaneous with the next installment or any subsequent installments of Annual Base Rental and thereafter becoming due and shall be collectible as rent. SECTION 4.04. The certificate, advice, bill or statement issued or given by the appropriate officials authorized or designated by law to issue or give the same or to receive payment of any Impositions, of the existence, non-payment or amount of such Imposition shall be prima facie evidence for all purposes of the existence, non-payment or amount of such Imposition. SECTION 4.05. Tenant may render the Demised Premises for all taxing jurisdictions and may, if Tenant shall so desire, endeavor at any time or times to obtain a lowering of the assessed valuation upon the Demised Premises for the purpose of reducing taxes thereon and, in such event, Landlord will offer no objection, and, at the request of Tenant, will cooperate with Tenant, but without expense to Landlord, in effecting such a reduction. Tenant shall be authorized to collect any tax refund payable as a result of any proceeding Tenant may institute for that purpose and any such tax refund shall be the property of Tenant to the extent to which it may be based on a payment made by Tenant, subject, however, to an apportionment between Landlord and Tenant with respect to taxes paid or contributed by Landlord in the year in which this Lease began and the year in which the term of this Lease ends, after deducting from such refund the costs and expenses, including reasonable legal fees, incurred by Tenant in connection with obtaining such refund. SECTION 4.06. Landlord shall not be required to join in any action or proceeding referred to in Section 4.03 or Section 4.05 hereof unless required by law or any rule or regulation in order to make such action or proceeding effective, in which event, any such action or proceeding may be taken by Tenant in the name of, but without expense to, Landlord, Tenant hereby agreeing to save Landlord harmless from all costs, expenses, claims, loss or damage by reason of, in connection with, on account of, growing out of, or resulting from, any such action or proceeding. SECTION 4.07. If Landlord is required by Landlord's Mortgagee to escrow sums for Imposition, then in such event, Tenant shall deposit in escrow with Landlord's Mortgagee an amount equal to one-twelfth (1/12th) of the amount of the Impositions for such prior calendar year, on the 1st day of each calendar month of the then-current calendar year. To the extent that the sums thus deposited are sufficient therefor, Landlord's Mortgagee shall pay therefrom all Impositions due for such calendar year at the time or times when the payments thereof become due. In the event that the sums thus deposited by Tenant are insufficient to pay the actual amount of Impositions for such then-current year, then in such event, Tenant shall be obligated to pay the amount of any such deficiency to the appropriate taxing authority; in the event that the amount so deposited (including 6 10 income accruing thereon) exceeds the amount of Impositions for such then-current calendar year, the excess shall be refunded to Tenant. ARTICLE 5 ALTERATIONS AND ADDITIONS SECTION 5.01. Tenant shall have the right, from time to time, to make during the term of this Lease at its sole cost and expense, additions, alterations and changes (hereinafter sometimes referred to in this Section 5.01 as "alterations") in or to the Demised Premises, provided Tenant shall not then be in default in the performance of any of Tenant's covenants or agreements in this Lease, subject, however, in all cases to the following: (a) no structural or exterior alterations shall be commenced except upon prior written consent of Landlord; (b) no alterations of any kind, shall be made which would tend (i) to impair the structural soundness of the Improvements, (ii) to decrease the total cubical volume of the Improvements, (iii) to give to any owner, lessee or occupant of any other property or to any other person or corporation any easement, right-of-way or any other right over Landlord's interest in the Demised Premises, or (iv) to modify the basic utility and function of the Improvements; (c) no alterations shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required from time to time, all permits and authorizations of all municipal departments and governmental subdivisions having jurisdiction. Landlord shall join, but without expense to Landlord, in the application for such permits or authorizations whenever such action is necessary and is requested by Tenant; (d) any alterations involving in the aggregate an estimated cost of more than $100,000.00 shall be conducted under the supervision of an architect or engineer selected by Tenant, and no such alterations shall be made, except in substantial accordance with detailed plans and specifications and cost estimates prepared and approved in writing by such architect or engineer; (e) any alterations shall be made within a reasonable time (subject to unavoidable delays) and in a good and workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws and with all other laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments, departments, commissions, boards and officers, and in accordance with the orders, rules and regulations of the National Board of Fire Underwriters, or any other body or bodies hereafter exercising similar functions; (f) if any involuntary liens for labor and materials supplied or claimed to have been supplied to the Demised Premises shall be filed, Tenant shall pay, bond or otherwise obtain the release or discharge thereof with reasonable promptness but in all events prior to foreclosure thereof; 7 11 (g) a policy of workmen's compensation insurance covering all persons employed in connection with the work and with respect to whom death or bodily injury claims could be asserted against Landlord, Tenant or the Demised Premises and, to the extent that the insurance under subsection (b) of Section 7.01 hereof does not adequately protect Landlord with respect to said alterations, comprehensive general liability insurance for the mutual benefit of Landlord and Tenant in a minimum amount of $5,000,000.00, which comprehensive general liability insurance policy shall include (i) coverage for bodily injury and death, property damage and product's liability coverage; and (ii) contractual liability coverage insuring the obligations of Tenant under the terms of this Lease shall be maintained by Tenant at the Tenant's sole cost and expense at all times when any work is in progress in connection with any alterations. All such insurance policies shall be in standard form and shall be in such responsible companies as Landlord shall approve, which approval shall not be unreasonably withheld. All policies of liability insurance and certificates of workmen's compensation insurance therefor issued by the respective insurers, bearing notations evidencing the payment of premiums or accompanied by other evidence reasonably satisfactory to Landlord of such payment, shall be delivered to Landlord prior to the commencement of any alterations; (h) if the cost of any such alterations shall be in excess of $100,000.00 as reasonably estimated by the architect, Landlord may require Tenant to furnish to Landlord a surety company bond in form reasonably satisfactory to Landlord, issued by a company reasonably acceptable to Landlord, or other security reasonably satisfactory to Landlord, in an amount at least equal to the estimated cost of such alterations, guaranteeing the completion and payment of the cost thereof free and clear of all liens, conditional bills of sale and chattel mortgages growing out of such alteration work other than Permitted Mortgages. In no event shall Tenant be entitled to any abatement, allowance, reduction or suspension of the Annual Base Rental, additional rent and other payment herein reserved or required to be paid by reason of such alterations nor shall Tenant, by reason thereof, be released of or from any other obligations imposed upon Tenant under this Lease. Whether under the provisions of this Lease or otherwise, neither Tenant nor any of Tenant's agents, employees, representatives, contractors or subcontractors shall have any power or authority to do any act or thing or to make any contract or agreement which shall result in the creation of any mechanics' lien or other lien or claim upon or against Landlord's interest in the Demised Premises, and Landlord shall have no responsibility to Tenant or to any contractor, subcontractor, supplier, materialman, workman or other person, firm or corporation who shall engage in or participate in any additions, alterations, changes or replacements thereof unless Landlord shall expressly undertake such obligation by an agreement in writing signed by Landlord and made between Landlord and Tenant, or such contractor, subcontractor, supplier, materialman, workman or other person, firm or corporation. 8 12 ARTICLE 6 USE, MAINTENANCE, AND REPAIRS SECTION 6.01. Tenant is presently occupying the Demised Premises under the Existing Lease and is fully aware of the physical condition and state thereof, and Tenant accepts the same on an "AS-IS, WHERE-IS basis in the physical condition and state in which the Demised Premises now are without any representation or warranty, express or implied in fact or by law, by Landlord and without recourse to Landlord, as to the physical nature, condition or usability thereof. Landlord shall not be required to furnish any services or facilities or to make any repairs or alterations in or to the Demised Premises, throughout the term of this Lease, Tenant hereby assuming the full and sole responsibility for the condition, demolition, construction, operation, repair, replacement, maintenance and management of the Demised Premises, as herein stated. SECTION 6.02. Tenant shall use the Demised Premises solely for general office purposes as its corporate headquarters and for related purposes incidental thereto including, but not limited to, manufacturing and warehousing uses incidental thereto. SECTION 6.03. Tenant shall not use or occupy or permit the Demised Premises to be used or occupied, nor do or permit anything to be done in or on the Demised Premises, in whole or in part, in a manner which would in any way make void or voidable any insurance then in force with respect thereto, or which would make it impossible to obtain fire or other insurance thereon required to be furnished by tenant hereunder, or as will cause or be apt to cause structural injury to the Improvements or any part thereof, or as will constitute a public or private nuisance, and shall not use or occupy or permit the Demised premises to be used or occupied, in whole or in part, in a manner which violates any present or future, ordinary or extraordinary, foreseen or unforeseen laws, regulations, ordinances or requirements of the federal, state or municipal governments, or of any departments, subdivision, bureaus or offices thereof, or of any other governmental, public or quasi-public authorities now existing or hereafter created, having jurisdiction over the Demised Premises; provides, however, that Tenant may, in good faith (and wherever necessary, in the name of, but without expense to, Landlord) and after having secured Landlord to its reasonable satisfaction by cash or by a surety company bond in an amount, in a company and in substance reasonably satisfactory to Landlord, against loss or damage, contest the validity of any such laws, regulations, ordinances or requirements and, pending the determination of such contest, may postpone compliance therewith, except that Tenant shall not so postpone compliance therewith as to subject Landlord to any fine or penalty or to prosecution for a crime, or to cause the Demised Premises or any part thereof to be condemned or to be vacated. Tenant will indemnify and save harmless Landlord against any recovery or loss to which Landlord may be subject or which Landlord may sustain, including reasonable attorney's fees and expenses incurred by Landlord arising or alleged to arise from any breach of this covenant or by reason of any action or proceeding which may be brought against Landlord or against the Demised Premises, or any part thereof, by virtue of violation of any such laws, regulations, ordinances or requirements relating to the use and occupancy of the Demised Premises, or by virtue of any such present or future law of the United States of America, or of the State of California, or the County of Alameda, City of Livermore, or other municipal, public or quasi-public authority now existing or hereafter created, having jurisdiction in the premises. 9 13 SECTION 6.04. Tenant shall take good care of the Demised Premises, make all repairs thereto, interior and exterior, structural and non-structural, ordinary and extraordinary, foreseen and unforeseen, and shall maintain and keep the Demised Premises and the sidewalks and curbs in first class order, repair and condition, reasonable wear and tear excepted. Tenant shall also keep the Common Areas of the Demised Premises free and clear from rubbish and shall not encumber or obstruct the same or allow the same to be encumbered or obstructed in any manner. SECTION 6.05. Tenant shall have the right at any time and from time to time to sell or dispose of any building equipment or personal property subject to this Lease which may have become obsolete or unfitted for use or which is no longer useful, necessary or profitable in the conduct of Tenant's business, provided that if such equipment or property be necessary to the operation of the Improvements, Tenant shall then or theretofore substitute for the same other building equipment or personal property not necessarily of the same character, but capable of performing the same function as that performed by the property so disposed of, and of high quality and suitable for its intended purpose. SECTION 6.06. Tenant shall diligently comply with ;and execute at its own expense during the term of this Lease, all present and future laws, acts, rules, requirements, orders, directions, ordinances, and/or regulations, ordinary and extraordinary, foreseen or unforeseen, concerning the condition or use of the Demised Premises or any part thereof, or the streets adjacent thereto of any federal, state, municipal or other public department, bureau, officer or authority or of the National Board of Fire Underwriters, or other body having similar functions, or of any liability, fire, or other insurance company having policies outstanding with respect to the Demised Premises, whether or not such laws, acts, rules, requirements, orders, directions, ordinances and/or regulations required the ;making of structural alterations or the use or application of portions of the Demised Premise for compliance therewith or interfere with the use and enjoyment of the Demised Premises, and shall protect, hold harmless and indemnify Landlord of and from all fines, penalties, claim or claims for damages of every kind and nature arising out of any failure to comply with any such laws, acts, rules, requirements, orders, direction, ordinances and/or regulations; provided, further, that Tenant may, in good faith (and wherever necessary, in the name of, but without expense to, Landlord), and after having secured Landlord to its reasonable satisfaction by cash or by a surety company bond in an amount, in a company and in substance satisfactory to Landlord, against loss or damage, contest the validity of any such law, act, rule, requirement, order, direction, ordinance and/or regulation and, pending the determination of such contest, may postpone compliance therewith, except that Tenant shall not so postpone compliance therewith, as to subject Landlord to any fine or penalty or to prosecution for a crime, or to cause the Demised Premises or any part thereof to be condemned or to be vacated. SECTION 6.07. Landlord shall not be responsible or liable for any damage or injury to any property, fixtures, merchandise or decorations or to any person or persons at any time on the Demised Premises from steam, gas or electricity or from water, rain or snow, whether the same may leak into, issue or flow from any part of the Improvements or from pipes or plumbing work of the same, or from any other place or quarters, nor shall Landlord be in any way responsible or liable in case of any accident or injury including death to any of Tenant's employees, agents, or to any person or persons in or about the Demised Premises or the streets or sidewalks adjacent thereto; and Tenant agrees that it will not hold Landlord in any way responsible or liable therefor and will further indemnify and hold Landlord harmless from and against any and all claims, liability, penalties, 10 14 damages, expenses and judgments arising from injury to persons or property of any nature and also for any matter or thing growing out of the occupation of the Demised Premises, or of the streets or sidewalks adjacent thereto. Landlord shall not be liable for interference with light or incorporeal hereditaments by anybody, or caused by the operation by or for any governmental authority in the construction of any public or quasi-public work and Landlord shall not be liable for any latent or any other defects in the Improvements or any building or buildings now or hereafter erected upon the Demised Land. Landlord here assigns to Tenant, without warranty, on a non-exclusive basis, any and all warranties, guaranties, or other rights which Landlord may have against any contractors constructing any portion of the Improvements. SECTION 6.08. Landlord shall have the right to show the Demised Premises at any time during the term hereof to any prospective purchasers or mortgagees of the same, and may enter upon the Demised Premises, or any art thereof, for the purpose of ascertaining the condition of said premises or whether Tenant is observing and performing the obligations assumed by it under this Lease, all without hindrance or molestation from Tenant. Landlord shall also have the right to enter upon the Demised Premises for the purpose of making any necessary repairs thereto and performing any work thereof that may be necessary ;by reason of Tenant's failure to make any such repairs or perform any such work. The above-mentioned rights of entry shall be exercisable only at reasonable times, at reasonable hours, at reasonable intervals and on reasonable notice. Nothing contained herein, however, shall impose or imply any duty on the part of Landlord to make any such repairs or perform any such work. SECTION 6.09. Notice is hereby given that Landlord shall not be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and that no mechanics' or other lien, for any such labor or materials shall attach to or affect the reversionary or other estate or interest of Landlord in and to the Demised Premises. Whenever and as often as any such lien shall have been filed against the Demised Premises, if based upon any action or interest of Tenant, any subtenant or of any one claiming through Tenant or such subtenant, Tenant shall forthwith take such actin by bonding, deposit or payment as will remove or satisfy the lien and, in default thereof for thirty (30) days after notice to tenant, then in addition to any other of Landlord's rights and remedies, Landlord may pay the amount of such mechanics' lien, or discharge the same by bond or deposit, and the amount so paid or deposited (including the premium on any such bond) with interest thereon at the Default Rate from the date of such payment or deposit shall be deemed additional rent reserved under this Lease and, at the option of Landlord, shall be payable contemporaneously with the next installment of rent or with any subsequent installment of rent thereafter becoming due. SECTION 6.10. Upon the expiration of the term of this Lease or on the sooner termination thereof, Tenant shall peaceably and quietly leave, surrender and yield up unto Landlord all and singular the Demised Premises broom-clean and free of occupants and shall repair all damage to the Demised Premises caused by or resulting from the removal of any removable property of Tenant. Any removable property of Tenant which shall remain on the Demised Premises after the expiration of the term of this Lease or sooner termination thereof and the removal of Tenant from the Demised Premises may, at the option of Landlord, be deemed to have been abandoned, and either may be retained by Landlord as its property or may be disposed of in such manner as Landlord may see fit. If such personal property or any part thereof shall be sold, Landlord may receive and retain the proceeds of such sale and apply the same, at its option, against the expenses of the sale, the cost of 11 15 moving and storage, any arrears of rent or additional rent payable hereunder and any damages to which Landlord may be entitled under Article 12 hereof or pursuant to law. SECTION 6.11. If Tenant holds over and refuses to surrender possession of the Demised Premises after the termination of this Lease by lapse of time or otherwise, Landlord shall have the option to treat such holding over as a tenancy at sufferance. During such tenancy the Annual Base Rental shall be one hundred fifty percent (150%) of the amount in effect immediately prior to the termination of this Lease, plus a prorated part of the Impositions. SECTION 6.12. Tenant will indemnify, protect and save harmless Landlord from and against each and every claim, demand, fine, penalty, cause of action, liability, damage, judgment or loss, of whatsoever kind or nature, to which Landlord may be subject or which Landlord may sustain, including without limitation, reasonable attorneys' fees, reasonable costs and other reasonable expenses incurred by Landlord in defending against the same, resulting or alleged to result from any violation by Tenant or any failure of Tenant in the performance of any of the covenants or agreements contained in this Article 6 or in any other Article of this Lease. ARTICLE 7 INSURANCE SECTION 7.01. During the term of this Lease, Tenant will, at its sole cost and expense, keep and maintain policies of -- (a) insurance on the Improvements or any replacements or substitutions therefor against loss or damage by fire and against loss or damage by other risks now insured against by "ALL RISKS" provisions of policies generally in force on Improvements of like type in Livermore, California, in amounts sufficient to provide coverage for the full insurable value of the Improvements or any replacements or substitutions therefor, the policy for which insurance shall have a replacement cost endorsement or similar provision. The term "full insurable value" shall mean actual replacement value (exclusive of cost of excavation, foundations and footings). Such "full insurable value" shall be determined from time to time (but not more frequently than once in any twelve calendar months) at the request of Landlord, by one of the insurers or, at the option of Tenant, by an appraiser, engineer, architect or contractor approved in writing by Landlord (which approval shall not be unreasonably withheld) and paid by Tenant. No omission on the part of Landlord to request any such determination shall relieve Tenant of any of its obligations under this Article; (b) comprehensive general public liability insurance protecting and indemnifying Tenant and Landlord against any and all claims for damages to person or property or for loss of life or of property occurring upon, in, or about the Demised Premises and the adjoining streets, in a minimum amount of $5,000,000.00; (c) war risk insurance upon the Improvements as and when such insurance is obtainable from the United States Government or any agency or instrumentality thereof, and a state of war or national or public emergency exists or threatens, in the maximum amount obtainable up to the full insurable value thereof; 12 16 (d) boiler and pressure apparatus liability insurance to the limit of not less than $100,000 in respect of any one accident, provided, however, that if the Improvements shall be without a boiler plant, no such boiler insurance will be required; and (e) such other insurance on the Improvements or any replacements or substitutions therefor and in such amounts as may from time to time be reasonably required by Landlord against other insurable hazards which at the time are commonly insured against in the case of premises similarly situated, due regard being given to the height and type of the Improvements, its construction, location, use and occupancy, or any replacements or substitutions therefor. SECTION 7.02. All insurance provided for in subsections (a), (b), (d), and (e) of Section 7.01 hereof shall be effected under policies, issued by companies which are rated at least XII-A by Bests Rating Guide or other national rating organizations. Any policies of insurance of the character described in subsections (a), (c) and (e) of Section 7.01 hereof shall expressly provide that any losses thereunder shall be adjusted with and approved by Landlord, Tenant and Landlord's Mortgagee. All such insurance shall be carried in the name of Landlord, Tenant and Landlord's Mortgagee and loss thereunder shall be paid to Landlord's Mortgagee and held pursuant to the terms of its mortgage. SECTION 7.03. At the times required under the provisions of Section 7.01 and not less than thirty (30) days prior to the expiration dates of the expiring policies theretofore furnished pursuant to this Article 7, originals or certified copies of the policies bearing notations evidencing the payment of premiums or accompanied by other evidence satisfactory to Landlord of such payment shall be delivered by Tenant to Landlord, except that whenever there shall be a Landlord's Mortgage, the originals of such policies of insurance may be deposited with Landlord's Mortgagee until Landlord's Mortgage shall be paid, in which event duplicate originals or certified copies of such policies shall meanwhile be delivered to Landlord. If Tenant defaults in obtaining any insurance as required in this Article 7, Landlord may at its option, but without any obligation so to do, obtain such insurance and pay the premiums therefor, and Tenant shall reimburse Landlord for any premiums so paid, together with interest thereon at the Default Rate, and any premiums so paid by Landlord shall be considered as additional rent due and owing by Tenant to Landlord. In the event of the termination of this Lease, Landlord shall succeed to all of the rights of tenant in and to any insurance policies then in force and effect, including all unearned premiums. SECTION 7.04. Tenant shall not take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article 7 to be furnished by, or which may reasonably be required to be furnished by Tenant, unless Landlord is included therein as an insured, with loss payable as in this Lease provided. Tenant shall immediately notify Landlord of the taking out of any such separate insurance and shall deliver the policy or policies or certified copies as provided in Section 7.03 hereof. SECTION 7.05. Each policy delivered hereunder shall contain an agreement by the insurer that such policy shall no be cancelled without at least thirty (30) days' prior written notice to Landlord and any Landlord's Mortgagee. 13 17 SECTION 7.06. At the expiration of the term of this Lease, all policies shall be transferred to Landlord free of all right, title and interest of Tenant except as to Tenant's interest with respect to any prior casualty loss and those claiming under Tenant, and Landlord shall pay to Tenant an amount equal to the unearned premiums apportioned as of such expiration date. SECTION 7.07. Notwithstanding any provision to the contrary contained herein, during the term of the "Loan," provided that Tenant complies with all the requirements o the "Beneficiary" under the "Deed of Trust" )as all such quoted terms are defined in Section 25.12, below), with respect to insurance, Tenant shall be deemed to be in compliance with the terms hereof. ARTICLE 8 DAMAGE OR DESTRUCTION SECTION 8.01. If, at any time during the term of this Lease, the Demised Premises or any part thereof shall be damaged or destroyed by fire or other casualty (including any casualty for which insurance coverage was not obtained or obtainable) of any kind or nature, ordinary or extraordinary, foreseen or unforeseen, Tenant, at its sole cost and expense, and whether or not the insurance proceeds, if any, shall be sufficient for the purpose, shall commence and thereafter proceed with reasonable diligence (subject to a reasonable time allowance for the purpose of adjusting the insurance loss and for unavoidable delay) to repair, alter, restore, replace or rebuild the same as nearly as possible to its value immediately prior to such damage or destruction, subject to such changes or alterations as Tenant may elect to make in conformity with the provisions of Section 5.01 hereof. Such repair, alteration, restoration, replacement or rebuilding, including such changes and alterations as aforementioned and including temporary repairs for the protection of other property pending the completion of any thereof, are sometimes referred to in this Article 8 as the "Work." SECTION 8.02. Except as otherwise provided in this Article 8, the conditions under which any Work is to be performed and the method of proceeding with and performing the same shall be governed by all of the provisions of Section 5.01 hereof. SECTION 8.03. Subject to the terms of Landlord's Mortgage, all insurance proceeds paid to Landlord's Mortgagee (referred to in this Article 8 as the "Insurance Trustee") on account of such damage or destruction under the policies of insurance provided for in Article 7 hereof, (sometimes referred to in this Article 8 as the "Insurance Proceeds"), shall be applied by the Insurance Trustee to the payment of the cost of the Work to the extent such Insurance Proceeds shall be sufficient for that purpose, and shall be paid out to or for the account of Tenant from time to time as such Work progresses. The Insurance Trustee shall make such payments or disbursements upon the written request by Tenant when accompanied by the following: (a) a certificate, dated not more than fifteen (15) days prior to such request, signed by Tenant or its duly authorized representative and by a qualified architect of recognized standing in charge of the Work who shall be selected by Tenant setting forth that -- (i) the sum then requested either has been paid by Tenant or is justly due to contractors, subcontractors, materialmen, architects or other persons who have rendered services or furnished materials in connection with the Work, 14 18 giving a brief description of the services and materials and the several amounts so paid or due and stating that no part thereof has been made the basis of any previous or then pending request or has been paid out of any proceeds of insurance received by Tenant, and that the sum requested does not exceed the cost of the services and materials described in the certificate, (ii) except for the amount stated in such certificate to be due as aforesaid, there is no outstanding indebtedness known to the persons signing such certificate after due inquiry which might become the basis of a vendor's, mechanic's or materialmens' or similar lien upon such Work, the Demised Premises or Tenant's leasehold interest, or any part thereof, and (iii) the cost, as estimated by the persons signing such certificate, of the Work required to be done subsequent to the date of such certificate in order to complete the same, does not exceed the amount of Insurance Proceeds remaining in the hands of the Insurance Trustee after the payment of the sum so requested; and (b) a certificate, dated not more than fifteen (15) days prior to such request, of a title or abstract company satisfactory to Landlord then doing business in the City of Livermore, covering the period from the date of this Lease (or the date of the last such certificate furnished pursuant to any of the applicable provisions of this Lease) to the date of such certificate, setting forth all liens and encumbrances, if any, of record and reflecting that there are no involuntary liens or encumbrances of record of any kind on the Demised Premises except those permitted by the terms of this Lease and except such as will be discharged by payment of the amount then requested. Subject to the terms of Landlord's Mortgage, upon compliance with the foregoing provisions of this Section 8.03, the Insurance Trustee shall, out of the Insurance Proceeds, pay or cause to be paid to Tenant or to the persons named in the certificate the respective amounts stated therein to have been paid by Tenant or to be due to them, as the case may be. Upon receipt by the Insurance Trustee of evidence satisfactory to it of the character required by subsections (a) and (b) of this Section 8.03 that the Work has been completed and paid for in full and there are no liens of the character referred to therein, and if Tenant is not then in default, the Insurance Trustee shall pay any remaining balance of the Insurance Proceeds to Landlord's Mortgagee, if there by any, and if not, to Tenant. If the Insurance Proceeds received by the Insurance Trustee shall be insufficient to pay the entire cost of the Work as reasonably estimated by Landlord, Tenant shall supply the amount of any such deficiency and shall first apply the same to the payment of the cost of the Work before calling upon the Insurance Trustee for the disbursement of the Insurance Proceeds held by the Insurance Trustee. Under no circumstance shall Landlord be obligated to make any payment, disbursement or contribution towards the cost of the Work. 15 19 SECTION 8.04. In no event shall Tenant be entitled to any abatement, allowance, reduction or suspension of rent because part or all of the Demised Premises shall be untenantable owing to the partial or total destruction thereof; and notwithstanding anything herein to the contrary, no such damage or destruction shall affect in any way the obligation of Tenant to pay the Annual Base Rental, additional rent and other payments herein reserved or required to be paid, nor release Tenant of or from any obligation imposed upon Tenant under this Lease. ARTICLE 9 CONDEMNATION SECTION 9.01. If, at any time during the term of this Lease, title to the whole or substantially all of the Demised Premises shall be taken in condemnation proceedings or by any right of eminent domain, this Lease shall terminate and expire on the date of such taking and the Annual Base Rental and additional rent reserved shall be apportioned and paid to the date of such taking. For purposes of this Article 9, "substantially all of the Demised Premises" shall be deemed to have been taken if the untaken portion cannot be practically and economically used or converted for use by Tenant for the purposes for which the Demised Premises are being used immediately prior to such taking. In the event of any such taking and the termination of this Lease: (a) Landlord shall be entitled to receive (i) the entirety of such portion of said award or awards as shall represent compensation for the value of the Demised Land, or the part thereof so taken, considered as vacant and unimproved and such portion of such award or awards with the interest, if any, paid by the condemning authority as shall represent consequential damages, if any, to the portion of the Demised Land not so taken, considered as vacant and unimproved; plus (ii) such portion of said award or awards, with interest, if any paid by the condemning authority as shall represent compensation for the value which the Improvements would have had at the expiration of the term of this Lease, but for such taking; (b) Tenant shall be entitled to receive the balance of said award or awards, with interest, if any paid by the condemning authority as shall represent compensation for the value of the Improvements or portion thereof taken. Tenant hereby assigns to Landlord all rights which Tenant may have by virtue of this Lease or otherwise in and to any portion of said award or awards described in item (a), above and grants to Landlord the exclusive right to negotiate with the condemning authority with respect to such award or awards or portions thereof. SECTION 9.02. In the event of any such taking of less than the whole or substantially all of the Demised Premises, the term of this Lease shall not be reduced or affected in any way, and (a) Landlord shall be entitled to receive and retain as its own property such portion of the award or awards with the interest thereon, if any, paid by the condemning 16 20 authority as shall represent compensation for the value of the Demised Land, or the part thereof, so taken considered as vacant and unimproved, plus consequential damages to the portion or portions of the Demised Land not so taken, considered as vacant and unimproved. (b) if the balance of said award or awards (including compensation for the Improvements or portion thereof taken, and damages if any to the Improvements not so taken) (herein sometimes referred to as "Condemnation Proceeds") shall be paid to Landlord's Mortgagee (who in this Article 9 is referred to as the "Condemnation Trustee") and held pursuant to the terms of Landlord's Mortgage and this Article 9; (c) Tenant, at its sole cost and expense and whether or not the Condemnation Proceeds payable under subsection (b) of this Section 9.02 shall be sufficient for the purpose, shall commence and thereafter proceed with reasonable diligence to repair, alter and restore the remaining part of the Demised Premises so as to constitute a complete, rentable project, subject to such changes or alterations as Tenant may elect to make in conformity with the provisions of Section 5.01 hereof. Such repairs, alterations or restoration, including such changes and alterations as above mentioned and including temporary repairs, for the protection of other property pending the completion of any thereof, are sometimes referred to in this Section 9.02 as the "Work"; (d) the conditions under which the Work is to be performed and the method of proceeding with and performing the same shall be governed by all of the provisions of Section 5.01 hereof; and (e) subject to the terms of Landlord's Mortgage, the Condemnation Trustee shall hold, apply, make available and pay over to Tenant the Condemnation Proceeds in the same manner as is provided to be done by the Insurance Trustee with respect to insurance proceeds under the provisions of Section 7.02 hereof, provided that the references in Section 7.02 to the provisions of Sections 8.01, 8.02 and 8.03 shall be deemed to be references to the provisions of subsections (c), (d) and (e) respectively of this Section 9.02; SECTION 9.03. If the whole or any part of the Demised Premises or of Tenant's interest in this Lease shall be taken in condemnation proceedings or by any right of eminent domain for a temporary use or occupancy, the term of this Lease shall not be reduced or affected in any way and Tenant shall continue to pay in full the Annual Base Rental, additional rent and other payments herein reserved, without reduction or abatement in the manner and at the times herein specified and, except only to the extent that Tenant is prevented from so doing pursuant to the terms of the order of the condemning authority, Tenant shall continue to perform and observe all of the other covenants, agreements, terms and provisions of this Lease as though such taking had not occurred. SECTION 9.04. Landlord and Tenant each covenant and agree to seek separate awards in all such condemnation proceedings and to use their respective best efforts to see that such separate awards are made at all stages of all such proceedings. 17 21 SECTION 9.05. Tenant, Landlord and Landlord's Mortgagee shall each have the right, at its own expense, to appear in any condemnation proceeding and to participate in any and all hearings, trials and appeals therein. SECTION 9.06. In the event Landlord or Tenant shall receive notice of any proposed or pending condemnation proceeding affecting the Demised Premises, the party receiving such notice shall promptly notify the other party and Landlord's Mortgagee. ARTICLE 10 ASSIGNMENT AND SUBLEASE SECTION 10.01. Tenant shall not assign, transfer, pledge, mortgage or sublease the Demised Premises or any portion thereof or any interest therein without the prior written consent of Landlord which shall not be unreasonably withheld. SECTION 10.02. If this Lease be assigned with Landlord's consent, Landlord may and is hereby empowered to collect Annual Base Rental and other sums payable hereunder to accrue thereafter from the assignee. In such event, Landlord may apply the net amount received by it to the Annual Base Rental, additional rent and other payments herein reserved or provided for. SECTION 10.03. The making of any assignment, mortgage, pledge, encumbrance or subletting, in whole or in part, shall not operate to relieve Tenant from Tenant's obligations under this Lease and, notwithstanding any such assignment, mortgage, pledge, encumbrance or subletting, Tenant shall remain liable for the payment of all Annual Base Rental, additional rent and other charges and for the due performance of all the covenants, agreements, terms and provisions of this Lease to the full end of the term of this Lease, whether or not there shall have been any prior termination of this Lease by summary proceedings or otherwise. SECTION 10.04. Any consent by Landlord herein contained or hereafter given to any act or acts for which Landlord's consent is by the terms hereof required, shall be held to apply only to the specific transaction hereby or thereby approved. ARTICLE 11 MORTGAGE OF THE FEE SECTION 11.01. Any first lien mortgage or deed of trust (a "Landlord's Mortgage") hereafter covering Landlord's interest in the Demised Premises including, without limitation, any such deed of trust in favor of The Variable Annuity Life Insurance Company, shall be subject to the Tenant's interest under this Lease; provided, however, upon request of any such Landlord's Mortgagee, Tenant shall subordinate its interest hereunder to any such Landlord's Mortgage so long as such Landlord's mortgagee agrees not to disturb Tenant's possession provided Tenant is not in default hereunder. ARTICLE 12 DEFAULT PROVISIONS SECTION 12.01. This Lease and the term and estate hereby granted are subject to the limitation that 18 22 (a) whenever Tenant shall default in the payment of any installment of Annual Base Rental, additional rent or any other sum payable by Tenant to Landlord on any date upon which the same ought to be paid, and if such default shall continue for ten (10) days after Landlord shall have given to Tenant a written notice specifying such default; or (b) whenever Tenant shall do, or permit to be done, whether by action or inaction, anything contrary to any covenant or agreement on the part of Tenant herein contained or shall fail in keeping or performance of any of the covenants, agreements, terms or provisions contained in this Lease which on the part or behalf of tenant are to be kept or performed (other than those referred to in the foregoing subsection (a) of this Section 12.01) and Tenant shall fail to commence (subject to unavoidable delay) to take steps to remedy the same within thirty (30) days after Landlord shall have given to Tenant a written notice specifying the same, or having so commenced shall thereafter fail to proceed diligently to remedy the same, but, in all events, within ninety (90) days after such notice; or (c) whenever a decree or order for relief shall be entered by a court having jurisdiction over Tenant in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) shall be appointed for any substantial part of Tenant's property, or the winding-up or liquidation of Tenant's affairs shall be ordered, and such situation under this subsection (c) shall continue and shall not be remedied by Tenant within one hundred twenty (120) days after the happening of any such event; or (d) whenever Tenant shall commence a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar law, or Tenant shall consent t the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of any substantial part of the property of Tenant, or to the taking possession of any such property by any such functionary or the making of any assignment for the benefit of creditors by Tenant, or Tenant shall fail generally to pay its debts as such debts become due, or any corporate Tenant shall take corporate action in furtherance of any of the foregoing; (any of the aforesaid occurrence being herein referred to as an "Event of Default") then at any time thereafter Landlord may at its option, in addition to all other rights and remedies given hereunder or by law or equity, do any one or more of the following: (a) Landlord shall be entitled to keep this Lease in full force and effect and Landlord may enforce all of its rights and remedies under this Lease, including the right to recover rent and other sums as they become due, plus interest at the highest rate then allowed by law, from the due date of each installment of rent or other sum until paid; or 19 23 (b) Landlord may terminate Tenant's right to possession by giving Tenant written notice of termination, whereupon this Lease and all of Tenant's rights in the Premises shall terminate. Any termination under this paragraph shall not release Tenant from the payment of any sum then due Landlord or from any claim for damages or rent accrued. Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Demised Premises by Tenant, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Landlord and Tenant. SECTION 12.02. Upon any such termination of this Lease or Tenant's right to possession of the Demised Premises or upon expiration of this Lease, Tenant shall peaceably quit and surrender the Demised Premises to Landlord, and Landlord may without further notice enter upon, re- enter, possess and repossess itself thereof, by force summary proceedings, ejectment or otherwise, and may dispossess and remove Tenant and all other persons and property from the Demised Premises and may have, hold and enjoy the Demised Premises and the right to receive all rental and other income of and from the same. SECTION 12.03. In the event Landlord exercises the remedies grant pursuant to Section 12.01(b), Landlord may recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including, but not limited to: (i) the cost of recovering possession of the Premises; (ii) expenses of reletting, including necessary renovation and alteration of the Premises; (iii) reasonable attorneys' fees, any real estate commissions actually paid and that portion of any leasing commission paid by Landlord applicable to the unexpired term of this Lease; (iv) the worth at the time of award of the unpaid rent which had been earned at the time of termination; and (v) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in subparagraph (iv) of this Section 12.03 shall be computed by allowing interest at the maximum rate then permitted by law. The term "rent" as used in this paragraph shall include all sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. Actions to collect amounts due by Tenant provided for in this paragraph of Section 12.03 may be brought from time to time by Landlord during the aforesaid period, on one or more occasions, without the necessity of Landlord's waiting until expiration of such period; and in no event shall Tenant be entitled to any excess of rent (or rent plus other sums) obtained by reletting over and above the rent herein reserved. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the term of this Lease would have expired if it had not been terminated under the provisions of this Article 12, or under any provisions of law or had Landlord not re-entered the premises. 20 24 Nothing herein contained shall be construed as limiting or precluding the recovery by Landlord against Tenant of any damages to which Landlord may lawfully be entitled in any case other than those particularly provided for above. SECTION 12.04. To the extent permitted by law, Tenant, for Tenant, and on behalf of any and all persons claiming through or under Tenant, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this Lease for the term hereby demised after being dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided. SECTION 12.05. The words "enter", "entry", "re-enter" or "reentry" are not restricted to their technical legal meanings. SECTION 12.06. In case of any default arising hereunder or holding over or possession by Tenant after the expiration or termination of this Lease, Tenant shall pay Landlord for all actual reasonable expenses incurred by Landlord by reason thereof, including but not limited to reasonable attorneys' fees. SECTION 12.07. In the event of termination of this Lease or of Tenant's right to possession of the Demised Premises or repossession of the Demised Premises for an event of default, Landlord shall not have any obligation to re-let or attempt to re-let the demised Premises, or any portion thereof, or to collect rental after re-letting (if any); but Landlord shall have the option to re-let or attempt to re-let and in the event of re-letting Landlord may re-let the whole or any portion of the Demised Premises for any period, to any tenant, and for any use and purpose. SECTION 12.08. In the event of any default by Landlord, Tenant's exclusive remedy shall be an action for damages (Tenant hereby waiving the benefit of any laws granting it a lien upon the property of Landlord and/or upon rent due Landlord), but prior to any such action Tenant will give Landlord written notice specifying such default with particularity, and Landlord shall thereupon have a reasonable period, but in no event less than thirty (30) days, in which to commence to cure any such default. Unless and until Landlord fails so to commence to cure any default after such notice or having so commenced thereafter fails to exercise reasonable diligence to complete such curing, Tenant shall not have any remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Landlord only during the period of its possession of the Demised Premises and not thereafter. ARTICLE 13 LANDLORD'S RIGHT TO PERFORM; CUMULATIVE REMEDIES; WAIVERS SECTION 13.01. If Tenant shall fail to pay any Imposition or make any other payment required to be made under this Lease or shall default in the performance of any other covenant, agreement, term, provision or condition herein contained, or shall default in the performance of any covenant, agreement, term, provision or condition contained in any sublease of the Demised Premises and shall not cure such default within the time permitted in any such sublease, Landlord, without being under any obligation to do so and without thereby waiving such default, may make 21 25 such payment and/or remedy such other default for the account and at the expense of Tenant (and enter the Demised Premises for such purposes) immediately and without notice in the case of emergency, or, in any other case, if Tenant shall fail to make such payment or remedy such default with all reasonable dispatch after Landlord shall have notified Tenant in writing of such default. Bills for any reasonable expense incurred by Landlord in connection therewith, and bills for all reasonable costs, expenses and disbursements of every kind and nature whatsoever, including reasonable counsel fees, involved in collection or endeavoring to collect the Annual Base Rental or additional rent or any part thereof, or enforcing or endeavoring to enforce any right against Tenant, under or in connection with this Lease, or pursuant to law, including (without being limited to) any such reasonable attorney's fees and cost, expense and disbursements involved in instituting and prosecuting summary proceedings, as well as reasonable bills for any property, material, labor or services provided, furnished or rendered, or caused to be furnished or rendered, by Landlord to Tenant, with respect to the Demised Premises and other equipment and construction work done for the account of Tenant (together with interest at the Default Rate from the respective dates of Landlord's making of each such payment or incurring of each such cost or expense), may be sent by Landlord to Tenant monthly, or immediately, at Landlord's option, and shall be due and payable in accordance with the term of said bills and if not paid when due the amount thereof shall immediately become due and payable as additional rent under this lease. SECTION 13.02. Landlord may restrain any breach or threatened breach of any covenant, agreement, term, provision or condition herein contained, but the mention herein of any particular remedy shall not, in any case other than those particularly provided for above, preclude Landlord from any other remedy it might have, either in law or in equity. The failure of Landlord to insist upon the strict performance of any one of the covenants, agreements, terms, provisions or conditions of this Lease or to exercise any right, remedy or election herein contained or permitted by law shall not constitute or be construed as a waiver or relinquishment for the future of such covenant, agreement, term, provision, condition, right, remedy or election, but the same shall continue and remain in full force and effect. Any right or remedy of Landlord in this Lease specified or any other right or remedy that Landlord may have at law, in equity or otherwise upon breach of any covenant, agreement, term, provision or condition in this Lease contained upon the part of Tenant to be performed, shall be distinct, separate and cumulative rights or remedies and no one of them whether exercised by Landlord or not, shall be deemed to be in exclusion of any other. No covenant, agreement, term, provision or condition of this Lease shall be deemed to have been waived by Landlord unless such waiver be in writing, signed by Landlord or Landlord's agent duly authorized in writing. Consent of Landlord to any act or matter must be in writing and shall apply only with respect to the particular act or matter to which such consent is given and shall not relieve Tenant from the obligations wherever required under this Lease to obtain the consent of Landlord to any other act or matter. Receipt or acceptance of Annual Base Rent or additional rent by Landlord shall not be deemed to be a waiver of any default under the covenants, agreements, terms, provisions and conditions of this Lease, or of any right which Landlord may be entitled to exercise under this Lease. In the event that Tenant is in arrears in the payment of Annual Base Rent or additional rent, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited and Tenant agrees that Landlord may apply any payments made by Tenant to any items Landlord sees fit irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. This Lease may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 22 26 ARTICLE 14 INTENTIONALLY OMITTED ARTICLE 15 INTENTIONALLY OMITTED ARTICLE 16 INTENTIONALLY OMITTED ARTICLE 17 IMPAIRMENT OF LANDLORD'S TITLE SECTION 17.01. Nothing in this Lease shall be deemed or construed to mean that Landlord has granted to Tenant any right, power or permission to do any act or to make any agreement which may create, give rise to, or be the foundation for, any right, title, interest, lien, charge or other encumbrance upon the estate of Landlord in the Demised Premises other than to the extent of the leasehold created hereunder or to be created under any new lease which Landlord is obligated to execute hereunder. ARTICLE 18 TENANT'S BANKRUPTCY SECTION 18.01. Landlord and Tenant agree that if Tenant ever becomes the subject of a voluntary or involuntary bankruptcy, reorganization, composition, or other similar type proceeding under the Federal Bankruptcy Laws, as now enacted or hereinafter amended, then "adequate protection" of Landlord's interest in the Demised Premises pursuant to the provisions of Sections 361 and 363 (or their successor sections) of the Bankruptcy Code 11 U.S.C. Paragraph 101, et seq. (such Bankruptcy Code as amended from time to time being herein referred to as the "Bankruptcy Code") prior to assumption and/or assignment of the Lease by Tenant shall included, but not be limited to the continued payment by Tenant of all Annual Base Rental, additional rent and all other sums due and owing under this Lease and the performance of all other covenants and obligations under this Lease by Tenant. SECTION 18.02. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations of Tenant arising under this Lease on and after the effective date of such assignment. Any such assignee shall, upon demand by Landlord, execute and deliver to Landlord an instrument confirming such assumption of liability. SECTION 18.03. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as "rent" shall constitute "rent" for the purposes of Section 502(b)(7) of the Bankruptcy Code. 23 27 SECTION 18.04. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the Estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust by Tenant for the benefit of Landlord and shall be promptly paid to or turned over to Landlord. SECTION 18.05. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to the tenant, then notice of such proposed offer/assignment, setting forth (i) the name and address of such person or entity, (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's or entity's future performance under the Lease, shall be given to Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall made application to a court of competent jurisdiction for authority and approval to enter into such assumption and assignment, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at an prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such persons or entity, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. ARTICLE 19 ESTOPPEL CERTIFICATE SECTION 19.01. Landlord and Tenant shall execute and deliver to each other, at such time or times as either Landlord or Tenant may request, a certificate evidencing: (a) whether or not the Lease is in full force and effect; (b) whether or not the Lease has been modified or amended in any respect, and submitting copies of such modifications or amendments, if any; (c) whether or not there are any existing defaults hereunder to the knowledge of the party executing the certificate, and specifying the nature of such defaults, if any; and (d) such other matters as may be reasonably requested by the other party. ARTICLE 20 INTENTIONALLY OMITTED ARTICLE 21 INVALIDITY OF PARTICULAR PROVISIONS SECTION 21.01. If any term or provision of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the 24 28 application of such term or provisions to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. ARTICLE 22 NOTICE SECTION 22.01. Any notice, communication, request, reply or advice, or duplicate thereof (in this Section 22.01 severally and collectively, for convenience, called "Notice"), in this Lease provided or permitted to be given, made or accepted by either party to any other party must be in writing, and may, unless otherwise in this instrument expressly provided, be given or be served by depositing the same in the United States mail, adequate postage prepaid and registered or certified and addressed to the party to be notified, with return receipt requested, or by delivering the same in person to such party, or, if the party or parties to be notified be incorporated, to an officer of such party, or by prepaid telegram, when appropriate, addressed to the party, or by prepaid telegram, when appropriate, addressed to the party to be notified. Notice deposited in the mail in the manner hereinabove described shall be effective, unless otherwise stated in this Lease, from and after the expiration of three (3) days after it is so deposited. Notice given in any other manner shall be effective only if and when received by the party to be notified. For purposes of Notice the addresses of the parties shall, until changed as hereinafter provided, be as follows: If to Landlord, to: 3055 Triad Dr. Corp. 3055 Triad Drive Livermore, California 94550 If to Tenant, to: Triad Systems Corporation 3055 Triad Drive Livermore, California 94550 With a copy to: Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301-1809 Attention: Jeff Trant However, the parties hereto and their respective heirs, successors, legal representatives and assigns shall have the right from time to time and at any time to change their respective addresses and each shall have the right to specify as its/their address any other address within the continental United States of America by at least fifteen (15) days' written Notice to the other party; provided, however, if at any one time more than one person or party owns an interest in the Demised Premises, nevertheless such persons or parties may not designate more than two places or addresses to receive Notice pursuant to the terms hereof. Each party shall have the right to change such party's address for purposes of Notice, by giving written Notice to the other party in the manner herein set forth. ARTICLE 23 NON-WAIVER SECTION 23.01. No variations, modifications or changes herein or hereof shall b binding upon any party hereto unless executed by it or by a duly authorized officer or a duly authorized agent of 25 29 the particular party. No waiver or waivers of any breach or default or any breaches or defaults by either party of any term, condition or liability of or performance by the other party of any duty or obligation hereunder, including without limitation the acceptance by Landlord or payment by Tenant of any rentals at any time or in any manner other than as herein provided, shall be deemed a waiver thereof or of any waiver thereof in the future, nor shall any such waiver or waivers be deemed or construed to be a waiver or waivers of subsequent breaches or defaults of any kind, character or description under any circumstances. SECTION 23.01. The acceptance by Landlord of any performance, Annual Base Rental, additional rent or other sum or sums of money or other charges herein reserved to be paid or provided to be done by Tenant from any person, firm or corporation other than Tenant shall not discharge Tenant or any others liable with Tenant except to the extent of the performance and payment so accepted by Landlord from liability to pay the Annual Base Rental herein reserved, additional rent or other sum or sums of money and other charges herein provided to be paid by Tenant or from liability to perform any of the terms, covenants, conditions and agreements herein set forth. ARTICLE 24 WARRANTY OF PEACEFUL POSSESSION; LIMITATION OF LANDLORD'S LIABILITY SECTION 24.01. Landlord covenants and warrants that Tenant on paying the rents herein provided and performing all of its covenants and agreements herein contained, shall and may peaceably and quietly have, hold, occupy, use and enjoy, and shall have the full, exclusive and unrestricted use and enjoyment of, all of the Demised Premises during the entire term hereof, for any and all lawful purposes subject to the other terms and provisions hereof; and provided Tenant has fully performed all of its obligations hereunder, Landlord agrees to warrant and forever defend the title to the Demised Land against the claims of any and all persons whomsoever lawfully claiming or to claim the same or any part thereof, subject only to the provisions of this Lease. SECTION 24.02. It is expressly understood and agreed that the term "Landlord" as used in this Lease, means only the owner for the time being of the Demised Premises, and in the event of the sale, assignment or transfer by such owner of its interest in said premises, such owner shall thereupon be released and discharged from all covenants and obligations of Landlord thereafter accruing; but such covenants and obligations shall run with the land and be binding upon each new owner or successor for the time being of the Demised Premises. No such change in ownership shall be binding on Tenant until notice thereof shall be given to Tenant, accompanied by a counterpart original or certified copy of the instrument of conveyance which shall have effected such change. Under no circumstances whatsoever shall Landlord ever be liable hereunder for consequential damages or special damages; and all liability of Landlord for damages for breach of any covenant, duty or obligation of Landlord hereunder may be satisfied only out of the interest of Landlord in the Demised Premises existing at the time any such liability is adjudicated in a proceedings as to which the judgment adjudicating such liability is non-appealable and not subject to further review. 26 30 ARTICLE 25 MISCELLANEOUS SECTION 25.01. This Lease Agreement has been negotiated in and shall be construed and enforced in accordance with the laws of the State of California. SECTION 25.02. All personal pronouns used in this Agreement shall include the other genders whether used in the masculine or feminine or neuter gender and the singular shall include the plural whenever and as often as may be appropriate. The words "hereof," "herein," "hereunder," "hereinafter" and the like refer to this entire instrument, not just to the specific Article, section or paragraph in which such words appear. SECTION 25.03. This Lease shall constitute a real right and covenant running with the Demised Premises, and this lease and all of its terms and provisions shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, legal representatives, successors and assigns (subject to the limitations on assignment by Tenant hereunder), and whenever in this Lease a reference to either of the parties hereto is made, such reference to either of the parties hereto is made, such reference shall be deemed to include, wherever applicable, a reference to the heirs, legal representatives, successors and assigns of said party. SECTION 25.04. Intentionally Omitted. SECTION 25.05. Tenant shall keep accurate books of account showing all costs and expenses incurred and charges made and all credits and returns made and received in connection with the management of the Demised Premises. Upon written requests from Landlord, Tenant shall furnish to Landlord copies of significant contracts and agreements relating to maintenance, operation and upkeep of the Improvements. SECTION 25.06. This Intentionally Omitted. SECTION 25.07. In any circumstances where Landlord is permitted to enter upon the Demised Premises during the term of this Lease, whether for the purpose of curing any default of Tenant, repairing damage resulting from fire or other casualty or an eminent domain taking or is otherwise permitted hereunder or by law to go upon the Demised Premises, no such entry shall constitute an eviction or disturbance of Tenant's use and possession of the Demised Premises or a breach by Landlord of any of its obligations hereunder or render Landlord liable for damages of loss of business or otherwise or entitle Tenant to be relieved from any of its obligations hereunder or grant Tenant any right of set-off or recoupment or other remedy; and in connection with any such entry incident to performance of repairs, replacements, maintenance or construction, all of the aforesaid provisions shall be applicable notwithstanding that Landlord may elect to take building materials upon the Demised Premises that may be required or utilized in connection with such entry by Landlord. SECTION 25.08. Landlord and Tenant stipulate and agree that in the event of any breach or threatened breach of any covenant, duty or obligation of Tenant contained in this Lease, damages would be inadequate and speculative, and, therefore, Landlord shall be entitled, at Landlord's option, to the appointment of a receiver, a temporary restraining order and/or a temporary injunction, without the necessity of proving the inadequacy of any legal remedy or irreparable harm. Tenant 27 31 hereby waives any and all defenses to the application for a receive, temporary restraining order and/or temporary injunction, and hereby consents to such action in the event of any breach or threatened breach by Tenant. The foregoing provisions of this Section 25.08 are express conditions which this Lease is entered into by Landlord. The remedies of Landlord hereunder shall be deemed cumulative and no remedy of Landlord, whether exercised by Landlord or not, shall be deemed to be in exclusion of any other. Except as may be otherwise herein expressly provided, in all circumstances under this Lease where prior consent or permission of one party ("first party") is required before the other party ("second party") is authorized to take any particular type of acting, the matter of whether to grant such consent or permission shall be within the sole and exclusive judgment and discretion of the first party; and it shall not constitute any nature of breach by the first party hereunder or any defense to the performance of any covenant, duty or obligation of the second party hereunder that the first party delayed or withheld the granting of such consent or permission, whether or not the delay or withholding of such consent or permission was prudent or reasonable or based on good cause. SECTION 25.09. In all instances where Tenant is required hereunder to pay any sum or do any act at a particular indicated time or within an indicated period, it is understood that time is of the essence. SECTION 25.10. The obligation of Tenant to pay all rent and other sums hereunder provided to be paid by Tenant and the obligation of Tenant to perform Tenant's other covenants and duties hereunder constitute independent, unconditional obligations to be performed at all times provided for hereunder, save and except only when an abatement thereof or reduction therein is hereinabove expressly provided for and not otherwise. Tenant waives and relinquishes all rights which Tenant might have to claim any nature of lien against or withhold, or deduct from or off-set against any rent and other sums provided hereunder to be paid Landlord by Tenant. Tenant waives and relinquishes any right to assert, either as a claim or as a defense, that Landlord is bound to perform or is liable for the nonperformance of any implied covenant or implied duty of Landlord not expressly herein set forth. SECTION 25.11. All monetary obligations of Landlord and Tenant (including, without limitation), any monetary obligation of Landlord or Tenant for damages for any breach of the respective covenants, duties or obligations of Landlord or Tenant hereunder) are performable exclusively in Livermore, Alameda County, California. SECTION 25.12. Reference is here made to that certain loan commitment dated June 10, 1988, as amended by letters dated June 23, and July 8, 1988, issued by American General Investment Corporation to Triad Systems Corporation (the "Commitment"). As part of the consideration for funding the loan contemplated under the Commitment (the "Loan"), Triad Systems Corporation has assigned the Commitment to 3055 Triad Dr. Corp., and it is contemplated that 3055 Triad Dr. Corp., as maker, shall execute and deliver to The Variable Annuity Life Insurance Company ("Beneficiary"), is payee, a promissory note in the amount of $15,500,000.00, which promissory note shall be secured, inter alia, by a First Deed of Trust and Assignment of Rents, Security Agreement and Fixture Filing covering, inter alia, the Land (the "Deed of Trust"). Landlord and Tenant hereby agree that this Lease may be terminated by Tenant upon the occurrence of any of the following circumstances: 28 32 (1) Prior to foreclosure of the Deed of Trust, by payment in full of all sums payable under the Note and the Deed of Trust (subject to and in accordance with the terms thereof, including, without limitation, any provisions thereof limiting prepayment rights); or (2) Following foreclosure of the Deed of Trust, by payment of all sums payable under the Note and Deed of Trust (subject to and in accordance with the terms thereof, including, without limitation, any provisions thereof limiting prepayment rights) as if such foreclosure had not occurred, together with all costs and expenses incurred by the holder of the Note in connection with any such foreclosure. The provisions of this Section 25.12 are not meant to be, and do not constitute, any amendment or modification of the rights of the holder of the Note or the Beneficiary under the Deed of Trust. The affidavit by Beneficiary of the amounts due under items (1) or (2) preceding shall be conclusive and binding upon Tenant with respect to such matters. This Lease Agreement is hereby executed and delivered effective as of the date and year first above written. 3055 TRIAD DR. CORP. By: /s/ JEROME W. CARLSEN --------------------- Name: Jerome W. Carlsen Title: Vice President "LANDLORD" TRIAD SYSTEMS CORPORATION By: /s/ JAMES R. PORTER ------------------- Name: James R. Porter Title: President "TENANT" 29 33 EXHIBIT "A" 3055 TRIAD DR. CORP. PERMITTED EXCEPTIONS PAGE 1 OF 1 PAGE 1. Agreement for Subdivision Improvement by and between Triad Systems Corporation and the City of Livermore, recorded December 9, 1985 in the Official Records of Alameda County under Series No. 85-261848. 2. Agreement for Development of Land by and between Triad Systems Corporation, a California corporation, and the City of Livermore, a municipal corporation, recorded December 9, 1985 in the Official Records of Alameda County under Series No. 85-261849 and re-recorded on November 19, 1986 under Series No. 86-290730, as amended by Amendment to Development Agreement recorded September 29, 1987 in the Official Records of Alameda County under Series No. 87-266894. 3. Public Utility Easement, Landscape Easement, Storm Drain Easement, Sanitary Sewer Easement, Water Conservation Easement and Scenic Route Easement filed in Parcel Map 3994 of Alameda County. 4. Limitations, covenants, conditions, restrictions, reservations, exceptions, or terms, but deleting restrictions, if any, based on race, color, religion or national origin contained in instrument recorded September 29, 1987, in the Official Records of Alameda County, under Series No. 87-266895. 5. Public Utilities Easement, Landscaping Easement, Storm Drainage Easement and Emergency Vehicle Access Easement as shown on filed Parcel Map 5112 of Alameda County. 6. Building set back line as shown on filed Parcel Map 5112 of Alameda County. 30 EX-6.3 7 FIRST AMENDMENT TO PROJECT LEASE AGREEMENT 1 FIRST AMENDMENT TO PROJECT LEASE AGREEMENT THIS FIRST AMENDMENT TO PROJECT LEASE AGREEMENT (this "AMENDMENT") is effective as of the 26th day of February, 1997, by and between Triad Park, LLC, a California limited liability company ("PARK"), intended successor in interest to 3055 TRIAD DR. CORP., a California corporation ("3055 CORP") and TRIAD SYSTEMS CORPORATION, a Delaware corporation ("TRIAD") in the following factual context: A. On August 1, 1988, Triad, as Tenant and 3055 Corp., as Landlord, entered into that certain Project Lease Agreement (the "LEASE") covering a tract of land containing 15.0633 acres, and being Parcel Two of Parcel Map 5112, filed September 29, 1987 in Book 122 or Parcel Maps, Pages 11 through 14, inclusive, Alameda County Records (the "DEMISED LAND"), which Lease also covered the improvements on the Demised Land Agreement consisting of three (3) buildings containing approximately 219,818 square feet (the "IMPROVEMENTS"). B. On August 23, 1988, 3055 Corp., as Trustor, and Mason-McDuffie Financial Corporation, as Trustee, executed that certain First Deed of Trust and Assignment of Rents, Security Agreement and Fixture Filing, for the benefit of The Variable Annuity Life Insurance Company, as Beneficiary (the "VARIABLE DEED OF TRUST"), pursuant to which 3055 Corp. agreed to obtain Beneficiary's prior consent to any amendment to the Agreement; accordingly, Beneficiary joins in this Amendment to acknowledge the terms and conditions of and to give its consent to this Amendment. C. On February 27, 1997, 3055 Corp. will merge up into its parent Triad, who will succeed by operation of law to all of 3055 Corp.'s assets and liabilities, including but not limited to all of its rights, title and interest in and to the Demised Land and the Improvements, subject to the Variable Deed of Trust, pursuant to the Real Estate Distribution Agreement entered into among Triad Systems Corporation, 3055 Triad Dr. Corp. and Triad Park, LLC, dated as of February 27, 1997 (the "REAL ESTATE DISTRIBUTION AGREEMENT"). D. On February 27 1997, Triad will contribute certain designated assets to Park, including but not limited to all of Triad's just acquired rights, title and interest in and to 2 the Demised Land and the Improvements, subject to the Variable Deed of Trust pursuant to the Real Estate Distribution Agreement. E. Subject to all of the terms and conditions of this Amendment, 3055 Corp. and Triad desire to amend the Lease and to anticipate the acquisition of the Landlord's interest by Park, as more particularly set forth below. In this factual context, the parties agree as follows: SECTION 1. EFFECTIVE DATE. This Amendment shall be effective on the date (the "EFFECTIVE DATE") on which Triad contributes the Demised Land subject to the Variable Deed of Trust to Park pursuant to the Real Estate Distribution Agreement. SECTION 2. NO MERGER. Upon the merger of 3055 Corp. into its parent Triad, the interests of both the Landlord and the Tenant under the Lease shall be held by the same entity, subject to the assignment for security purposes to The Variable Annuity Life Insurance Company. The parties agree that the Lease shall not be effected by Triad having title to both the estates of the Landlord and of the Tenant under the Lease, that there shall be no merger and that the leasehold estate shall continue to exist subject to the assignment for security purposes to The Variable Annuity Life Insurance Company. SECTION 3. NOVATION. Upon the transfer by Triad to Park of all of Triad's rights, title and interest in and to the Demised Land and the Improvements, there shall be a automatic novation of the Lease resulting in Park being substituted for Triad (who was the successor to 3055 Corp.) as the Landlord under the Lease and thereafter Triad and 3055 Corp. shall have no further interest in or liability for the interest of the Landlord under the Lease. Triad shall continue at all times to be the Tenant under the Lease. SECTION 4. TERM. Subject to all of the terms and conditions as in the Lease, except as hereinafter provided, the term of the Lease (the "PRIMARY TERM") is for a period of five (5) years, commencing on the Effective Date and ending at midnight on the date that is five (5) years after the Effective Date (the "PRIMARY TERM ENDING DATE"). SECTION 5. RENEWAL OPTION. Provided and on the condition that no Event of Default has occurred and be continuing, and subject to all of the terms and conditions as in the Lease, except as hereinafter provided, Tenant shall have an option (the "RENEWAL OPTION") to renew the Lease for one (1) renewal term of five (5) years. Tenant shall notify Landlord no less 2 3 than two hundred seventy (270) days prior to the Primary Term Ending Date of its intent to exercise the Renewal Option. If Tenant so elects to exercise the Renewal Option, the Lease shall extend for a term (the "RENEWAL TERM") commencing on the day after the Primary Term Ending Date and ending at midnight on the day that is five (5) years after the Primary Term Ending Date. Tenant shall have no further right to renew the Lease. SECTION 6. RENT. (a) During the first two (2) years of the Primary Term, the Annual Base Rental payable to Landlord shall be $2,505,720.00, payable monthly in advance in twelve (12) equal installments, one (1) such installment to be payable on the first day of each month during the first two (2) years of the Primary Term. (b) During the final three (3) years of the Primary Term, the Annual Base Rental payable to Landlord shall be an amount equal to the then prevailing market rate ("MARKET RENTAL RATE") in the immediate Alameda County market area as of the end of the second (2nd) year of the Primary Term (the "ADJUSTMENT DATE"). At least one-hundred twenty (120) days prior to the end of the second (2nd) year of the Primary Term, Tenant shall institute the Appraisal Process (as hereinafter defined) to establish the Market Rate Rental for the final three (3) years of the Primary Term. If the determination of the Market Rental Rate is made after the start of the third (3rd) year of the Primary Term, Tenant shall continue to pay rent at the rate applicable to the preceding period until the Market Rental Rate is determined. Tenant shall, promptly after the Market Rental Rate is determined, pay any difference for the period affected by the adjustment. The Market Rental Rate shall be payable monthly in advance in twelve (12) equal installments, one (1) such installment to be payable on the first day of each month during the final three (3) years of the Primary Term. The foregoing notwithstanding, in no event shall the Annual Base Rental for the last three (3) years of the Primary Term be less than the rental called for in Section 6(a) nor more than 1.2 times the rental called for in Section 6(a). (c) During the Renewal Term, the Annual Base Rental payable to Landlord shall be an amount equal to the then prevailing market rate ("RENEWAL RENTAL RATE") in the immediate Alameda County market area as of the commencement of the Renewal Term. At least one-hundred twenty (120) days prior to the end of the Primary Term, Tenant shall institute the Appraisal Process to establish the Renewal Rental Rate for the Renewal Term. The Adjustment Date for determining the Renewal Rental Rate shall be the Primary Term Ending Date. If the determination of the Renewal Rental Rate is made after the start of the Renewal Term, Tenant shall continue to pay rent at the rate applicable to the preceding period until the Renewal Rental Rate is determined. Tenant shall, promptly after the Renewal Rental Rate is determined, pay any difference for the period affected by the adjustment. The Renewal Rental Rate shall be payable 3 4 monthly in advance in twelve (12) equal installments, one (1) such installment to be payable on the first day of each month during the Renewal Term. (d) The "Appraisal Process" is begun by Tenant's designation of an appraiser (the "FIRST APPRAISER") to determine the Market Rental Rate or the Renewal Rental Rate, as the case may be (collectively, the "APPRAISED RATE") of the Demised Premises. The First Appraiser shall make and deliver to Tenant and Landlord an appraisal of the Demised Premises Appraised Rate (the "FIRST APPRAISED RATE") within twenty (20) business days of its appointment. At the election of Landlord, an appraiser (the "SECOND APPRAISER") shall be appointed within seven (7) days following delivery of the First Appraised Rate. The Second Appraiser shall make and deliver to Tenant and Landlord a second appraisal of the Demised Premises Appraised Rate (the "SECOND APPRAISED RATE") within twenty (20) business days of its appointment. In the event that the First Appraised Rate and the Second Appraised Rate do not differ by more than ten percent (10%) of the lower value, the average of the First Appraised Rate and Second Appraised Rate shall be deemed to be the Market Rental Rate or the Renewal Rental Rate, as the case may be. In the event that the First Appraised Rate and the Second Appraised Rate differ by more than ten percent (10%) of the lower value, the First Appraiser and the Second Appraiser shall, within seven (7) days following the delivery of the Second Appraised Rate, appoint a third appraiser (the "THIRD APPRAISER"" and together with the First Appraiser and the Second Appraiser, the "APPRAISERS"), who shall deliver to Tenant and Landlord an appraisal of the Demised Premises Appraised Rate (the "THIRD APPRAISED RATE") within fifteen (15) business days following its appointment by the First Appraiser and the Second Appraiser. The one, if any, of the First Appraised Rate, the Second Appraised Rate or the Third Appraised Rate which differs the most from the other two shall not be considered, and the average of the two remaining values shall be the Market Rental Rate or the Renewal Rental Rate, as the case may be. Each of the Appraisers shall make their respective appraisals as of the Adjustment Date. Each appraisal shall reflect the gross fair market rental value of the Demised Premises. The Appraisers shall be disinterested, independent and shall be qualified to appraise premises of the nature of the Demised Premises, and such Appraisers shall have been actively engaged in the appraisal of premises of the nature of the Demised Premises for a period of not less than five (5) years immediately preceding their appointment under this Amendment. The expenses and fees, including without limitation the fees of the Appraisers and any legal and accounting fees, incurred in connection with the appraisal(s) conducted pursuant to this Section 6(d) shall be shared equally by Tenant and Landlord. (e) The determination of "gross fair market rental value" shall be the reasonable good faith estimate of the market rental rate per square foot of the Demised Premises for office type rental space of comparable size, age, location and quality. 4 5 SECTION 7. ADDITIONAL RENT AND IMPOSITIONS. In addition, during the Primary Term and the Renewal Term, Tenant shall pay all other rent and other amounts due under the Lease, including without limitation, additional rent and other charges described in Article 3 of the Lease and the Impositions described under Article 4 of the Lease. SECTION 8. RIGHT TO SUBLEASE. Article 10 of the Lease is amended by adding the following Section 10.05: Section 10.05. In the event Landlord consents to a sublease of any portion of the Demised Premises, which consent Landlord agrees shall not be unreasonably withheld, Tenant agrees that if the rental rate agreed upon between Tenant and its proposed sublessee is greater than the rental rate for such allocable portion of the Demised Premises that Tenant must pay to Landlord under this Amendment, all of such excess rent shall be considered additional rent owed by Tenant to Landlord (less brokerage commissions, attorneys' fees and other disbursements reasonably incurred by Tenant for such subletting) and shall be paid by Tenant to Landlord as, if, and when received from such sublessee in the same manner that Tenant pays Annual Base Rental. SECTION 9. CONTINUING EFFECT/DEFINED TERMS. Except as expressly modified herein, the Lease shall continue in full force and effect in accordance with its terms. All defined terms used herein without definition shall have the meaning ascribed to such terms as set forth in the Lease. Section 10. Effectiveness. This Amendment does not become effective as an amendment to the Lease until executed and delivered by both Landlord and Tenant. The undersigned parties have executed this Amendment as of the day and year first above written. LANDLORD: 3055 CORP., a California corporation By: /s/ JAMES R. PORTER ------------------- Name: James R. Porter Title: President 5 6 SUBSTITUTED LANDLORD TRIAD PARK, LLC, a California limited liability company By 3055 MANAGEMENT CORP., a California corporation; its sole manager By: /s/ JAMES R. PORTER ------------------- Name: James R. Porter Title: Vice President, Secretary, & CFO TENANT: TRIAD SYSTEMS CORPORATION, a Delaware corporation By: /s/ JAMES R. PORTER ------------------- Name: James R. Porter Title: President Acknowledged and Consented to, this _____ day of __________, 1997. THE VARIABLE ANNUITY LIFE INSURANCE COMPANY, as Mortgagee By: _______________________________________________ Name: _____________________________________________ Title: ____________________________________________ 6 EX-12.1 8 INFORMATION STATEMENT 1 INFORMATION STATEMENT Concerning the Distribution of 19,708,639 membership interests ("Shares") of TRIAD PARK, LLC a Delaware limited liability company ("Company") by Cooperative Computing, Inc., a Delaware corporation, formerly known as Triad Systems Corporation ("Triad") The Shares described in this Information Statement are being distributed by Triad to the Triad stockholders of record as of the close of trading on February 26, 1997 ("Distributees"). No consideration will be paid by Distributees for the Shares, and there is no assurance that a trading market will develop for trading of the Shares. 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 INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. The date of this Information Statement is __________, 1997. 2 TABLE OF CONTENTS
Page Summary of Spin-Off Transaction 5 Introduction 8 Reasons for the Distribution 8 Plan of Distribution 8 Risk Factors 11 Relationship between Triad and the Company 15 Description of Distribution Agreement 16 Description of Lease Agreement 17 Description of Properties of the Company 18 Summary of Appraisal Report on Properties of the Company 19 Business of the Company 20 Management of the Company 20 Compensation of Management 22 Transactions with Interested Parties 23 Holdings of Principal Share Holders and Security Holdings of Manager(s), Executive Officers and Advisory Board Members 23 Description of Shares 24 Summary of Limited Liability Company Agreement 25 Tax Considerations 27 Ownership of Shares by Employee Benefit Plans 36 Trading of Shares 37 Legal Matters 37 Additional Information 37 Index to Financial Statements 38 Management's Discussion and Analysis of Results of Operations and Financial Condition 39 Financial Statements 41 Notes to Financial Statements 45 Report of Independent Accountants 53 Pro Forma Statements of Operations 55
2 3 EXHIBITS Exhibit A Real Estate Distribution Agreement Exhibit B Project Lease Agreement Exhibit C First Amendment to Project Lease Agreement Exhibit D Appraisal of: Triad Business Park, Livermore, California Exhibit E Limited Liability Company Agreement of Triad Park, LLC Exhibit F Form of Transfer Application Exhibit G Form of Triad Park, LLC Rights Plan 3 4 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS INFORMATION STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR THE ISSUANCE OF ANY SECURITIES IN CONNECTION HEREWITH SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED HEREIN SINCE THE DATE HEREOF. SEE "ADDITIONAL INFORMATION." 4 5 SUMMARY OF SPIN-OFF TRANSACTION This summary is a brief summary of certain information contained in the body of this Information Statement. This summary does not purport to contain all material information relating to the formation and spin-off of Triad Park, LLC (the "Company"), and is qualified in its entirety by, the information and financial statements (including the notes) appearing elsewhere in this Information Statement. STOCKHOLDERS SHOULD READ CAREFULLY THIS INFORMATION STATEMENT IN ITS ENTIRETY. PRE-TENDER OFFER STATUS Prior to the initiation of the spin-off transactions described below, the real estate assets now owned by the Company were owned by Triad and its wholly-owned subsidiary, 3055 Triad Dr. Corp., a California corporation ("3055 Triad Dr. Corp."). 3055 Triad Dr. Corp. was the owner of Triad's headquarters consisting of three buildings and improvements (comprising 220,000 square feet) situated on approximately 15 acres of land in Triad Park, Livermore, California (the "Headquarters"). 3055 Triad Dr. Corp. also owned an additional 46 acres of surrounding unimproved land, all of which was, and continues to be, subject to certain encumbrances including a first deed of trust securing indebtedness of approximately $9,749,000 at December 31, 1996. Triad was the owner of approximately 257 acres of undeveloped land located in Triad Park. The Headquarters and the 303 total acres of undeveloped land (the "Land", the Land and the Headquarters, collectively the "Property") were, and continue to be, encumbered by assessment bonds issued by the City of Livermore in the amount of approximately $9,228,000 at December 31, 1996. MERGER AGREEMENT AND TENDER OFFER On October 23, 1996, Cooperative Computing, Inc., a Texas corporation ("CCI"), through its wholly owned subsidiary CCI Acquisition Corp., a Delaware corporation ("CAC"), commenced a tender offer (the "Offer") to purchase all of the outstanding shares of common stock, $.001 par value per share (the "Common Stock"), of Triad. CAC made the Offer in accordance with the terms of the Agreement and Plan of Merger, dated as of October 17, 1996 (the "Merger Agreement"), among CCI, CAC and Triad, which provided, among other things, that certain real property assets of Triad and 3055 Triad Dr. Corp. would be spun off to the stockholders of Triad in a dividend to be declared prior to the consummation of the Offer. The dividend was declared on February 26, 1997. On February 27, 1997, the Offer was consummated with CAC obtaining over 98% of the outstanding shares of Triad Common Stock in the tender process. For a description of the distribution of membership interests of the Company (the "Shares"), see "Summary of Spin-Off Transaction -- Transfer of Assets / Plan of Distribution." THE COMPANY The Company was organized under the laws of the State of Delaware as a limited liability company on February 10, 1997. Prior to the distribution of the Shares discussed herein, the Shares of the Company have been owned 99% by Triad and 1% by 3055 Management Corp., a California corporation ("Management Corp."), all the stock of which is owned by William W. Stevens, James R. Porter and Richard C. Blum, three current or former directors of Triad. The Management Corp. is the exclusive operator of the Company's business except that certain actions require the approval of its Advisory Board (the "Advisory Board"). See "Management of the Company." 5 6 At the time of the formation of the Company, 3055 Triad Dr. Corp., the owner of the Headquarters, was merged with and into Triad, with Triad being the surviving corporation. TRANSFER OF ASSETS / PLAN OF DISTRIBUTION Pursuant to that certain Real Estate Distribution Agreement dated as of February 26, 1997 between Triad, 3055 Triad Dr. Corp., Management Corp. and the Company (the "Distribution Agreement") Triad contributed to the Company certain of its respective real estate assets located in Livermore, California, consisting primarily of the Headquarters, subject to the existing first deed of trust, and the Land, subject to existing assessment bonds, and the right to certain refunds for infrastructure expenditures from the City of Livermore. Pursuant to the Distribution Agreement, the Company assumed certain liabilities of Triad related to the Headquarters and the Land, Triad agreed to provide certain administrative support to the Company and the Company indemnified Triad against all taxes, costs and expenses related to the formation of the Company, the Property and the distribution of the Shares. See "Description of Distribution Agreement." Triad is distributing (the "Distribution") to its stockholders of record as of the close of trading on February 26, 1997 (the "Distribution Record Date"), in the form of a dividend, 99% of the issued and outstanding Shares. The remaining 1% of the Shares will continue to be owned by Management Corp. The Distribution is being made on the basis of one Share for each share of Common Stock outstanding after the close of trading on the Distribution Record Date. The former Triad shareholders entitled to receive the Shares are referred to as the "Distributees" and the holders of Shares subsequent to the Distribution Record Date are referred to as "Share Holders." See "Plan of Distribution." TAX CONSEQUENCES The tax consequences of owning Shares in the Company to a particular Share Holder will depend in part on the Share Holder's own tax circumstances. Each Share Holder should consult his or her own tax advisor about the United States federal, state and local tax consequences of owning Shares in the Company. For a general discussion regarding certain tax consequences of receiving shares of stock as a dividend, see Section 4 of the Offer to Purchase, filed by CAC and CCI with the Securities and Exchange Commission (the "Commission") on October 23, 1996. The Company anticipates that it will be classified for federal income tax purposes as a partnership and that the beneficial owners of Shares will generally be considered partners in the Company. Accordingly, the Company will pay no federal income taxes and a Share Holder will be required to report in the Share Holder's federal income tax return their share of the Company's income, gains, losses and deductions, regardless of whether or not the Company makes cash distributions to the Share Holders. In general, cash distributions to a Share Holder will be subject to federal income tax only if, and to the extent that, they exceed the tax basis in Share Holder's Shares. As a partnership for tax purposes, the Company and the Share Holders will be subject to a number of complex tax rules limiting the deductibility of losses, rules for the calculation of tax basis and special rules affecting tax exempt Share Holders. The Company will be classified (or will elect to be classified) as a corporation for purposes of the California Revenue and Taxation Code. The Company will pay corporate income taxes in California and any distributions by the Company to the Share Holders will be subject to tax as dividends or liquidating distributions, as the case may be, for purposes of the California income tax laws. 6 7 For a more detailed discussion of these issues, see "Tax Considerations." NO ASSURANCE OF ANY MARKET FOR SHARES Because the Company has been owned only by Triad and Management Corp., no trading market currently exists for the Shares. The Company has no present intention of applying to any exchange or quotation service in order to obtain trading or quotation privileges after the distribution of the Shares from Triad. Therefore, there is no assurance that an active market will develop for the trading of the Shares, and there is likewise no assurance as to any price at which the Shares may trade at any future time. See "Trading of Shares." CASH DISTRIBUTIONS In general, the Company will distribute distributable cash to the Share Holders at such times and in such amounts as the Advisory Board may determine. The Company is required pursuant to the Distribution Agreement to maintain a minimum net worth of $2,350,000 until 60 days after the expiration of all statutes of limitation with respect to the assessment of any tax deficiency related to the transactions contemplated by the Distribution Agreement, which is estimated to be approximately four years. This obligation to maintain a minimum net worth will affect the Company's ability to make distributions. See "Description of Shares." RISK FACTORS The Company faces a number of real estate risks and risks related to its relationship with Triad, as well as risks related to the Shares. See "Risk Factors." 7 8 INTRODUCTION This Information Statement is furnished in connection with the distribution by Triad Systems Corporation ("Triad") of 19,708,639 membership interests ("Shares") of Triad Park, LLC ("Company") described herein ("Distribution"). The principal executive offices of the Company are located at 3055 Triad Drive, Livermore, California 94550. This Information Statement is being sent to the Triad stockholders of record as of the close of trading on February 26, 1997 ("Distributees") on or about __________, 1997. Pursuant to the terms of the Distribution Agreement, Triad will distribute to the Distributees 99% of the issued Shares of the Company, all as described under "Plan of Distribution" below. Each Distributee will receive one Share for each share of Common Stock held as of the close of trading on February 26, 1997. (See "Plan of Distribution"). REASONS FOR THE DISTRIBUTION During the negotiation of the Merger Agreement, Triad's Board of Directors believed that the real property assets of Triad were being undervalued and that the maximum value for Triad's stockholders with respect to such real property assets would be achieved by effecting the Distribution and liquidating such real property assets. Pursuant to the Merger Agreement, CAC agreed to offer to purchase all outstanding shares of Common Stock at a per share price of $9.25 per share, net to the seller in cash. The Offer pricing contemplated that the land and buildings owned by Triad and 3055 Triad Dr. Corp. in Livermore, California and certain other related assets would not be subject to the Offer but instead would be contributed to the Company, and substantially all of the Shares would be distributed to Triad's stockholders of record as of the close of trading immediately prior to the consummation of the Offer. PLAN OF DISTRIBUTION DESCRIPTION OF THE PLAN CONTRIBUTION TRANSACTIONS. Prior to Triad's contribution of any property to the Company, Triad, 3055 Triad Dr. Corp. and the Company entered into a First Amendment to Project Lease Agreement dated as of February 26, 1997 (the "Lease Amendment") which amended the term and rental rate of the subject lease and contemplated 3055 Triad Dr. Corp. merging into Triad and whereby upon the contribution of the Property to the Company, the Company would automatically be substituted as the landlord under the Project Lease Agreement dated as of August 1, 1988 between 3055 Triad Dr. Corp., as landlord, and Triad, as tenant (the "Lease Agreement"). The Lease Agreement, as amended, continues the existing rent of $2,505,720 per year for the first two years and provides for an adjustment to market value for the remaining three years, but not to a rent less than the current rent or more than 120% of the current rent. There is also an option in favor of Triad to extend the term for five additional years. At the time of formation of the Company, 3055 Triad Dr. Corp., the owner of the Headquarters, was merged with and into Triad, with Triad being the surviving corporation. 8 9 3055 Management Corp. ("Management Corp.") was formed by James R. Porter, William W. Stevens and Richard C. Blum who contributed to Management Corp. promissory notes with a value equal in the aggregate to 1.01% of the value of the real property assets to be contributed to the Company by Triad pursuant to the Real Estate Distribution Agreement dated as of February 26, 1997 among Triad, 3055 Triad Dr. Corp., the Management Corp. and the Company ("Distribution Agreement"). Pursuant to the Distribution Agreement, Triad contributed all of the assets associated with approximately 303 acres of unimproved land in Triad Park owned by Triad (the "Land"), subject to all existing encumbrances including approximately $9,228,000 in bonded indebtedness at December 31, 1996, and all of the assets associated with three buildings and improvements (comprising 220,000 square feet) situated on approximately 15 acres of land in Triad Park (the "Headquarters," and collectively with the Land, the "Property"), subject to all existing encumbrances including a first deed of trust of approximately $9,749,000 at December 31, 1996, in exchange for 99% of the Shares of the Company (the "Contribution"). Management Corp. contributed a promissory note equal to 1.01% of the value of the contribution of Triad in exchange for 1% of the Shares of the Company. At the time of these contributions, an aggregate of 19,708,639 Shares were issued to Triad and 199,077 Shares were issued to Management. POST-CONTRIBUTION, PRE-DISTRIBUTION TRANSACTIONS. For the period of time following the Contribution and up to the Distribution, the Company has operated in a manner designed to maintain or increase the value of its real estate assets. Additional Encumbrances. The City of Livermore has entered into a Bond Indenture and issued an Official Statement to raise a total of $9,070,000 in new funds from the sale of Mello-Roos bonds. The sale of the bonds closed March 24, 1997 and the proceeds are designated to refinance the prior bonded indebtedness of approximately $2,300,000, to fund reimbursements to the Company of approximately $2,050,000 arising from previously completed improvements, to provide funds of approximately $3,700,000 to complete improvements to the Land required by various agreements with the City of Livermore and others, to pay financing expenses of $620,000 and to create a bond reserve fund of approximately $400,000 held by the City of Livermore. Of this new indebtedness, approximately $6,938,000 would encumber the Property owned by the Company. Thus, upon completion of this bond offering, the total indebtedness encumbering the Property owned by the Company will be approximately $14,382,000. Operational Support. In order to facilitate the orderly management of the Company following the Contribution, for a period of one year Triad has agreed to provide (at no cost to the Company) at least two cubicles of office space and telephone and secretarial support to two employees of the Company and to give those employees access to such other office equipment as is reasonable and necessary. In addition, in order to assist the Company in meeting its reporting requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and to conduct its real estate operations for two years following the Contribution, Triad has agreed to provide the Company with certain in-house legal and accounting support and the Company has agreed to reimburse Triad for its fully burdened cost of the personnel providing such support. The Company has agreed that Triad will have no liability for the actions of their personnel providing this support. 9 10 Listing Agreement. The Company intends to enter into a listing agreement with Grubb & Ellis on financial terms to be negotiated to sell the Property for the Company. DISTRIBUTION OF SHARES. The final step in the Plan of Distribution is the distribution of the Shares to the Distributees. The conditions to the Distribution having been fulfilled, Triad is transferring its 99% of the Shares in the Company to the Distributees as a dividend distribution. The dividend distribution was declared by Triad's Board of Directors on February 26, 1997. Upon receipt of the dividend distribution, a Distributee will automatically become a member of the Company (each a "Share Holder") and will own one Share for each share of Triad Common Stock owned by such Distributee at the close of trading on February 26, 1997. No consideration will be paid by the Distributees in connection with the Distribution. Certificates representing the Shares are being mailed to Distributees along with this Information Statement. One percent of the Shares have been issued to Management Corp., in exchange for its contribution of a promissory note equal to 1% of the total Company capital. Management Corp. serves as the manager of the Company (see "Management of the Company"). The stock of Management Corp. is owned by three of Triad's current or former directors. When Management Corp. pays its promissory note to the Company, the Company will use the proceeds of the note to redeem that number of Shares from the stockholders of Management Corp. that will cause their aggregate percentage ownership interest in the Company to equal their aggregate percentage ownership of Common Stock prior to the consummation of the Offer) (see "Transactions with Interested Parties"). The Company will pay Management Corp. an annual fee equal to 2% of the Company's taxable income allocated to Management Corp. for the preceding taxable year, to compensate Management Corp. for California state income taxes on its share of the Company's income. In other words, Management Corp. will receive income equal to 102% of the income that a Share Holder of equal ownership interest would receive (see "Compensation of Management"). APPROVAL OF PLAN OF DISTRIBUTION NOT REQUIRED Under the laws of Delaware, the Plan of Distribution is not required to be submitted to the stockholders of Triad for their approval. Consequently, the Triad stockholders did not have and do not have the right to approve or disapprove the Plan of Distribution. REASON FOR FURNISHING THIS INFORMATION STATEMENT This Information Statement is being prepared by Triad solely in order to provide information to the Distributees in connection with the Distribution. It is not to be construed as an inducement or encouragement to buy or sell any securities of the Company or any other business entity. 10 11 RISK FACTORS The Company's ability to dispose of its real estate assets and make cash distributions to Share Holders is subject to many risks. These risks fall into several categories, including, but not limited to, general economic risks such as interest rate fluctuations, changes in gross domestic product, tax law changes, and other macro-economic factors. In addition, the Company is subject to certain risks relating to the real estate business, the Company's relationship with Triad, the nature of the Shares and their illiquidity and the Company's limited operating history. REAL ESTATE RELATED RISKS 1. General Risks. The Company's investment in the Property is subject to all the risks generally incident to the ownership of real property. The ability of the Company to make distributions to Share Holders, and the amounts and timing of any distributions, are dependent on the value of the Property. The value of the Property and the amount the Company is able to obtain in sales of such Property may be adversely affected by changes in national economic conditions, changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, changes in interest rates and in the availability, costs and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, changes in real estate tax rates and other operating expenses, changes in governmental rules and fiscal policies, changes in zoning laws, acts of God, including earthquake and other natural disasters (which may result in uninsured losses) and other factors which are beyond the control of the Company. 2. Value and Illiquidity of Real Estate. The primary purpose of the Company is to liquidate the Property as promptly and prudently as is feasible. However, real estate investments are relatively illiquid. Therefore, the ability of the Company to dispose of the Property in a prompt manner may be limited. Consequently, the amount to be received from any sale of the Property is heavily dependent upon the strength of the commercial real estate market in the San Francisco East Bay Area in general, and the Pleasanton/Livermore/San Ramon market in particular. This market has fluctuated widely during the past 10 years. There can be no assurance that the Company will be able to sell the Property in a prompt manner. Further, there can be no assurance of the amount of proceeds from any sale. 3. Payment Obligations and Dependence on Payments under Lease Agreement. The Company will have fixed payment obligations in the form of (i) monthly payments on a first deed of trust encumbering the Headquarters in the amount of $165,381 and (ii) semi-annual payments on bonded indebtedness encumbering all of the unsold Property in the estimated amount of $650,000. The Headquarters is leased for five years at a rate which produces a small positive cash flow above the mortgage payments. The Company's ability to make distributions to Share Holders will depend, in part, upon the ability of the Triad, as lessee, to make rental payments. Any failure or delay by Triad in making rental payments may adversely affect the Company's ability to make distributions to the Share Holders. Besides rental payments from Triad, the Company is dependent on the sale of the Property to produce cash flow for continued operations. Unless the Company has a sustained rate of sales, it may not have sufficient cash for operations or distributions to Share Holders. 4. Lease Agreement. Under the terms of the Lease Amendment, the expiration date of the Lease Agreement was changed to February 27, 2002, with the current rental rate remaining effective for two years (1997 and 1998). The rent for the remaining three years of the term of the Lease Agreement (1999-2002) will be an amount equal to the prevailing market rate in the Pleasanton/Livermore/San 11 12 Ramon market area as of the time of negotiation but not less than the current rent nor more than 120% of current rent. Although the Company currently believes the rent will increase, there can be no assurances that the rent will increase and there can be no assurances as to the amount of any such increases. 5. Governmental Entitlements. The sale of the undeveloped property will depend upon the ability of the Company, or other developers who contract to purchase property from the Company, to obtain necessary entitlements from the City of Livermore and other governmental agencies with jurisdiction. There can be no assurance that the Company or such other developers will be able to obtain the necessary entitlements. The inability to obtain entitlements or delays in obtaining entitlements could adversely affect the timing of and amounts received in connection with sales of the Property by the Company. 6. Reimbursement for Improvements. The Company is currently obligated to undertake approximately an additional $7,000,000 in improvements on the Property. The City of Livermore has indicated that it is willing to reimburse the Company for improvements undertaken and paid for by the Company by means of bond financings. Historically, the City of Livermore has fulfilled such reimbursement commitments to Triad and has been able to successfully sell related bond offerings. However, if for any reason the City of Livermore is unsuccessful in completing a bond offering, the Company would not receive any reimbursement for such improvements. In addition, there is a significant chance the cost of the improvements undertaken by the Company will exceed the amount of the bond financings and the Company would be responsible for paying any such cost overruns. 7. Property Taxes. The Property is subject to real estate taxes. The real estate taxes may decrease or increase as property tax rates change and as the value of the properties are assessed or reassessed by taxing authorities. There is a possibility that the spin-off transactions described herein may be considered a change in ownership and trigger a reassessment of the Property to current market value. However, based upon the Appraisal (see the "Appraisal") the current market value is believed to be less than the value currently used for property tax purposes. If property taxes increase as a result of such reappraisals or reassessments, the Company's ability to make expected distributions to Share Holders could be adversely affected. 8. Environmental Matters. The Company's financial condition may be affected by the obligation to pay for the cost of complying with existing environmental laws as well as future environmental legislation. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous or toxic substances or petroleum product releases at a property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by such parties in connection with contamination. Such laws, ordinances and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence or release of such hazardous or toxic substances or petroleum products. In addition, the owner or operator of a site may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site. Further, a real estate owner may be required to make certain accommodations in accordance with various endangered species laws and regulations of the California Fish and Game Department. Although the Company is not currently aware of any environmental liabilities which are expected to have a material adverse effect on the Company's operations or financial condition, there can be no guarantee that such liabilities will not arise in the future. 12 13 RISKS RELATED TO RELATIONSHIPS WITH TRIAD 1. Payments under Lease Agreement and Lease Amendment. The Company's principal predictable revenue source is the lease of the Headquarters to Triad pursuant to the Lease Agreement and Lease Amendment. As a result, in the event that Triad is unable for any reason to continue to make its lease payments in a timely manner, such inability or delay may have a material adverse impact on the Company's revenues and the Company's ability to make distributions to the Share Holders. Triad's financial performance may also impact the value of the Headquarters in a sale transaction. 2. Indemnification. The Company has agreed to provide broad indemnification to Triad for several matters, including, but not limited to, any environmental claims, losses, damages, liabilities and costs, including reasonable consultant's and attorneys' fees, any costs of expenses of the Distribution, particularly income taxes, fees and any claims of violations of state or federal securities laws, and any claims whatsoever arising out of the Property. Therefore, the Company is financially responsible for all expenses related to the formation of the Company and the Distribution, whether arising out of Share Holder or third party claims, tax adjustments by federal or state taxing authorities to the treatment of the spin-off transaction, environmental problems, or claims of past violations under any of Triad's obligations related to Property or similar problems. This indemnification obligation of the Company could have a material adverse affect on the ability of the Company to make distributions to Share Holders. 3. Management and Conflicts of Interests. James R. Porter serves on the Board of Directors of Triad and also serves on the Board of Directors of Management Corp. and the Advisory Board of the Company. William W. Stevens serves on the Board of Directors of Management Corp. and the Advisory Board of the Company. Stanley F. Marquis is employed by Triad as a senior officer and also serves on the Advisory Board of the Company. Larry D. McReynolds is the facilities manager for Triad and also serves as the President of the Company, and is in charge of the Company's day to day operations. Messrs. Porter, Stevens, Marquis and McReynolds are presently serving or are employed in the above positions and may continue to do so for an indefinite period of time. Messrs. Porter, Stevens, Marquis and McReynolds have extensive knowledge of the Company's real property assets. Therefore, the Company believes that Messrs. Porter, Stevens, Marquis and McReynolds will be important to the Company's success in obtaining maximum value for its real property assets. However, these individuals could develop conflicts of interest, particularly related to the Lease Agreement or the provisions of the Distribution Agreement. Such conflicts of interest could have a material adverse affect on the results of operations and financial condition of the Company. 4. Relations with Third Parties. Triad will supply the Company with certain legal and accounting help through Triad's legal and accounting personnel. The Company will be required to reimburse Triad for the cost of providing these services. However, unlike customary practice in third party professional service relationships, Triad will have no liability related to the services. Therefore, the Company may incur liability for which it would have no recourse. 5. Dual Representation of Triad and the Company. The primary agreements between Triad and the Company, including but not limited to the Lease Agreement and the Distribution Agreement, were not negotiated at arms' length and both Triad and the Company were represented by the same legal counsel at the time of entering into these agreements. Triad and the Company executed a Conflict Agreement related to these conflicts. The interests of CAC and its parent, as the future shareholders of Triad, were represented by separate legal counsel in the negotiation of these agreements. Consequently, the terms of such agreements may not be as favorable to the Company as they would have been if negotiated at arms' length. 13 14 RISKS RELATED TO THE SHARES. 1. Trading of Shares. Because all Shares have been owned by Triad and Management Corp., no trading market exists for the Shares. The Company has not applied, and has no present intention of applying, to any exchange or quotation service in order to obtain trading or quotation privileges for the Shares. Therefore, there is no assurance that an active market will develop for the trading of the Shares. There is likewise no assurance as to any price at which the Shares may trade at any future time. If an active market develops for the trading of the Shares, the Company believes that, due to the illiquid nature of the Property, the Shares may trade at a significant discount from their proportionate share of the fair market value of the Property. 2. Share Holder Rights Plan. The Company has adopted a Share Holder Rights Plan intended to achieve the highest value for all Share Holders in the event of an attempt to acquire control of the Company. The Share Holder Rights Plan may discourage certain buyers of the Shares, and therefore may reduce the volume of Shares trading at any time and/or the price of such Shares. There is no assurance that the Share Holder Rights Plan would not reduce the volume of Shares trading at any time and/or the price of such Shares. RISKS RELATED TO LACK OF OPERATING HISTORY Lack of Operating History. The business of the Company is to sell the Property as expeditiously as possible and in the meantime to own, operate and maintain it. Although certain executives of Management Corp. have some experience in the business relating to the Property, Management Corp. has no prior experience as a stand-alone business engaged in the real estate business. Further, the key executives of Management Corp. will not be devoting their full time or attention to the Company's business. The future success of the Company depends in large part on its ability to sell the Property and realize a profit. There can be no assurance that the Company will be able to sell the Property or realize a profit and its inability to do so could have a material adverse effect on the financial condition of the Company and the ability of the Company to make distributions to Share Holders. 14 15 RELATIONSHIP BETWEEN TRIAD AND THE COMPANY In connection with the transfer of the Land and the Headquarters to the Company, Triad, 3055 Triad Dr. Corp., Management Corp. and the Company entered into the Distribution Agreement, which includes agreements with respect to services, indemnification, tax sharing and other matters. Because all Shares of the Company were then owned by Triad and Management Corp., the Distribution Agreement was not entered into on the basis of arm's length negotiations between the parties. See "Description of Distribution Agreement." Similarly, the Company and Triad entered into the Lease Amendment which includes certain agreements with respect to a shortening of the lease term, renegotiation of the annual rental rate and sublease rights. Because all Shares of the Company were then owned by Triad and Management Corp., the Lease Amendment was not entered into on the basis of arm's length negotiations between the parties. See "Description of Lease Agreement." In order to facilitate the management of the Company following the Contribution, for a period of one year Triad has agreed to provide (at no cost to the Company) at least two cubicles of office space and telephone and secretarial support to two employees of the Company and to give those employees access to such other office equipment as is reasonable and necessary. In addition, in order to assist the Company in meeting its reporting requirements under the Exchange Act and to conduct its real estate operations, Triad will provide the Company with administrative assistance from Triad's legal and accounting personnel who have experience with the particular matters. The Company shall reimburse Triad for the fully burdened hourly cost of providing these services. Triad shall have no liability to the Company arising out of the performance of these services. Triad and the Company have agreed that Larry D. McReynolds will act both as a facilities manager for Triad and as a development manager for the Company as further described in the Distribution Agreement (the "Property Manager"). At the time of the Distribution, the Property Manager will be actively employed by Triad for fifty percent of his time and by the Company for fifty percent of his time. Effective upon the Contribution, the Company has agreed in the Distribution Agreement to indemnify Triad against any claims relating to "Environmental Costs and Liabilities" (as defined in the Distribution Agreement) associated with the Property prior to the Distribution. Subject to certain limitations, the Company has also agreed in the Distribution Agreement to indemnify Triad against certain taxes arising from, or relating to, among other things, any sale of the Property after October 17, 1996, the Company, the formation of the Company, the transfer by Triad or any affiliate of Triad of the Property to the Company, the assumption or refinancing of any liabilities with respect to the Property and the sale, exchange or distribution of interests in the Company by Triad. James R. Porter serves on the board of Triad and continues to be employed by Triad as a senior officer while he serves as a member of the Management Corp. board and the Advisory Board of the Company. William W. Stevens serves as a member of the Management Corp. board and the Advisory Board of the Company. Stanley F. Marquis is employed by Triad as a senior officer and serves as a member of the Advisory Board of the Company. Larry D. McReynolds is the facilities manager for Triad and also serves as the President of the Company and is in charge of its day to day operations. 15 16 Messrs. Porter, Stevens, Marquis and McReynolds are presently serving or are employed in the above positions and may continue to do so for an indefinite period of time. While the Company believes that these people with their extensive knowledge of the Company's business will be important to its success in obtaining maximum value for its real property assets, conflicts of interest could develop, particularly related to the Lease Agreement or the provisions of the Distribution Agreement. These potential conflicts arise from the loyalties owed by the same person acting as a corporate fiduciary for two different companies, under circumstances where the two companies may have adverse interests. Where such conflicts arise, it is expected that any of the foregoing persons who has a conflict will refrain from consideration of and voting on any such matter. DESCRIPTION OF DISTRIBUTION AGREEMENT The following is a summary of certain terms of the Distribution Agreement. This summary is not a complete description of the terms and conditions and is qualified in its entirety by reference to the Distribution Agreement, a copy of which without exhibits is attached as Exhibit A. CONTRIBUTIONS TO THE COMPANY On February 27, 1997 (the "Contribution Date") Triad transferred to the Company, as a contribution, subject to all title defects, objections, liens, pledges, claims, rights of first refusal, options, changes, security interests, mortgages, or other encumbrances of any nature (collectively, "Encumbrances") including but not limited to a first deed of trust securing indebtedness in the approximate amount of $9,749,000 at December 31, 1996 and bonded indebtedness in the approximate amount of $9,228,000 at December 31, 1996, the Land and the Headquarters, and all of the assets associated therewith (but not promissory notes received in sales of property that occurred prior to October 17, 1996), and including, without limitation, all right, title and interest of Triad in (i) all proceeds arising out of sales of the Land after October 17, 1996, and (ii) all rights to refunds and reimbursements from the City of Livermore, California or other governmental agency or utility for improvements installed and paid for by Triad. Also on the Contribution Date, Management Corp. transferred to the Company, as a contribution, its promissory note in the amount of $142,440.30. In conjunction with the contribution of the Property, the Company assumed the following liabilities related to the Property and the Distribution: (i) all indebtedness of Triad or 3055 Triad Dr. Corp. secured, in whole or in part, by any of the Property, (ii) all costs and expenses solely attributable to the transactions related to the Distribution, whether before or after the consummation of the Offer and (iii) certain other liabilities set forth in the Distribution Agreement. In exchange for their respective contributions, Triad and Management Corp. became the initial members of the Company. Triad received Shares in the Company in proportion to the value of the Property as shown in the Appraisal Report (as defined herein) plus certain additional assets, less the dollar amount of any liens against the Property. Management Corp. received Shares in proportion to the face amount of its promissory note to the Company. Triad received 99% of the Shares issued by the Company and Management Corp. received 1% of the Shares issued by the Company. DISTRIBUTION OF SHARES. A Form 10-SB Registration Statement filed by the Company with the Commission having been declared effective, Triad is distributing its Shares to the Distributees together with copies of this Information 16 17 Statement. The distributions of the Shares to the Distributees will be in the form of a dividend from Triad. INDEMNITIES. Effective upon the Contribution, the Company has agreed in the Distribution Agreement to indemnify Triad against any claims relating to "Environmental Costs and Liabilities" (as defined in the Distribution Agreement) associated with the Land or the Headquarters prior to the Distribution. Subject to certain limitations, the Company has also agreed in the Distribution Agreement to indemnify Triad against certain taxes arising from, or relating to, among other things, any sale of the Property after October 17, 1996, the Company, the formation of the Company, the transfer by Triad or any affiliate of Triad of the Property to the Company, the assumption or refinancing of any liabilities with respect to the Property and the sale, exchange or distribution of interests in the Company by Triad. NET WORTH COVENANT. To support its ability to fund the above-referenced indemnity, the Company has agreed to maintain a net worth of at least $2,350,000, such net worth to be calculated based upon the most recent appraised value of the Company's then existing real property assets, until 60 days after the expiration of all statutes of limitation related to the assessment of any tax deficiency related to the transactions contemplated by the Distribution Agreement. The Company estimates that the duration of such time period will be approximately four years. Triad may cause the real property to be appraised at any time and the Company must pay one half of the expense if the most current calculation of net worth is less than $4,000,000. POST-CONTRIBUTION CONTRACT SERVICES AGREEMENT. Triad has agreed to supply certain office space, secretarial support and legal and accounting support as describe above in "Relationship Between Triad and the Company." DESCRIPTION OF LEASE AGREEMENT The following is a summary of certain terms of the Lease Agreement, as amended by the Lease Amendment. This summary is not a complete description of the terms and conditions thereof and is qualified in its entirety by reference to the Lease Agreement and the Lease Amendment, copies of which are attached as Exhibit B and Exhibit C, respectively. PARTIES AND TERM. The Lease Agreement was entered into as of August 1, 1988 by and between 3055 Triad Dr. Corp., as landlord, and Triad, as tenant, and pertains to a lease of the Headquarters. By virtue of the Lease Amendment, the Company has succeeded 3055 Triad Dr. Corp. as landlord. The primary term provided for in the Lease Agreement expires on February 27, 2002, subject to earlier termination in accordance with the terms thereof. Triad has an option to renew the lease for one additional term of five years. RENT. The Lease Agreement calls for an annual rent of $2,505,720, payable monthly in advance in twelve equal installments, for the two year period from February 27, 1997 through February 26, 1999. The rental rate for the remaining three years of the primary term of the Lease Agreement is to be in an amount equal to the prevailing market rate in the immediate Alameda County market area as of the end of the second year of the primary term. The rental rate for the remaining three years of the primary term cannot be less than the rental rate for the first two years of the primary term and no greater than 120% of that rental rate. Payments under the Lease Agreement are on a "triple net lease" basis, free of any impositions and without abatement, deduction, or set-off. The tenant is required to pay all impositions (e.g., taxes, assessments, maintenance, insurance, repairs, security, utilities, water and sewer charges, excises, levies, etc.) in addition to the annual rent. 17 18 USE OF PROPERTY. Triad accepted and occupies the Property on an "as-is, where-is" basis without any representation or warranty, express or implied in fact or by law, and without recourse to the landlord (the Company) as to the physical nature, condition or usability of the Property. As landlord, the Company is not required to furnish any services or facilities or to make any repairs or alterations in or to the Property, it being understood that Triad assumed the full and sole responsibility for the condition, operation, repair, maintenance and management of the Property. Triad uses the Property for general office purposes as its corporate headquarters, including manufacturing and warehousing uses incidental thereto. ASSIGNMENT. Triad may not assign, transfer, pledge, mortgage or sublease the Property without the prior written consent of the Company. EVENTS OF DEFAULT. Triad may be deemed to be in default under the Lease Agreement in any of the following circumstances (each an "Event of Default"): (i) whenever Triad is in default in the payment of any installment of rent or any other sum payable to the Company, and if such default is not cured within ten (10) days after the Company notifies Triad of such default, (ii) whenever Triad fails in the keeping or performance of any covenant, agreement, term or provision contained in the Lease Agreement to be kept or performed by it and shall fail to commence to take steps (subject to unavoidable delay) to remedy the same within thirty (30) days after the Company notifies Triad of the same, or having commenced shall fail to remedy the same within ninety (90) days, (iii) whenever Triad becomes subject to a decree by a court having jurisdiction over it in an involuntary case under the federal bankruptcy laws and such situation continues and is not remedied by Triad within one hundred twenty (120) days after the entering of such decree and (iv) whenever Triad commences a voluntary case under the federal bankruptcy laws or fails generally to pay its debts when they come due. At the time of any Event of Default, the Company may, at its option, in addition to all other rights and remedies available to it under law or equity, do any one or more of the following: (i) terminate the Lease Agreement, in which case Triad must surrender possession of the Property to the Company, or (ii) enter upon and take possession of the Property and remove Triad from possession, with or without terminating the Lease Agreement. DESCRIPTION OF PROPERTIES OF THE COMPANY The Property consists of approximately 303 acres of unimproved land and the 220,000 (approximate) square feet of office contained in three separate buildings situated on 15 acres of land occupied by Triad. The Property is located on the north side of Interstate 580 in the City of Livermore, California. The City of Livermore is located approximately 40 miles southeast of San Francisco. All of the buildings are of concrete tilt-up construction and were built in 1987. Building G is a two story office building containing approximately 70,986 square feet. Building K is a 74,064 square foot single story research and development building and Building F is a single story industrial flex building of 74,768 square feet. The office build-out in Buildings K and F is 90 percent and 40 percent, respectively. The Company's management believes that the Headquarters is adquately insured. There are 689 parking spaces associated with the Headquarters. The parking area is landscaped and the areas between the buildings are improved as open courtyards, fenced with iron gates for controlled access. Although the buildings were primarily designed for owner-occupancy, they were also designed to be flexible to allow multi-tenant occupancy. 18 19 The 303 acres of vacant land is divided into land use categories of residential, industrial/office flex, retail and open space. The residential portion consists of three lots comprising approximately 28.1 useable acres. The industrial/office flex portion is divided into eight lots and contains approximately 114.6 acres. The retail/commercial portion is divided into ten lots and contains approximately 35.9 useable acres. The total useable area for these lots is approximately 141 acres. In addition, there are two lots, one of approximately 112 acres designated for open space or agricultural use and one lot of 4.54 acres dedicated for transportation improvements. Finally, approximately 7.8 acres are to be developed as public roadways. Approximately half the required offsite improvements are in place, funded through a combination of assessment bonds and community facility bonds. The construction of the remaining offsite improvements are expected to be funded through additional community facility bonds, as further described below in the final paragraph of this section. Several of the vacant land sites are in escrow and most of the remaining sites are subject to a first right of refusal contract. Two residential lots, comprising 19.4 acres, are in escrow to be sold to a single purchaser for a total price of $2,900,000 plus current assessments and up to approximately $1,500,000 of future assessments on these lots and an adjacent lot. This transaction is subject to the satisfaction of several material conditions, and the closing is not assured. One 19.3 acre lot is subject to a seven day right of first offer held by Lincoln Property Co., starting at $3.99 per square foot and increasing 5% per year, plus assessments. In addition, Lincoln Property Co. has the right of first offer on 8 lots plus the above mentioned lot. Finally, a previous purchaser of a lot holds a three year option, commencing September 1996, on 3.4 to 6 acres of land adjacent to the lot it owns. The option price is $3.60 per square foot plus assessments for two years, increasing to $5.50 for the third year. The Property is partially improved with infrastructure improvements, including curbs, gutters, storm drains and typical utilities. A community facilities bond issue was completed on March 24, 1997, the proceeds of which will fund the reimbursement to the Company of $2,050,000 for completed infrastructure and $3,700,000 for future infrastructure improvements. In addition, there are $7,000,000 of new bonds which are planned to be sold in the future to fund the remaining improvement required for completion of Triad Park. The current cost estimates for the required improvements indicate that the community facilities bond funding limits should be adequate to cover the expenses of the remaining items of improvement. However, design and engineering is not complete and there is a significant possibility that the actual cost of the improvements may be greater than estimated and may exceed the bond funding limit. Any shortfall in the bond funding will be borne by the Company or by purchasers of lots, which may have an adverse impact on the value of the Land. The remaining required improvements are scheduled to be completed by 2000. SUMMARY OF APPRAISAL REPORT ON PROPERTIES OF THE COMPANY The following is a brief summary of the contents of the Appraisal of: Triad Business Park, Livermore, California, prepared by Carneghi-Bautovich & Partners, Inc., dated November 18, 1996, as amended and qualified in a letter dated February 18, 1997 (the "Appraisal Report"). This summary is not a complete description of and is qualified in its entirety by reference to the Appraisal Report, a copy of which is attached hereto as Exhibit D. 19 20 The Appraisal Report contains detailed research, and a market value appraisal, of the Property, and purports to utilize appropriate valuation methods in accordance with Uniform Standards of Professional Appraisal Practice. The Appraisal Report includes a survey of the local county and subject neighborhood, research and analysis of market trends, discussion of easements and zoning and other information specific to the Property. The Appraisal Report also contains a description of existing and proposed improvements, the appraisal methodology used and comparable building and land sales to which the Property was compared. Based on the research and analysis contained in the Appraisal Report and subject to the assumptions and limitations contained therein, the appraisers have opined that the cash equivalent market value of the fee simple and leased fee interest in the Property, in as-is condition, assuming sale of all of the Property in a single transaction, as of November 1, 1996, was $31,800,000. Taking into account the current outstanding balance on the first deed of trust of approximately $9,850,000 and the current outstanding balances of assessment district bonds which encumber the Land of approximately $9,500,000, less the proceeds from a post appraisal sale of $576,351, but anticipated reimbursement of the cost of improvements by the City of Livermore of approximately $2,000,000, the current market value of net equity in the Property (appraised value plus reimbursements less encumbrances) is approximately $14,103,000. BUSINESS OF THE COMPANY The Company intends to continue the efforts of Triad to liquidate its investment in the Property. In the meantime, the Company will own, operate, improve and maintain the Property. The Company may enter into joint ventures with third parties for the purpose of disposing of the Property if the Advisory Board determines that such arrangements are appropriate to the purposes of the Company. There can be no assurance that the Company will be successful in its efforts to dispose of the Property or that the Company will realize a profit from its activities. The Company will be subject to all of the market forces which impact the ownership and operation of real property, including market supply and demand, interest rates, local, regional and national economic conditions, local land use policies and restrictions, construction costs, competition from other sellers and landlords, and the effects of inflation (see "Risk Factors -- Real Estate Related Risks"). The Company is unable to predict the amount of time it will take to completely dispose of the Property and wind up the Company. Share Holders will generally receive distributions, if at all, at such times and in such amounts as the Advisory Board determines (see "Summary of Limited Liability Company Agreement -- Distributions"). MANAGEMENT OF THE COMPANY The manager of the Company (the "Manager") is Management Corp. The Manager will be responsible for management and control of the business of the Company, subject to certain required approvals of the Advisory Board. The Share Holders, in their capacity as Share Holders, may elect or vote to remove members of the Advisory Board but otherwise will not directly or indirectly participate in the management or operation of the Company or have actual or apparent authority to act for or bind the Company. The stock of Management Corp. is owned in equal shares by Richard C. Blum, James R. Porter and William W. Stevens, who have been or are members of the Board of Directors of Triad, are members of the Advisory Board, and are Share Holders. See "Holdings of Principal Share Holders and Security Holdings of Managing Member(s), Executive Officers and Advisory Board Members." 20 21 The Advisory Board will be comprised of not less than three and not more than five individuals. The initial members of the Advisory Board are Stanley F. Marquis, James R. Porter, William W. Stevens, and Martin W. Inderbitzen, all of whom have served since the inception of the Company, except for Mr. Inderbitzen, who joined the Advisory Board on March 26, 1997, with one vacancy which may be filled by action of the remaining members. In 1998 and every two years thereafter, the Share Holders will elect the members of the Advisory Board, with each Share being entitled to one vote. Advisory Board members may be removed by the Share Holders at any time, with or without cause, and Advisory Board members may resign. If a member of the Advisory Board is removed, the Share Holders may elect a new Advisory Board member to fill the vacancy. If an Advisory Board member resigns or otherwise ceases to be a member, other than by removal, the remaining members of the Advisory Board may fill the vacancy. The Advisory Board has the right to approve certain actions and/or transactions of the Company as described in the LLC Agreement (as defined herein) and defined as "Major Decisions." The Manager may not undertake actions or transactions denominated as Major Decisions unless the Advisory Board has approved the action or transaction. The Advisory Board may appoint officers of the Company. It is anticipated that the Company will employ Larry D. McReynolds to serve as the President. As such, Mr. McReynolds will be in charge of the day to day activities of the Company with many of the same duties he previously performed for Triad. Mr. McReynolds will split his time equally between the Company and as the facilities director for Triad. The following table sets forth certain information with respect to members of the Advisory Board and officers of the Company.
Name Age Position - ---- --- -------- Richard C. Blum 63 Board member of Manager Stanley F. Marquis 53 Advisory Board member James R. Porter 61 Advisory Board member; Vice-President and Board member of Manager William W. Stevens 65 Advisory Board member; Chairman and Board member of Manager Martin W. Inderbitzen 45 Advisory Board member Larry D. McReynolds 51 President of Company
Mr. Blum was a director of Triad from 1992 to 1997. He is President and Chairman of Richard C. Blum & Associates, L.P. He is also a director of Northwest Airlines Corporation, URS Corporation and National Education Corporation. Mr. Marquis is Vice President, Finance, Corporate Secretary and Treasurer of Triad. He joined Triad in January 1980 as Director of Triad Systems Financial Corporation. In August 1983 he was elected President, Triad Systems Financial Corporation, a position he continues to occupy, and in September 1987 he was elected Treasurer of Triad. In December 1994 he was promoted to Vice President, Finance, Chief Financial Officer and became Corporate Secretary. Mr. Porter is the Chairman of the Board of Triad. He was elected as a director of Triad in September, 1985 and was its President and Chief Executive Officer from September, 1985 until the consummation of the Offer. He is also a director of Silicon Valley Bank and Brock International, Inc. 21 22 Mr. Stevens was Chairman of the Board of Triad from 1972 until the consummation of the Offer. He is the founder of Triad and was its President and Chief Executive Officer from its inception until September 1985. Mr. Inderbitzen has been a member of the State Bar of California since 1976, maintaining a general civil law practice since that time. His practice has included the areas of title, easement and real estate transactions including the negotiation and drafting of commercial leases, general contractor and sub-contractor agreements. His practice has emphasized land use entitlement and zoning work almost exclusively for the past 10 years. Mr. McReynolds joined Triad in September 1984 as its Manager, Facilities and became Manager, Real Estate and Facilities in June 1992. In July 1994 he also assumed responsibility for Office Services. Prior to joining Triad, he served as Director, Facilities and Engineering Services for Syva Company from May 1980 to September 1984. COMPENSATION OF MANAGEMENT The Manager will be entitled to receive an annual fee from the Company equal to 2% of the net income, if any, allocated to the Manager (in its capacity as a Share Holder) for the preceding fiscal year. This fee is intended to compensate the Manager for the additional California corporate income tax it will pay on its share of the Company's income. The LLC Agreement permits the payment of additional compensation to the Manager, with the approval of the Advisory Board. No additional compensation has been approved and none is contemplated at the present time. Members of the Advisory Board will be entitled to receive reimbursement of expenses and an annual retainer fee of $10,000, payable quarterly, plus a fee of $750 for each meeting and $250 for each telephonic meeting of the Advisory Board which they attend, as compensation for their services as members of the Advisory Board. The following table sets forth the compensation of the President of the Company for 1996 while serving in a comparable position to that of President. There are no other executive officers of the Company. SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary Bonus - ------------------------------ ---- -------- ------- Larry D. McReynolds, President (1) 1996 $108,000 $37,116
(1) Mr. McReynolds' compensation in a comparable position for the year 1996 included a management incentive bonus of $7,116 and an incentive bonus for real estate sales of $30,000. Officers and employees of the Company shall be entitled to receive compensation as determined by the Advisory Board. Future compensation is expected to be structured with salary and incentive bonuses structured to be compatible with similar job positions. All of Mr. McReynolds' salary and management bonus will be paid by Triad while the Company will reimburse Triad for 50% of his salary and will pay him 100% of any earned bonus based on real estate sales. 22 23 TRANSACTIONS WITH INTERESTED PARTIES To avoid subjecting the Share Holders to employment taxes as member/managers, among other reasons, Triad decided that the Company needed to have a manager. Stevens, Porter and Blum agreed to form a company (Management Corp.) to serve as the Manager of the Company. In order to allow the Manager to own 1% of the Shares and yet have the direct and indirect ownership of Shares by Stevens, Porter and Blum remain unchanged, the Company has agreed to redeem a number of Shares held individually by Stevens, Porter and Blum equal to approximately 1% of the Shares at the same valuation ($142,440.30) used to calculate the 1% of the Shares acquired by the Management Corp. (see "Plan of Distribution -- Distribution of Shares"). After giving effect to the redemption, Stevens, Porter and Blum will each own a number of Shares directly and indirectly through their ownership of Management Corp. equal to the number of shares of stock each held in Triad on the Distribution Record Date. HOLDINGS OF PRINCIPAL SHARE HOLDERS AND SECURITY HOLDINGS OF MANAGING MEMBER(S), EXECUTIVE OFFICERS AND ADVISORY BOARD MEMBERS The following table sets forth certain information, as of immediately after the Distribution (based upon holdings of Common Stock as of February 26, 1997), with respect to the beneficial ownership of Shares by (i) all persons expected by the Company to become the beneficial owners of more than 5% of the outstanding Shares upon completion of the Distribution, (ii) each director of the Company, (iii) the President of the Company, and (iv) all executive officers and directors of the Company as a group.
Amount and Nature of Name and Address of Beneficial Ownership Beneficial Owner of Shares Percent of Class(1) - ---------------------------------- --------------------- ------------------ Richard C. Blum 2,012,158 (2) 10.2% 909 Montgomery Street, Suite 400 San Francisco, CA 94133 Elliott Associates LP 1,257,260 6.4% 712 Fifth Avenue New York, NY 10019 Pioneering Management Corporation 1,237,950 6.3% 60 State Street Boston, MA 02109 Gabelli Funds, Inc. 1,031,200 (3) 5.2% One Corporate Center Rye, New York 10580-1434 James R. Porter 928,200 4.7% 3055 Triad Drive Livermore, CA 94550 William W. Stevens 423,690 (4) 2.1% 3055 Triad Drive Livermore, CA 94550
23 24 Stanley F. Marquis 136,824 0.07% 3055 Triad Drive Livermore, CA 94550 Larry D. McReynolds 18,317 0.009% 3055 Triad Drive Livermore, CA 94550 Martin W. Inderbitzen 0 0% 3055 Triad Drive Livermore, CA 94550 All Executive Officers and Directors as a Group 3,519,189 17.9%
_______________ (1) Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all Shares shown as beneficially owned by them, subject to community property laws, where applicable. (2) Richard C. Blum is a controlling person and Chairman of Richard C. Blum & Associates Inc. ("Inc."), which is the general partner of Richard C. Blum & Associates LP ("LP"). These Shares are directly owned by (a) three limited partnerships for which LP is the general partner (BK Capital Partners II, 111,111 Shares; BK Capital Partners III, 500,000 Shares; and BK Capital Partners IV, 275,936 Shares) and (b) a managed account over which LP has voting and investment discretion (The Common Fund, 1,111,111 Shares). Richard C. Blum disclaims beneficial ownership of these securities except to the extent of his pecuniary interest thereof. (3) Includes 205,000 Shares held by GAMCO Investors, Inc., 169,900 Shares held by Gabelli Performance Partnership L.P. and 656,300 Shares held by Gabelli Associates Fund. (4) Includes 423,690 Shares held as tenant-in-common with Virda J. Stevens. DESCRIPTION OF SHARES The following description of the Shares and certain provisions of the Company's Limited Liability Company Agreement (the "LLC Agreement"). This description is not intended to be complete and is qualified in its entirety by reference to the LLC Agreement, a copy of which is attached as Exhibit E (see "Summary of Limited Liability Company Agreement"). THE SHARES The Shares represent membership interests in the Company, which entitle the Share Holders to share in the income, gains, losses, deductions, credit, or similar items of, and to receive distributions from, the Company, the right to vote on certain specified matters, and the right to information concerning the business and affairs of the Company. No Share Holder shall have any obligation to contribute additional capital to the Company. For a description of the rights and privileges of Share Holders under the LLC Agreement, see "Summary of Limited Liability Company Agreement." 24 25 TRANSFER AGENT AND REGISTRAR ________________________ will serve as registrar and transfer agent (the "Transfer Agent") for the Shares and will receive a fee from the Company for serving in those capacities. All fees charged by the Transfer Agent for transfers of Shares will be borne by the Company and not by Share Holders, except that fees similar to those customarily paid by stockholders for surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges, special charges for services requested by a Share Holder and other similar fees or charges will be borne by the affected Share Holder. There will be no charge to Share Holders for disbursements of the Company's cash distributions, if any. The Company will indemnify the Transfer Agent, its agents and their respective agents and employees against all claims and losses that may arise out of acts performed or omitted in respect of its activities as Transfer Agent, except for any claim for any liability due to any gross negligence, bad faith or intentional misconduct of the indemnified person or entity. TRANSFER OF SHARES Transfers of Shares will be recorded by the Transfer Agent and recognized by the Company when the transferee executes and delivers a Transfer Application (the form of which is set forth as Exhibit F to this information statement and which is also set forth on the reverse side of the certificates representing the Shares) and delivers the certificate representing the Shares to be transferred, duly endorsed for transfer. Shares are securities and are transferable in accordance with the laws governing transfer of securities. A purchaser or transferee of Shares becomes a member of the Company when the transfer of the Shares is recorded by the Transfer Agent. SUMMARY OF LIMITED LIABILITY COMPANY AGREEMENT The following is a summary of the material provisions of the LLC Agreement. This summary is not intended to be complete and is qualified in its entirety by reference to the LLC Agreement, a copy of which is attached as Exhibit E. Certain provisions of the LLC Agreement are summarized elsewhere in this Information Statement under various headings. With regard to management of the Company, see "Management of the Company." With regard to allocations of income and loss, see "Tax Considerations." Share Holders are urged to review those sections of this Information Statement and the LLC Agreement carefully. ORGANIZATION AND DURATION The Company was organized as a Delaware limited liability company on February 10, 1997. The initial Share Holders of the Company were Triad and Management Corp. Following the Distribution, the Distributees and 3055 Management Corp. will be the Share Holders of the Company. The Company will dissolve upon the earlier of the liquidation of all of the Property or the vote of a majority in interest of the Share Holders to dissolve the Company. PURPOSE The purpose of the Company is to liquidate the Property, and in the course of liquidating the Property to hold, maintain, operate, develop, improve, subdivide, lease, finance, refinance, offer for sale and sell the Property and any portion of the Property, and to do all other acts or things that may be necessary or appropriate to accomplish the Company's purpose, including entering into joint venture arrangements with third parties, subject to any required Advisory Board approval. 25 26 LIMITED LIABILITY The liability of a member of a limited liability company is equivalent to the liability of a stockholder of a corporation -- it is limited to the member's share of the assets of the company. Thus, a Share Holder may lose his or her investment in the Company, but generally will not be liable for the obligations of the Company. Under Delaware law, a Share Holder who receives a distribution knowing that the distribution causes the Company's liabilities to exceed its assets is liable to the Company to return the distribution for three years from the date of the distribution. CAPITALIZATION OF THE COMPANY On February 27, 1997, Triad contributed the Property, certain receivables and $595,215 in cash to the Company. Concurrently, Management Corp. contributed its promissory note in the amount of $142,440.30 to the Company. The Management Corp. promissory note is due and payable on or before the fifth (5th) calendar day following the date of the Distribution. At the time the Management Corp. promissory note is paid, the Company will redeem from the Management Corp. stockholders a number of Shares that is equal, in the aggregate, to the Shares owned by Management Corp., at the issuance price of the Shares. The purpose of the redemption is to maintain the same relative ownership of Shares as existed among the Triad stockholders on the Distribution Record Date. Consequently, the total capitalization of the Company will be equal to the Triad contributions. No Share Holder has any obligation to make additional contributions to the Company. If the Company requires additional capital, it may issue additional membership interests for such prices and on such terms as the Advisory Board determines. Any such additional membership interests could have priority over the Shares as to distributions, voting rights or participation in management of the Company. DISTRIBUTIONS In general, the Company will make cash distributions to the Share Holders at such times and in such amounts as the Advisory Board determines. To the extent the Company has sufficient cash, the Company will distribute to the Share Holders an amount of cash equal to the Company's taxable income multiplied by the highest federal marginal tax rate imposed on individual taxpayers. There can be no assurance that the Company will make any distributions to the Share Holders or that any distributions will be adequate to enable the Share Holders to pay income taxes due on their shares of Company taxable income. In particular, the Distribution Agreement requires the Company to maintain a minimum net worth of $2,350,000 to ensure that the Company is able to satisfy the indemnities given by the Company to Triad under the terms of the Distribution Agreement. The limitations of the Distribution Agreement will inhibit the Company's ability to make distributions to the Share Holders. MEETINGS; VOTING Meetings of Share Holders will be held biannually, beginning in 1998. Under the Company's Bylaws, each Share is entitled to one vote upon each matter submitted to a vote at a meeting of Share Holders. At each biannual meeting, Share Holders will elect the members of the Advisory Board. The Share Holders shall also have the right to vote on (i) amendments to the LLC Agreement (except that no amendment may obligate a Share Holder to contribute additional capital to the Company unless the 26 27 Share Holder has approved the amendment and except to the limited extent that the Manager may amend the LLC Agreement), (ii) any merger of the Company with or into another business entity, and (iii) the dissolution of the Company. The Manager or the Advisory Board may submit other matters to the vote of Share Holders, but they are not obligated to submit any other matters to the vote of Share Holders. DISPUTE RESOLUTION The LLC Agreement provides that disputes between a Share Holder and the Company, or between the Manager and the Company must be submitted to nonbinding mediation before the dispute may be litigated, except to the extent litigation is necessary for statute of limitations purposes or to seek injunctive or other provisional relief to avoid irreparable damage or to preserve the status quo. Mediation is to be conducted in Alameda County, California and any litigation must be brought in the state courts in Alameda County or in the United States District Court in the Northern District of California. The Company will bear the cost of the mediator's fees and expenses, but the parties must pay their own attorneys' fees and any other related costs of mediation or litigation. RIGHTS PLAN The Company has entered into a Rights Agreement. The following is a brief summary of the Rights Agreement and is not intended to be complete and is qualified in its entirety by reference to the Rights Agreement, a copy of which is attached as Exhibit G. The Rights Agreement is similar to the rights plan previously adopted by Triad. It provides that each Share Holder will have the right to purchase additional Shares upon the commencement of a tender offer or if any person acquires ownership of 24% or more of the outstanding Shares, unless the Advisory Board has approved the tender offer or the acquisition. A Share Holder will have the right to purchase a number of additional Shares equal to (i) the product of the number of Shares he owns multiplied by $0.63 per Share, (ii) divided by 50% of the then current market price for the Shares. The Rights Agreement will terminate ten years after it is adopted. TAX CONSIDERATIONS This section is a summary of certain federal income tax considerations that may be relevant to Share Holders with respect to ownership and disposition of Shares. This section is based upon current provisions of the Internal Revenue Code of 1986, as amended ("Code"), existing and proposed regulations thereunder and current administrative rulings and court decisions, all of which are subject to change. Subsequent changes in such authorities may cause the tax consequences to vary substantially from the consequences described below. For a general discussion regarding tax consequences of receiving shares of stock as a dividend, see Section 4 of the Offer to Purchase, filed by CAC and CCI with the Commission on October 23, 1996. No attempt has been made in the following discussion to comment on all federal income tax matters affecting the Company or the Share Holders with respect to ownership and disposition of Shares. Moreover, the discussion focuses on Share Holders who are individual citizens or residents of the United States and has only limited application to corporations, estates, trusts, nonresident aliens or other Share Holders subject to specialized tax treatment (such as tax-exempt organizations, foreign persons, employee benefit plans, REITs or mutual funds). Accordingly, each Share Holder is advised to, and should consult, and should depend upon, the Share Holder's own tax advisor in analyzing the federal, state, local and foreign tax consequences of the ownership or disposition of Shares. 27 28 No ruling has been or will be requested from the Internal Revenue Service (the "IRS") with respect to classification of the Company as a partnership for federal income tax purposes, whether the Company's real estate activities will generate "qualifying income" under Section 7704 of the Code, or any other matter affecting the Company or Share Holders. Thus, no assurance can be provided that the statements set forth in this discussion would be sustained by a court if contested by the IRS. Furthermore, no assurance can be given that the treatment of the Company or the Share Holders will not be significantly modified by future legislative or administrative changes or court decisions. Any such modification may or may not be retroactively applied. PARTNERSHIP STATUS Limited Liability Company Treated as Partnership The tax benefits of partnership status will be available only if the Company is classified as a partnership for federal income tax purposes and not as an association taxable as a corporation. A limited liability company generally is treated as a partnership for federal income tax purposes. A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner is required to take into account the partner's allocable share of items of income, gain, loss and deduction of the partnership in computing the partner's federal income tax liability, regardless of whether cash distributions are made. Distributions by a partnership to a partner are generally not taxable unless the amount of a cash distribution exceeds the partner's adjusted basis in the partner's partnership interest. Effective January 1, 1997, the IRS issued new regulations for determining whether an entity will be taxed as a partnership or as a corporation. Unlike the prior regulations which made the determination based on the presence or absence of certain corporate characteristics, the new regulations permit certain business entities to elect to be taxed as partnerships. Under the new Regulations, a business entity that is formed under a statute which describes or refers to the entity as incorporated, or as a corporation, body corporate or joint-stock company, an insurance company, an FDIC-insured banking entity, or an entity owned by a state or political subdivision, will be a corporation for federal income tax purposes. Other business entities having at least two members will be taxed as partnerships, unless the entity affirmatively elects to be taxed as a corporation. The Company was not formed under a statute which refers to it as incorporated, a corporation, a body corporate or a joint stock company, nor is the Company an insurance company or a bank. The Company has two or more members and the Company will not elect to be taxed as a corporation. Therefore, it is anticipated that the Company will be classified as a partnership for federal income tax purposes under the new Regulations. There can be no assurance, however, that the Regulations will not be revoked, revised or overruled by administrative, judicial or legislative action in a manner which causes the Company to be taxed as a corporation. PUBLICLY TRADED PARTNERSHIPS Section 7704 of the Code provides that publicly-traded partnerships will, as a general rule, be taxed as corporations. In general, the Company is potentially subject to Section 7704 of the Code if interests in the Company are traded on an established securities market or are readily tradable on a secondary securities market (or the substantial equivalent thereof). However, an exception (the "Qualifying Income Exception") exists with respect to publicly-traded partnerships of which 90% or 28 29 more of the gross income for every taxable year consists of "qualifying income." Qualifying income includes interest, dividends, real property rents, and gain from the sale or other disposition of real property (including property held primarily for sale to customers in the ordinary course of a trade or business). The Company anticipates that at least 90% of its gross income will constitute qualifying income. If the Company fails to satisfy the Qualifying Income Exception (other than a failure which is determined by the IRS to be inadvertent and which is cured within a reasonable time after discovery) and interests in the Company are publicly traded for purposes of Section 7704 of the Code, the Company will be treated as if it had transferred all of its assets (subject to liabilities) to a newly formed corporation (on the first day of the year in which it fails to meet the Qualifying Income Exception) in return for stock in that corporation, and then distributed that stock to the Share Holders in liquidation of their interests in the Company. This contribution and liquidation should be tax-free to Share Holders and the Company, so long as the Company, at that time, does not have liabilities in excess of the basis of its assets. Thereafter, the Company would be treated as a corporation for federal income tax purposes. If the Company were treated as a corporation for federal income tax purposes in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, its items of income, gain, loss and deduction would be reflected only on its tax return rather than being passed through to the Share Holders, and its net income would be taxed to the Company at corporate rates. In addition, any distribution made to a Share Holder would be treated as either taxable dividend income (to the extent of the Company's current or accumulated earnings and profits), a nontaxable return of capital (to the extent of the Share Holder's adjusted tax basis in the Share Holder's Shares) or taxable capital gain (after the Share Holder's adjusted tax basis in the Shares is reduced to zero). Accordingly, treatment of the Company as a corporation likely would result in a material reduction in a Share Holder's cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the Shares. ___________ The following discussion is based upon the assumption that the Company will be classified as a partnership for federal income tax purposes. TAX CONSEQUENCES OF SHARE OWNERSHIP Flow-Through of Taxable Income No federal income tax will be paid by the Company. Instead, each Share Holder will be required to report on the Share Holder's income tax return their allocable share of the income, gains, losses and deductions of the Company without regard to whether corresponding cash distributions are received by such Share Holder. Consequently, a Share Holder may be allocated income from the Company even if he has not received a cash distribution. Each Share Holder will be required to include in income the Share Holder's allocable share of Company income, gain, loss and deduction for the taxable year of the Company ending with or within the taxable year of the Share Holder. Treatment of Company Distributions Distributions by the Company to a Share Holder generally will not be taxable to the Share Holder for federal income tax purposes to the extent of the Share Holder's basis in their Shares 29 30 immediately before the distribution. Cash distributions in excess of a Share Holder's basis generally will be considered to be gain from the sale or exchange of the Shares, taxable in accordance with the rules described under "Disposition of Shares" below. Any reduction in a Share Holder's share of the Company's liabilities for which no Share Holder bears the economic risk of loss ("nonrecourse liabilities") will be treated as a distribution of cash to that Share Holder. Basis of Shares A Share Holder's initial basis for the Share Holder's Shares will be the cost of the Shares plus the Share Holder's share of the Company's liabilities, for which no member of the Company has personal liability. For Shares received in the Distribution, a Share Holder's "cost" of the Share Holder's Shares will be the fair market value of the Shares at the time of the Distribution. The basis of the Shares will be increased by the Share Holder's share of Company income and by any increases in the Share Holder's share of Company nonrecourse liabilities. That basis will be reduced (but not below zero) by distributions from the Company, by the Share Holder's share of Company losses, by any decrease in the Share Holder's share of Company nonrecourse liabilities and by the Share Holder's share of expenditures of the Company that are not deductible in computing taxable income and are not required to be capitalized. Limitations on Deductibility of Company Losses The deduction by a Share Holder of the Share Holder's share of Company losses will be limited to the tax basis in the Share Holder's Shares and, in the case of an individual Share Holder or a closely-held corporate Share Holder (if more than 50% in the value of its stock is owned directly or indirectly by five or fewer individuals or certain tax-exempt organizations), to the amount which the Share Holder is considered to be "at risk" with respect to the Company's activities, if that is less than the Share Holder's basis. A Share Holder must recapture losses deducted in previous years to the extent that Company distributions cause the Share Holder's at risk amount to be less than zero at the end of any taxable year. Losses disallowed to a Share Holder or recaptured as a result of these limitations will carry forward and will be allowable to the extent that the Share Holder's basis or at risk amount (whichever is the limiting factor) is subsequently increased. Upon the taxable disposition of a Share, any gain recognized by a Share Holder can be offset by losses that were previously suspended by the at risk limitation but may not be offset by losses suspended by the basis limitation. Any excess loss (above such gain) previously suspended by the at risk or basis limitations is no longer deductible. In general, a Share Holder will be at risk to the extent of the tax basis of the Share Holder's Shares, excluding any portion of that basis attributable to the Share Holder's share of Company nonrecourse liabilities. A Share Holder's at risk amount will increase or decrease as the basis of the Share Holder's Shares increases or decreases (other than basis increases or decreases attributable to increases or decreases in the Share Holder's share of Company nonrecourse liabilities). The passive loss limitations generally provide that individuals, estates, trusts and certain closely-held corporations and personal service corporations can deduct losses from passive activities (generally, activities in which the taxpayer does not materially participate) only to the extent of the taxpayer's income from those passive activities. The passive loss limitations are applied separately with respect to each publicly-traded partnership. Consequently, assuming the Company is publicly traded for purposes of the passive loss rules, any passive losses generated by the Company will only be available to offset future income generated by the Company and will not be available to offset income from other passive activities or investments (including other publicly-traded partnerships), or salary or active business 30 31 income. Passive losses which are not deductible because they exceed a Share Holder's income generated by the Company may be deducted in full when the Share Holder disposes of the Share Holder's entire investment in the Company in a fully taxable transaction to an unrelated party. The passive activity loss rules are applied after other applicable limitations on deductions such as the at risk rules and the basis limitation. Tax-Exempt Organizations and Certain Other Share Holders Ownership of Shares by employee benefit plans, other tax-exempt organizations, nonresident aliens, foreign corporations, other foreign persons and regulated investment companies raises issues unique to such persons and, as described below, may have substantially adverse tax consequences. Employee benefit plans and most other organizations exempt from federal income tax (including individual retirement accounts and other retirement plans) are subject to federal income tax on unrelated business taxable income ("UBTI"). A substantial portion of the taxable income derived by such an organization from the ownership of Shares will be UBTI and thus will be taxable to such a Share Holder. A regulated investment company or "mutual fund" is required to derive 90% or more of its gross income from interest, dividends, gains from the sale of stocks or securities or foreign currency or certain related sources. It is not anticipated that any significant amount of the Company's gross income will include those types of income. Non-resident aliens and foreign corporations, trusts or estates which hold Shares will be considered to be engaged in business in the United States on account of ownership of Shares. As a consequence, they will be required to file federal tax returns in respect of their share of Company income, gain, loss or deduction and pay federal income tax at regular rates on any net income or gain. Generally, a partnership is required to pay a withholding tax on the portion of the partnership's income which is effectively connected with the conduct of a United States trade or business and which is allocable to the foreign partners, regardless of whether any actual distributions have been made to such partners. However, under rules applicable to publicly-traded partnerships, the Company will withhold amounts (currently at the rate of 39.6%) on actual cash distributions made to foreign Share Holders. Each foreign Share Holder must obtain a taxpayer identification number from the IRS and submit that number to the Transfer Agent of the Company on a Form W-8 in order to obtain credit for the taxes withheld. Because a foreign corporation which owns Shares will be treated as engaged in a United States trade or business, such a corporation may be subject to United States branch profits tax at a rate of 30%, in addition to regular federal income tax, on its allocable share of Company income and gain (as adjusted for changes in the foreign corporation's "U.S. net equity") which are effectively connected with the conduct of a United States trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States and the country with respect to which the foreign corporate Share Holder is a "qualified resident." In addition, such a Share Holder is subject to special information reporting requirements under Section 6038C of the Code. A foreign Share Holder will not be taxed upon the disposition of a Share if that foreign Share Holder has held less than 5% in value of the Shares during the five-year period ending on the date of the disposition and if the Shares are regularly traded on an established securities market at the time of the disposition (See "Risk Factors -- Risks Related to the Shares, Trading of Shares"). A foreign Share Holder who holds more than 5% in value of the Shares will be subject to the tax and withholding 31 32 requirements of the Foreign Investment in U.S. Real Property Tax Act upon disposition of such Share Holder's Shares. ALLOCATION OF COMPANY INCOME, GAIN, LOSS AND DEDUCTION In general, the LLC Agreement provides that Company income, gain, loss and deduction will be allocated among the Share Holders in proportion to their ownership of Shares. Section 704(a) of the Code provides generally that a partner's share of partnership items of income, gain, loss and deduction will be determined by the partnership agreement. However, if the allocations do not have "substantial economic effect," Section 704(b) of the Code provides that the allocations will be made in accordance with the partner's interest in the partnership, taking into account all of the facts and circumstances. The Regulations under Section 704(b) provide that a partnership allocation will be considered to have "substantial economic effect" if it is determined that the allocation has "economic effect" and the economic effect is "substantial." An allocation to partners will be considered to have "economic effect" if (i) the partnership maintains capital accounts in accordance with specific rules set forth in the Regulations and the allocation is reflected in adjustments to the partners' capital accounts, (ii) liquidating distributions are required to be made in accordance with the partners' respective capital account balances, and (iii) any partner with a deficit in the partner's capital account following the distribution of liquidation proceeds is unconditionally obligated to restore the amount of such deficit to the partnership. In order for the economic effect of an allocation to be considered "substantial," the Regulations require that the allocation must have a reasonable possibility of substantially affecting the dollar amount to be received by the partners, independent of tax consequences. The determination of a partner's interest in a partnership is made by taking into account all the facts and circumstances relating to the economic arrangement of the partners. The Regulations list the following factors to consider in determining a partner's interest in the partnership: (i) The partners' relative contributions to the partnership; (ii) the interests of the partners in economic profits and losses; (iii) the interests of the partners is cash flow and other non-liquidating distributions; and (iv) the rights of the partners to distributions of capital upon liquidation. The LLC Agreement does not provide for the maintenance of capital accounts; therefore the allocations of Company income, gain, loss and deduction will not satisfy the "substantial economic effect" test of the Regulations. However, the Share Holders will share in the economic profits and losses of the Company in proportion to their ownership of Shares and each Share will represent an equal contribution to the capital of the Company. Accordingly, the Company believes that the allocations of income, gain, loss and deduction in the LLC Agreement will be made in accordance with the Share Holders' interests in the Company and, therefore, should be respected for purposes of Section 704 of the Code. TAX TREATMENT OF OPERATIONS Initial Tax Basis, Holding Period, Depreciation and Amortization The tax basis of the assets of the Company will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of such assets. The Property will initially have an aggregate tax basis equal to the value determined by the Appraisal Report. Although there is some uncertainty regarding the Company's holding period in the Property, the Company's holding period in the Property should include the period during which the Property was held by Triad or 3055 Triad Dr. Corp. 32 33 If the Company disposes of depreciable property by sale, foreclosure, or otherwise, all or a portion of any gain (determined by reference to the amount of depreciation previously deducted and the nature of the property) may be subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly a Share Holder who has taken cost recovery or depreciation deductions with respect to property owned by the Company may be required to recapture such deductions as ordinary income upon a sale of the Share Holder's Shares. See "Disposition of Shares -- Recognition of Gain or Loss." Costs incurred in organizing the Company may be amortized over any period selected by the Company not shorter than 60 months. The costs incurred in promoting the issuance of the Shares must be capitalized and cannot be deducted currently, ratably, or upon termination of the Company. There are uncertainties regarding the classification of costs as organization expenses, which may be amortized, and as syndication expenses, which may not be amortized. Sales of Property Upon the sale, exchange or other disposition of Company assets, gain or loss at the Company level is measured by the difference between the amount realized by the Company and its adjusted basis in the property. The amount realized will generally equal the sum of the amount of cash received, the net fair market value of any property received and the outstanding balance of any indebtedness encumbering the property being disposed of and any other indebtedness that is assumed. For this purpose, a foreclosure of a loan secured by Company assets would be deemed to be a disposition of the assets. It is possible that the net cash proceeds distributed to a Share Holder upon a sale or disposition of the assets will not be sufficient to pay the Share Holder's federal income tax liability resulting from the sale or disposition. In general, any gain (or loss) to the Company arising from a sale of the Land will be characterized as ordinary income (or loss), assuming the Land is property held primarily for sale to customers in the ordinary course of the Company's trade or business. If the Land is not held primarily for sale to customers in the ordinary course of business, then gain or loss with respect thereto will be capital gain or loss, long-term if held for more than one year. Upon the sale of the Headquarters, any gain may be treated as gain described in Section 1231 of the Code if the Headquarters are held by the Company for more than one year from the date of the Distribution and if the Headquarters are not held primarily for sale to customers in the ordinary course of business. A Share Holder's share of the gain or loss from the disposition of Section 1231 assets will be combined with any Section 1231 gains or losses realized by that Share Holder in that taxable year from sources other than the Company. The Share Holder's net Section 1231 gain will generally be taxed as capital gain except to the extent of the Share Holder's unrecaptured net Section 1231 losses for the five most recent prior taxable years. For this purpose, the term "unrecaptured net Section 1231 losses" means the excess of the aggregate amount of the net Section 1231 losses during such five year period over previously recaptured net Section 1231 losses. A Share Holder's net Section 1231 losses will be treated as ordinary losses. If the Headquarters are not held for more than one year or are held primarily for sale to customers in the ordinary course of business, the gain or loss with respect to the sale of the Headquarters will be ordinary income or loss. Valuation of Company Property and Basis of Property The federal income tax consequences of the ownership and disposition of the Shares will depend in part on estimates by the Company of the relative fair market values, and determination of the initial tax basis, of the Land and the Headquarters. Although the Company has obtained a professional 33 34 appraisal of the Property, the valuation of property is subject to challenge and will not be binding on the IRS or the courts. If the estimates of the fair market values or determinations of basis are subsequently found to be incorrect, the character and amount of items of income, gain, loss or deductions previously reported by Share Holders might change, and Share Holders might be required to adjust their tax liability for prior years. DISPOSITION OF SHARES Recognition of Gain or Loss Gain or loss will be recognized on a sale of Shares equal to the difference between the amount realized and the Share Holder's tax basis for the Shares sold. A Share Holder's amount realized will be measured by the sum of the cash or the fair market value of other property received plus the Share Holder's share of the Company's nonrecourse liabilities. Because the amount realized includes a Share Holder's share of the Company's nonrecourse liabilities, the gain recognized on the sale of Shares could result in a tax liability in excess of any cash received from such sale. Generally, gain or loss recognized by a partner (other than a "dealer") on the sale or exchange of a partnership interest held for more than one year will generally be taxable as long-term capital gain or loss. A portion of this gain or loss, however, will be separately computed and taxed as ordinary income or loss under Section 751 of the Code to the extent attributable to assets giving rise to "unrealized receivables" or to "substantially appreciated inventory" owned by the partnership. The term "unrealized receivables" includes potential recapture items, including depreciation recapture. Inventory is considered to be "substantially appreciated" if its value exceeds 120% of its adjusted basis to the partnership. It is possible, however, that this tax treatment will not apply to the Shares received in the Distribution and that any gain on the sale or exchange of Shares will be ordinary income, under the provisions of Section 735 of the Code. The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis. Upon a sale or other disposition of less than all of such interests, a portion of that tax basis must be allocated to the interests sold using an "equitable apportionment" method. The ruling is unclear as to how the holding period of those interests is determined once they are combined. If this ruling is applicable to the holders of Shares, a Share Holder will be unable to select high or low basis Shares to sell as would be the case with corporate stock. It is not clear whether the ruling applies to the Company, because, similar to corporate stock, interests in the Company will be evidenced by separate certificates. A Share Holder considering the purchase of additional Shares or the sale of Shares in separate transactions should consult the Share Holder's tax advisor as to the possible consequences of such ruling. Allocations Between Transferors and Transferees In general, the Company's taxable income and losses will be determined on a monthly basis and subsequently apportioned among the Share Holders in proportion to the number of Shares owned by each of them prior to or after the fifteenth day of each calendar month. As a result, a Share Holder transferring Shares in the open market may be allocated income, gain, loss and deduction accrued after the date of transfer. The use of this method may not be permitted under existing Treasury Regulations. If this method is not allowed under the Treasury Regulations (or only applies to transfers of less than all of the 34 35 Share Holder's Shares), taxable income or losses of the Company might be reallocated among the Share Holders. Notification Requirements A Share Holder who sells or exchanges Shares is required by Section 6050K of the Code to notify the Company in writing of that sale or exchange within 30 days after the sale or exchange and in any event by no later than January 15 of the year following the calendar year in which the sale or exchange occurred. The Company is required to notify the IRS of that transaction and to furnish certain information to the transferor and transferee. However, these reporting requirements do not apply with respect to a sale by an individual who is a citizen of the United States and who effects the sale or exchange through a broker. Additionally, a transferor and a transferee of a Share will be required to furnish statements to the IRS, filed with their income tax returns for the taxable year in which the sale or exchange occurred, that set forth the amount of the consideration received for the Share that is allocated to goodwill or going concern value of the Company. Failure to satisfy these reporting obligations may lead to the imposition of substantial penalties. Constructive Termination The Company will be considered to have been terminated if there is a sale or exchange of 50% or more of the Shares within a 12-month period. A termination results in the closing of a partnership's taxable year for all partners and the partnership's assets are regarded as having been distributed to the partners and reconveyed to a new partnership. However, under new proposed regulations which are not yet effective, a terminating partnership will be deemed to have conveyed all its assets and liabilities to a newly formed partnership in exchange for all the interests in such new partnership and then the terminating partnership will be deemed to have liquidated and to have distributed to its partners the interests in the newly formed partnership. A termination of the Company could also result in loss of certain tax elections and certain basis adjustments. In the case of a Share Holder reporting on a taxable year other than the Company's taxable year, the closing of the tax year of the Company may result in more than 12 months' taxable income or loss of the Company being includable in the Share Holder's taxable income for the year of termination. In addition, each Share Holder will realize taxable gain to the extent that any money deemed as a result of the termination to have been distributed to the Share Holder exceeds the adjusted basis of the Share Holder's Shares. New tax elections required to be made by the Company must be made subsequent to a constructive termination. Finally, a termination might either accelerate the application of or subject the Company to any tax legislation enacted prior to the termination. STATE AND LOCAL TAX CONSIDERATIONS In addition to federal income taxes, Share Holders will be subject to other taxes, such as state and local income taxes. Although an analysis of those various taxes is not presented here, each Share Holder should consider their potential impact on the Share Holder's investment in the Company. The Company will be (or will elect to be) taxed as a corporation for purposes of the California Revenue and Taxation Code. Therefore, the Company will be subject to California income tax on its taxable income and Share Holders will be subject to state and local income tax on any distributions to them with respect to their Shares. However, the Company's taxable income or loss for California purposes will not pass through to the Share Holders (in contrast to the federal income tax treatment). 35 36 It is the responsibility of each Share Holder to investigate the legal and tax consequences, under the laws of pertinent states, of the Share Holder's investment in the Company. Accordingly, each Share Holder should consult, and must depend upon, the Share Holder's own tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each Share Holder to file all state and local, as well as United States federal, tax returns that may be required of such Share Holder. OWNERSHIP OF SHARES BY EMPLOYEE BENEFIT PLANS Ownership of Shares by an employee benefit plan is subject to certain additional considerations because the investments of such plans are subject to the fiduciary responsibility and prohibited transaction provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and restrictions imposed by Section 4975 of the Code. As used herein, the term "employee benefit plan" includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or Individual Retirement Accounts established or maintained by an employer or employee organization. Among other things, consideration should be given to (a) whether such investment is prudent under Section 404(a)(1)(B) of ERISA; (b) whether in maintaining such investment, such plan will satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether such investment will result in recognition of unrelated business taxable income by such plan and, if so, the potential after-tax return. See "Tax Considerations--Tax Consequences of Share Ownership." The person with investment discretion with respect to the assets of an employee benefit plan (a "fiduciary") should determine whether maintaining an investment in the Company is authorized by the appropriate governing instrument and is a proper investment for such plan. Section 406 of ERISA and Section 4975 of the Code (which also applies to Individual Retirement Accounts that are not considered part of an employee benefit plan) prohibit an employee benefit plan from engaging in certain transactions involving "plan assets" with parties that are "parties in interest" under ERISA or "disqualified persons" under the Code with respect to the plan. In addition to considering whether the ownership of Shares is a prohibited transaction, a fiduciary of an employee benefit plan should consider whether such plan will, by owning Shares, be deemed to own an undivided interest in the assets of the Company, with the result that the Manager also would be a fiduciary of such plan and the operations of the Company would be subject to the regulatory restrictions of ERISA, including the prohibited transaction rules, as well as the prohibited transaction rules of the Code. The Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed "plan assets" under certain circumstances. Pursuant to these regulations, an entity's assets would not be considered to be "plan assets" if, among other things, (a) the equity interests acquired by employee benefit plans are publicly offered securities -- i.e., the equity interests are widely held by 100 or more investors independent of the issuer and each other, freely transferable and registered pursuant to certain provisions of the federal securities laws, (b) the entity is an "operating company," including a "real estate operating company," -- i.e., on specified valuation dates, at least 50% of the entity's assets are invested in real estate which is managed or developed directly by the entity, or (c) there is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each class of equity interest is held by the employee benefit plans referred to above, Individual Retirement Accounts and other employee benefit plans not subject to ERISA (such as government plans). The Company's assets should not be considered "plan assets" under these regulations because it is expected that the Company will satisfy the requirements in (a) and (b) above and may also satisfy the requirements in (c). 36 37 Plan fiduciaries who receive Shares in the Distribution should consult with their own counsel regarding the consequences under ERISA and the Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations. TRADING OF SHARES Because all Shares of the Company have been owned only by Triad and Management Corp., no trading market currently exists for the Shares. The Company has not applied, and has no present intention of applying to, any exchange or quotation service in order to obtain trading or quotation privileges. Therefore, there is no assurance that an active market will develop for the trading of the Shares, and there is likewise no assurance as to any price at which the Shares may trade at any future time. Additionally, due to the illiquid nature of the Property, the future price at which the Shares may trade will likely be at a significant discount from their proportionate share of the fair market value of the Property. LEGAL MATTERS Certain legal matters in connection with the Distribution are being passed upon for the Company by McCutchen, Doyle, Brown & Enersen, LLP, San Francisco, California. ADDITIONAL INFORMATION The Company has filed with the Commission a registration statement on Form 10-SB under the Exchange Act, to which this Information Statement is attached as an exhibit. All documents filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the following regional offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company is also required to file electronic versions of these documents with the Commission through the Commission's Electronic Data Gathering Analysis and Retrieval (EDGAR) system. The Commission maintains a world wide web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. After the foregoing registration statement becomes effective, the Company will be subject to the reporting requirements and other applicable provisions of the Exchange Act. 37 38 INDEX TO FINANCIAL STATEMENTS
Page Management's discussion and analysis of financial condition and results of operations of Triad Park, LLC 39 Balance sheets as of September 30, 1995 and 1996 (and December 31, 1996, unaudited) 41 Statements of operations of the years ended September 30, 1995 and 1996 (and three months ended December 31, 1995 and 1996, unaudited) 42 Statements of members' equity for the years ended September 30, 1995 and 1996, (and three months ended December 31, 1996, unaudited) 43 Statements of cash flows for the years ended September 30, 1995 and 1996 (and three months ended December 31, 1995 and 1996, unaudited) 44 Notes to financial statements 45 Report of independent accountants 53 Pro forma statements of operations 55
38 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following Management's Discussion and Analysis is based upon and should be read in conjunction with the Company's financial statements and notes thereto included elsewhere in this Information Statement. RESULTS OF OPERATIONS Revenues generated from the leasing of the facilities located at 3055 Triad Drive were $2.5 million in both fiscal 1995 and 1996. These revenues are pursuant to a lease agreement in effect through 2001. Revenues from land sales were $3.8 million during fiscal 1996. Revenues from land sales were $640,000 for the three months ended December 31, 1996 (first quarter of fiscal 1997) with no sales during the comparable period in the prior year. There were no land sales during fiscal 1995. Gross margin was $3.5 million in fiscal 1996, a 84% increase over the gross profit of $1.9 million in fiscal 1995. This increase was directly attributed to the land sales during 1996. Gross margin for the first quarter of 1996 was $491,000 compared to $678,000 for the first quarter of 1997. The increase was directly attributed to land sales. Net income was $521,000 in fiscal 1996 compared with a net loss of $548,000 in fiscal 1995. The increase is due principally to the absence of any land sales in 1995. Likewise, the increase from a loss of $130,000 for the first quarter of fiscal 1996 to a loss of $8,000 for the first quarter of fiscal 1997 was due to the absence of land sales in the earlier period. LAND SALES As of December 31, 1996, the Company had approximately 302.6 acres of unimproved land remaining to be sold. Approximately 35.9 acres are zoned for retail/commercial use, 28.1 acres for residential use, and 114.6 acres for retail/light industrial/office use. The remaining acres are zoned for open space/agricultural and transportation purposes. The Company sold four parcels totaling 25.5 acres during fiscal 1996 for $3.8 million and one parcel of 4.1 acres for $600,000 during the first quarter of fiscal 1997. There were no land sales during fiscal 1995 or the first quarter of fiscal 1996. GROSS MARGIN Land sale gross margins were 41% for fiscal 1996 and 28% for the first quarter of fiscal 1997. Gross margins on rental income were 78% for all periods as the properties are subject to a triple net lease whereby substantially all operating expenses are paid by the tenant. COSTS AND EXPENSES Land-related sales expenses include broker commissions, escrow fees, etc., and totaled $369,000 for fiscal 1996 and $64,000 for the first quarter of fiscal 1997. 39 40 General and administrative expenses consists of property taxes and other general management and operational costs including costs necessary to maintain the appearance of the land in a marketable condition and personnel and overhead expenses required for the development, management and marketing of the properties. The expenses were $623,000 in fiscal 1995 and $723,000 in fiscal 1996 with the increase attributed to incremental management efforts associated with the fiscal 1996 land sales. Operating expenses were similar for the first quarters of 1996 and 1997. Interest expense consists of mortgage interest on the buildings and the bonded indebtedness incurred in connection with the development improvements and community services. Interest expense was approximately $1.9 million for fiscal 1995 and 1996, decreasing slightly due to normal debt maturation. Likewise, interest expense for the first quarters of 1996 and 1997 was relatively unchanged at $472,000 and $449,000, respectively. FUTURE OPERATING RESULTS Future operating results will depend upon conditions in its market that may affect demand for real estate. Seasonal trends, building trends, competing developments and other external forces in the market could cause results to fluctuate, especially on a quarterly basis. LIQUIDITY AND CAPITAL RESOURCES Triad Park, LLC's ability to continue funding its current business will depend upon the timing and volume of land sales. Management expects that it will likely continue to have sufficient borrowing capacity to finance any needs which may arise in the ordinary course of business. During March 1995, the Financial Accounting Standards Board issued Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of," which requires the 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 would be recognized. The Company does not believe the adoption of SFAS No. 121, which is required in fiscal 1997, will have a material impact on the Company's financial condition or operating results. 40 41 TRIAD PARK, LLC (a Delaware limited liability company) BALANCE SHEETS (in thousands) _______
September 30, ---------------------- December 31, ASSETS 1995 1996 1996 -------- -------- ------------ (unaudited) Land for resale $ 25,250 $ 22,850 $ 27,876 Property, plant and equipment 18,703 18,171 12,362 Assessments receivable 1,859 2,073 2,091 -------- -------- -------- Total assets $ 45,812 $ 43,094 $ 42,329 ======== ======== ======== LIABILITIES AND MEMBERS' EQUITY Debt $ 21,715 $ 19,464 $ 18,840 -------- -------- -------- Total liabilities 21,715 19,464 18,840 -------- -------- -------- Commitments and contingencies (Note 9). Members' equity 24,097 23,630 23,489 -------- -------- -------- Liabilities and member's equity $ 45,812 $ 43,094 $ 42,329 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 41 42 TRIAD PARK, LLC (a Delaware limited liability company) STATEMENTS OF OPERATIONS (in thousands, except per share amounts) ________
Year Ended Three Months Ended September 30, December 31, ------------------- ------------------- 1995 1996 1995 1996 ------- ------- ------- ------- (unaudited) Revenues: Rental income $ 2,506 $ 2,506 $ 627 $ 627 Land sales - 3,795 - 640 ------- ------- ------- ------- Total revenues 2,506 6,301 627 1,267 Depreciation of rental property 558 547 136 137 Cost of land sold - 2,231 - 452 ------- ------- ------- ------- Gross margin 1,948 3,523 491 678 ------- ------- ------- ------- Costs and expenses: Sales expenses - 369 - 64 General and administrative 623 723 162 174 ------- ------- ------- ------- Total costs and expenses 623 1,092 162 238 ------- ------- ------- ------- Operating income 1,325 2,431 329 440 Interest expense 1,929 1,857 472 449 ------- ------- ------- ------- Income (loss) before provision for (benefit from) income taxes (604) 574 (143) (9) Provision for (benefit from) income taxes (56) 53 (13) (1) ------- ------- ------ ------- Net income (loss) $ (548) $ 521 $ (130) $ (8) ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. 42 43 TRIAD PARK, LLC (a Delaware limited liability company) STATEMENTS OF MEMBERS' EQUITY for the years ended September 30, 1995 and 1996 and the three months ended December 31, 1996 (in thousands) _______
Undistributed Total Unallocated Earnings Members' Capital (Losses) Equity -------- -------- -------- Balance, October 1, 1994 $ 27,741 $ (4,674) $ 23,067 Contributions 1,578 1,578 Net loss - (548) (548) -------- -------- -------- Balance, September 30, 1995 29,319 (5,222) 24,097 Distributions (988) (988) Net income 521 521 -------- -------- -------- Balance, September 30, 1996 28,331 (4,701) 23,630 Distributions (133) (133) Net loss - (8) (8) -------- -------- -------- Balance, December 31, 1996 (unaudited) $ 28,198 $ (4,709) $ 23,489 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 43 44 TRIAD PARK, LLC (a Delaware limited liability company) STATEMENTS OF CASH FLOWS (in thousands) _______
Year Ended Three Months Ended September 30, December 31, ------------------- ------------------- 1995 1996 1995 1996 ------- ------- ------- ------- (unaudited) Cash flows from operating activities: Net income (loss) $ (548) $ 521 $ (130) $ (8) Gain from sale of land - (1,194) - (124) Depreciation 558 547 136 137 Amortization 20 20 5 6 ------- ------- ------- ------- Net cash provided by (used in) operating activities 30 (106) 11 (11) ------- ------- ------- ------- Cash flows from investing activities: Land sales - 3,523 - 576 Investment in property, plant and equipment (36) (15) (3) - Acquisition of land - (972) - - Land improvements (187) (146) (38) (30) Assessment district improvements (292) (214) (80) (18) ------- ------- ------- ------- Net cash provided by (used in) investing activities (515) 2,176 (121) 528 ------- ------- ------- ------- Cash flows from financing activities: Repayment of debt (1,093) (1,082) (443) (406) Members contribution (distribution) 1,578 (988) 553 (133) ------- ------- ------- ------- Net cash provided by (used in) financing activities 485 (2,070) 110 (539) ------- ------- ------- ------- Net increase (decrease) in cash - - - - Cash, beginning of period - - - - ------- ------- ------- ------- Cash, end of period $ - $ - $ - $ - ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,929 $ 1,857 $ 472 $ 449 ======= ======= ======= ======= Income taxes $ - $ 53 $ - $ 5 ======= ======= ======= ======= NONCASH INVESTING AND FINANCIAL ACTIVITY: Land reclassified from property, plant and equipment to land for resale $ 5,672 ======= Assessment district improvements and related debt transferred upon sale $ 1,348 $ 224 ======= =======
The accompanying notes are an integral part of these financial statements. 44 45 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS _______ 1. Description of Business and Basis of Presentation: Triad Park, LLC (the Company) is a Delaware limited liability company organized to effect the spin-off of certain real estate assets and related liabilities of Cooperative Computing, Inc., a Delaware Corporation, formerly known as Triad Systems Corporation (Triad). On October 17, 1996 Triad signed a definitive merger agreement with Cooperative Computing, Inc. (CCI), a Texas corporation, and its affiliate, CCI Acquisition Corp. (CAC), a Deleware corporation, under which CCI, through CAC, would acquire Triad. Pursuant to the terms of the merger agreement, CCI, through CAC, commenced a cash tender offer for all outstanding shares of Triad at a price of $9.25 per share on October 23, 1996. As a condition precedent to completion of the merger, Triad arranged for the spin-off of certain real estate assets and related liabilities (the Predecessor Business) to Triad shockholders. On February 27, 1997, immediately prior to completion of the tender offer, Triad contributed such assets and related liabilities to the Company. Under the terms of the Real Estate Distribution Agreement (the Agreement), all indebtedness of Triad or any of its subsidiaries secured, in whole or in part, by any of the contributed assets have been assumed by the Company. Stockholders of Triad will receive one Triad Park membership interest for each share of Triad common stock held as of February 26, 1997, the Distribution Record Date. The Company's operations will include the ownership and management of the spun-off real estate assets, all of which are located in Livermore, California, for their orderly liquidation and distribution of related net proceeds to the holders of membership interests. The Company will be dissolved upon the earlier of a majority vote to dissolve the Company or upon the sale or other disposition of all or substantially all of the assets and properties of the Company and distribution of the proceeds to the members. The financial statements presented herein include the financial position, results of operations and cash flows of the Predecessor Business as if the Company had existed as a corporation separate from Triad for all periods presented on a historical basis and may not be indicative of actual results of operations and financial position of the Company as an independent stand-alone entity. The statements of operations reflect certain expense items incurred by Triad which are allocated to the Company on a basis which management believes represents a reasonable allocation of such costs. These allocations consist primarily of corporate expenses such as management and accounting services. Expenses related to the normal recurring management activities of the Company have been allocated based on an estimate of Triad personnel time dedicated to the operations and management of the Company. Continued 45 46 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS, Continued _______ 2. Summary of Significant Accounting Policies: 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 dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. REAL ESTATE HELD FOR RESALE: Real estate held for resale includes developed lots, land underdeveloped and raw land. Real estate held for resale is carried at the lower of cost or market. The cost of development of building lots includes the land, the related costs of development (planning, survey, engineering and other) and interest costs during development, all of which are capitalized. The carrying costs of property held for resale, interest expense, property taxes and other are expensed. Common costs are allocated based on square footage and relative market value. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the lease term, whichever is less. As property, plant and equipment are disposed of, the asset related cost and related accumulated depreciation or amortization are removed from the accounts, and the resulting gains or losses are reflected in operations. DEBT ISSUANCE COSTS: The unamortized costs associated with the issuance of debt are recorded with the associated liability. Amortization is computed according to the interest method for debt issuance costs and is included in interest expense. Upon retirement of remaining principal balances, the associated unamortized costs are reflected in operations. Continued 46 47 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS, Continued _______ 2. Summary of Significant Accounting Policies, continued: REVENUE RECOGNITION: Profits on sale of developed lots, developed land and raw land are recognized in accordance with standards established for the real estate industry which generally provide for deferral of all or part of the profit on a sale if the buyer does not meet certain down payment requirements or certain other tests of the buyer's financial commitment to the purchase, or the Company is required to perform significant obligations subsequent to the sale. Cost of sales include an allocated pro rata portion of acquisition and development costs along with sales commissions, closing costs and other costs specifically related to the sale. INCOME TAXES: The Company does not provide for income taxes as all income and losses are allocated to the members for inclusion in their respective tax returns except for the state of California for which the Company has elected to be treated as a taxable entity. The tax basis of the Company's net assets is estimated at approximately $14 million which is determined based on appraised value under a bulk sale assumption. As a result, gains on future sales as reported for tax purposes may be substantially higher than those reported for financial statement purposes. INTERIM FINANCIAL STATEMENTS: In the opinion of management, the unaudited interim financial statements as of December 31, 1996 and for the three month periods ended December 31, 1995 and 1996 and include all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly the Company's financial position as of December 31, 1996 and the results of its operations and cash flows for the three month periods ended December 31, 1995 and 1996. The results of operations for the three months ended December 31, 1996 are not necessarily indicative of the results to be expected for the full year. Continued 47 48 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS, Continued _______ 3. Related Party Agreement: The Company's developed commercial property, consisting of three buildings and improvements on approximately 15 acres, is occupied by Triad Systems Corporation under a lease agreement that provides for annual rent of $2,505,720 payable monthly in advance through February 1999 and prevailing market rate thereafter, providing that annual rental shall not fall below rate in effect at the date of renegotiation nor exceed 120% of such rental rate. Payments under the lease are on a "net lease" basis, free of any impositions and with out abatement, deduction or set-off. The tenant is required to pay all impositions (e.g. taxes, assessments, water and sewer charges, excises, levies, etc.) in addition to the annual rent. 4. Property, Plant and Equipment: Property, plant and equipment consist of the following (in thousands):
September 30, ---------------------- December 31, 1995 1996 1996 -------- -------- ------------ (unaudited) Building and leasehold improvements $ 16,302 $ 16,317 $ 16,317 Less accumulated depreciation (4,248) (4,795) (4,932) -------- -------- -------- 12,054 11,522 11,385 Land 6,649 6,649 977 -------- -------- -------- Total property, plant and equipment $ 18,703 $ 18,171 $ 12,362 ======== ======== ========
The above facilities and land are all subject to a lease agreement with Triad Systems Corporation for use as their headquarters (see Note 3). During December 1996, certain land previously intended for use by Triad Systems Corporation in their operations was reclassified as land for resale in connection with the merger and spin-off (see Note 6). Continued 48 49 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS, Continued _______ 5. Debt: Long-term debt consists of the following (in thousands):
September 30, ------------------------ December 31, 1995 1996 1996 -------- -------- ------------ (unaudited) Mortgage loan payable, bearing interest at 9.9%, and maturing through 2003 $ 10,946 $ 10,004 $ 9,749 Assessment district improvement bonds, bearing interest rates ranging from 4.75% to 7.25%, and maturing through 2014 10,932 9,606 9,228 Unamortized debt issuance costs (163) (146) (137) -------- -------- -------- Total debt $ 21,715 $ 19,464 $ 18,840 ======== ======== ========
The interest rate on the mortgage financing for the Livermore headquarters facility may be adjusted at the option of the lender in 1998 and could impact the interest rate from 1999 to its maturity in 2003. Borrowings are collateralized by the land and buildings and are payable in monthly installments. A portion of the Company's land for resale and the parcel retained for its facilities are part of assessment districts and are subject to bonded indebtedness incurred in connection with the development of improvements and community services. Semiannual principle and interest payments on the bonds are required as long as the parcels are owned by the Company. As the Company sells land, the corresponding obligation will be assumed by the new owners. Continued 49 50 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS, Continued _______ 6. Land Held for Resale: Real estate held for resale consists of property in Livermore, California, classified by planned use as follows (dollars in thousands):
September 30, 1996 December 31, 1996 -------------------- -------------------- Use Classification Acreage Cost Acreage Cost ------------------ ------- -------- ------- -------- Residential 28.1 $ 4,015 28.1 $ 4,029 Retail/commercial 40.0 5,430 35.9 4,797 Retail/industrial/office 68.2 12,285 114.3 17,925 Open space/agricultural 112.0 - 112.0 - Transportation 12.3 1,120 12.3 1,125 ----- -------- ----- -------- 261.6 $ 22,850 302.6 $ 27,876 ===== ======== ===== ========
The cost of land held for resale includes the cost of developments financed with debt that transfers to the buyer upon sale amounting to $7,838,000 and $9,800,000 at September 30 and December 31, 1996, respectively. During the three months ended December 31, 1996, approximately 34 acres of land previously held for future use by Triad Systems Corporation was reclassified to land held for resale. As a result, costs of approximately $5.7 million which include debt financed amounts of approximately $2.2 million were reclassified from property and equipment to land held for resale. 7. Members Equity: Holders of membership interests (members) have the right to vote on certain matters of the Company including the election and removal of Advisory Board members, merger with or into another business entity and dissolution of the Company. All the issued and outstanding membership interests are fully paid and nonassessable. Holders of membership interests do not have preemptive or conversion rights, nor rights to redemption or sinking fund provisions by the Company. In the event of any liquidation, dissolution or winding up of the Company, the holders of the membership interests are entitled to share ratably in proportion to their ownership as of the date of distribution in any assets remaining after payment of all debts and liabilities. Continued 50 51 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS, Continued _______ 8. Significant Customers: The Company had land sales to the following significant customers in 1996 (in thousands): Customer A $ 1,636 Customer B 1,389 Customer C 450 Customer D 320 -------- Total $ 3,795 ========
There were no land sales in 1995. 9. Contingencies: Under the terms of the Distribution Agreement (see Note 1), all costs and expenses solely attributed to the transactions related to the spin-off and related dividend to Triad shareholders will be paid by the Company when such amounts are due. The Company will indemnify and hold Triad and its subsidiaries harmless from and against loss, cost, damage or expense arising out of or related to any failure of the Company to discharge the obligations specified in the Agreement. The Company will indemnify and hold Triad and its subsidiaries harmless from and against any taxes attributed to, arising out of or relating to the Company, its formation, the transfer of contributed assets, the assumption or refinancing of liabilities with respect to the contributed assets, the sale, exchange, distribution, dividend or other disposition of interests of the Company by Triad or its subsidiaries. To support its ability to fund the indemnity commitment to Triad, the Company has agreed to maintain net assets with a minimum market value of $2,350,000 based upon the most recent appraised value of the Company's then existing real property assets until 60 days after the expiration of all statutes of limitation related to the collection of taxes related to the transactions contemplated by the Agreement (estimated to be approximately four years). Triad may cause the real property to be appraised at any time and the Company must pay one half of the expense if the most current calculation of net worth is less than $4,000,000. Compliance with these requirements may limit the Company's ability to make distributions to shareholders. Continued 51 52 TRIAD PARK, LLC (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS, Continued _______ The Company is obligated to undertake an estimated additional $7,000,000 in improvements to its land held for resale in connection with its approved development plan. The City of Livermore has indicated that it is willing to reimburse the Company for such improvements by means of a bond financing. Historically, the City of Livermore has been able to successfully sell its bond offerings and the current estimates for required improvements indicate that bonded funding limits will be adequate to cover the remaining items of improvement. However, the actual costs of the improvements may be greater than estimated and may exceed the bond funding limit. Alternatively, if the City of Livermore is unsuccessful in completing a bond offering, it is possible the Company would not receive any reimbursement for such improvements. Any shortfall in the bond funding will be borne by the Company or by purchasers of lots, which may have an adverse effect on the value of the land. 10. Subsequent Event: The City of Livermore has entered into a Bond Indenture and issued an Official Statement to raise a total of $9,070,000 in new funds from the sale of Mello-Roos bonds. The sale of the bonds closed March 24, 1997, and the proceeds are designated to refinance the prior bonded indebtedness of approximately $2,300,000, to fund reimbursements to the Company of approximately $2,050,000 arising from previously completed improvements, to provide funds of approximately $3,700,000 to complete improvements to the Land required by various agreements with the City of Livermore and others, to pay financing expenses of $620,000 and to create a bond reserve fund of approximately $400,000 held by the City of Livermore. Of this new indebtedness, approximately $6,938,000 would encumber the Property owned by the Company. Thus, upon completion of this bond offering, the total indebtedness encumbering the Property owned by the Company will be approximately $14,382,000. 52 53 REPORT OF INDEPENDENT ACCOUNTANTS To the Members of Triad Park, LLC: We have audited the accompanying balance sheet of the Predecessor Business (See Note 1) of Triad Park, LLC (a Delaware limited liability company) as of September 30, 1996, and the related statements of operations, changes in members' equity and cash flows for the years ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. 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 audit provides 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 the Predecessor Business of Triad Park, LLC (a Delaware limited liability company) as of September 30, 1996 and the results of its operations and cash flows for the years ended September 30, 1996 and 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand LLP San Jose, California March 14, 1997, except for Note 10, Subsequent Event, the date for which is as of March 24, 1997 53 54 TRIAD PARK, LLC (a Delaware limited liability company) INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS _______ The following unaudited pro forma condensed statements of operations give effect to the spin-off of Triad Park, LLC by Triad Systems Corporation as if it had occurred at the beginning of each period presented. The pro forma information is based on the estimates and assumptions set forth below and in the note to such statements. This pro forma information has been prepared utilizing the historical financial statements of the Predecessor Business of Triad Park, LLC. This information should be read in conjunction with the historical financial statements and notes thereto. The pro forma financial data have been included as required by the rules and regulations of the Securities and Exchange Commission and are provided for comparative purposes only. The pro forma financial data does not purport to be indicative of the results which actually would have been obtained if the spin-off had been effected on the dates indicated or of those results which may be obtained in the future. 54 55 TRIAD PARK, LLC (a Delaware limited liability company) PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) _______
Three Months Ended Year Ended September 30, 1996 December 31, 1996 ----------------------------------- ----------------------------------- Historical Adjustments Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- ---------- ----------- --------- Revenues: Rental income $ 2,506 $ 2,506 $ 627 $ 627 Land sales 3,795 3,795 640 640 -------- -------- -------- ------- ------- -------- Total revenues 6,301 6,301 1,267 1,267 Depreciation of rental property 547 547 137 137 Cost of land sold 2,231 2,231 452 452 -------- -------- -------- ------- ------- -------- Gross margin 3,523 3,523 678 678 -------- -------- -------- ------- ------- -------- Costs and expenses: Marketing 369 369 64 64 General and administrative 723 723 174 174 -------- -------- -------- ------- ------- -------- Total costs and expenses 1,092 1,092 238 238 -------- -------- -------- ------- ------- -------- Operating income 2,431 2,431 440 440 Interest expense (a) (1,857) $ (2,594) (4,451) (449) $ (635) (1,084) -------- -------- -------- ------- ------- -------- Income (loss) before provision for (benefit (9) (644) from) income taxes 574 (2,594) (2,020) (635) Provision for (benefit from) income taxes 53 (241) (188) (1) (59) (60) -------- -------- -------- ------- ------- -------- Net income (loss) $ 521 $ (2,353) $ (1,832) $ (8) $ (576) $ (584) ======== ======== ======== ======= ======= ======== Pro forma net income (loss) per share $ (0.10) $ (0.03) ======== ======== Pro forma shares used in per share calculation (b) 17,570 18,450 ======== ========
See accompanying note. 55 56 TRIAD PARK, LLC (a Delaware limited liability company) NOTE TO PRO FORMA CONDENSED STATEMENTS OF OPERATIONS _______ 1 Pro Forma Statements of Operations: Prior to February 26, 1997, Triad Park, LLC ("the Company") was a wholly-owned subsidiary of Triad Systems Corporation (Triad). During February 1997 Triad transferred certain real estate assets and related liabilities to the Company as a condition precedent to Triad's merger with Cooperative Computing, Inc. Effective February 26, 1996, Triad spun-off the Company as a dividend to the shareholders. All membership interests in the Company will be distributed to Triad shareholders on a pro rata basis on the Distribution Date, as defined in the Real Estate Distribution Agreement. The accompanying pro forma condensed statements of operations give effect to the spin-off as if it had occurred at the beginning of the period presented. The pro forma information is based on the estimates and assumptions set forth below. This pro forma information has been prepared utilizing the historical financial statements of the Predecessor Business of the Company. This information should be read in conjunction with the historical financial statements and notes thereto and is included as required by the rules and regulations of the Securities and Exchange Commission and is provided for comparative purpose only. The pro forma financial data do not purport to be indicative of the results which actually would have been obtained if the acquisition had been effected on the date indicated or of those results which may be obtained in the future. Pro forma adjustments consist of the following: (a) To record interest expense which would have been incurred by the Company for working capital needs funded by intercompany contributions at an estimated annual rate of 9%. (b) The number of shares used to compute pro forma earnings per share is based on the fully diluted average number of Triad common shares outstanding for each period presented. 56 EX-12.2 9 APPRAISAL OF: TRIAD BUSINESS PARK 1 [Carneghi-Bautovich & Partners, Inc. Letterhead] November 18, 1996 Mr. Larry McReynolds Manager Real Estate & Facilities Triad Systems Corporation 3055 Triad Drive Livermore, CA 94550-9559 Re: 96-ASF-359, Appraisal Triad Business Park Livermore, California Dear Mr. McReynolds: At your request and authorization, Carneghi-Bautovich & Partners, Inc. has made an appraisal of the as-is fee simple interest in 27 vacant land sites in the Triad Business Park and the as-is leased fee interest in the 219,818 square feet of office and office/flex buildings occupied by Triad Systems, assuming the entire holding is sold in a single transaction. The subject is located on the north side of Interstate 580 at Airway Boulevard in the City of Livermore, Alameda County, California. The subject is identified as Lots 1 through 25 and the Triad Systems Corp. buildings shown on the Triad Park site plan presented later in this report. The subject lots and building improvements are identified by the Alameda County Assessor's office as portions of Assessor's Parcel Numbers 905-9-2, 3, 7, 8, 9, 10, 11, 12, 18-1, 19, 21, 22-3, 29, 30, 31, 32, 33, 34, 35, 44, 47, and 48. The vacant sites are divided into the planning and use categories of residential, industrial/office flex, retail, and open space. The residential portion is divided into three lots and contains approximately 25 usable acres. The industrial flex portion is divided into 12 lots and contains approximately 92 usable acres. The retail/commercial oriented portion is divided into 10 lots and contains approximately 27 usable acres. The total usable area for these 25 lots is approximately 144 acres. In addition, there are two lots, one of approximately 110 acres designated for open space or agricultural use and one of 4.54 acres planned to be dedicated for transportation improvements. Approximately half the required offsite improvements are in place, funded through a combination of assessment bonds and community facility bonds. The construction of the remaining offsite improvements are expected to be funded through additional community facility bonds and are planned with the sale of the subject lots. The building improvements consist of 3 buildings that contain a total area of 219,818 square feet on a 15-acre site. All of the buildings are of concrete tilt-up construction and were built in 1987. Building G is a two-story office building containing approximately 70,986 square feet. Buildings K and F are single story industrial flex buildings with 74,064 and 74,768 square feet. The office build-out in these buildings is 90 percent and 40 percent respectively. 2 Mr. Larry D. McReynolds -2- November 18, 1996 This appraisal assumes that the buyer will succeed to the rights and obligations of Triad under the existing Subdivision Improvements Agreement. Further, relative to the building improvements, this appraisal assumes the proposed lease amendment between Triad Systems as tenant and 3055 Triad Drive Corp., as landlord has been executed and is in effect at the stated terms therein. The purpose of this appraisal is to estimate the as-is market value of the subject property. The intended use (function) of this appraisal is for the exclusive use by Triad Systems Corporation, for documentation as to market value concerning a proposed transaction, for the calculation of taxable income for the proposed transaction to be reported by the Internal Revenue Service, for evaluation of possible offers as to fairness and will (at least in part) be included as an exhibit to an information statement to be sent to all Triad stockholders and filed with the Securities Exchange Commission. This is a complete appraisal presented in a self-contained appraisal report. A more complete description of the subject property as well as the research and analysis leading to our opinion of value is contained in the attached report. Chapter I provides a summary of the salient facts and conditions upon which this appraisal is based and reviews the value conclusions. Based on the research and analysis contained within the attached report and subject to the assumptions and limiting conditions contained therein, it is the opinion of the undersigned that the cash equivalent market value of the fee simple and leased fee interest in the subject property, in as-is condition, assuming the lease amendment is executed and sale in a single transaction, as of November 1, 1996, is: THIRTY ONE MILLION EIGHT HUNDRED THOUSAND DOLLARS ($31,800,000) Further, it is our opinion that the property could be sold at the above market value within a 12-month exposure period. CERTIFICATION OF APPRAISERS We, the undersigned, hereby certify that, to the best of our knowledge and belief: the statements of fact contained in this report are true and correct; the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, unbiased professional analyses, opinions, and conclusions; we have no present or prospective interest in the property that is the subject of this report, and we have no personal interest or bias with respect to the parties involved; our compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a 3 Mr. Larry D. McReynolds -3- November 18, 1996 subsequent event; the appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan; our analyses, opinions and conclusions were developed, and this report has been prepared in conformity with the Uniform Standards of Professional Appraisal Practice, Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute; and is in compliance with FIRREA; we have made a personal inspection of the properties which are the subject of this report; no one other than the undersigned provided significant professional assistance to the persons signing this report. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. As of the date of this report Chris Carneghi and Ronald Blum have completed the requirements under the continuing education program of the Appraisal Institute. In accordance with the Competency Provision in the USPAP, we certify that our education, experience and knowledge are sufficient to appraise the type of property being valued in this report. We are pleased to have had this opportunity to be of service. Please contact us if there are any questions regarding this appraisal. Sincerely, CARNEGHI-BAUTOVICH & PARTNERS, INC. /s/ CHRIS CARNEGHI ------------------ Chris Carneghi, MAI Certified General Real Estate Appraiser State of California No. AG001685 /s/ RONALD BLUM --------------- Ronald Blum, MAI Certified General Real Estate Appraiser State of California No. AG009958 /s/ MARK A. WATTS ----------------- Mark A. Watts Certified General Real Estate Appraiser State of California No. AG015362 /sl 4 TABLE OF CONTENTS I. REPORT SUMMARY 1 A. Property Appraised 1 B. Subject Property Identifications 2 C. Purpose and Function of Appraisal 2 D. Scope of Appraisal 2 E. Date of Appraisal and Date of Report 2 F. Definition of Terms 3 G. Valuation Summary 3 H. Specific Limiting Conditions 4 I. General Limiting Conditions 4 II. AREA AND NEIGHBORHOOD DESCRIPTION 6 A. Alameda County 6 B. The City of Livermore 6 C. Subject Neighborhood 7 III. MARKET TRENDS 9 A. Industrial Flex and Office Markets 9 B. Commercial/Retail Market 9 C. Residential Market 10 D. Conclusions 10 IV. PROPERTY IDENTIFICATION 12 A. Subject Property Description 12 B. Ownership 12 C. Easements and Restrictions 13 D. Zoning 14 E. Utilities 16 F. Environmental Observations 16 G. Flood Zone, Seismic, Census Tract and Map Page Grid Information 16 H. Assessed Valuation and Real Estate Taxes 17 V. PROPERTY DESCRIPTION 18 A. Existing and Proposed Site Improvements 18 B. Site Layout and Description 19 C. Building Improvements 21 D. ADA Compliance 24
5 TABLE OF CONTENTS, CONTINUED VI. HIGHEST AND BEST USE AND APPRAISAL METHODOLOGY 25 A. Highest and Best Use 25 B. Methodology 27 VII. RETAIL VALUATION - FINISHED LAND 30 A. Comparable Sales - Industrial and Retail Sites 30 B. Analysis and Conclusions Industrial and Commercial Lots 33 C. Residential Lots 36 D. Open Space 37 E. Summary 37 VIII. DISCOUNTED (BULK) VALUE CONCLUSION 38 A. DCF Assumptions 38 B. Bulk Value Conclusion 42 C. As-Is Value 42 IX. VALUE OF TRIAD BUILDINGS - DIRECT SALES COMPARISON APPROACH 43 A. Comparable Building Sales 43 B. Analysis 45 X. VALUATION BY THE INCOME APPROACH 47 A. Current Leasing Status 47 B. Lease Survey and Analysis 49 CC. Stabilized Income Statement 50 D. Value Conclusion 52 XI. RECONCILIATION AND CONCLUSION - BUILDING IMPROVEMENTS 53 XII. FINAL VALUE CONCLUSION 54 XIII. EXPOSURE/MARKETING PERIOD 55 A. Exposure Period 55 B. Marketing Time 55
6 TABLE OF EXHIBITS
PAGE LIST OF TABLES Table 1 - Site Number and Identification 12.1 Table 2 - Assessed Value and Taxes 17.1 Table 3 - Comparable Land Sales 30.1 Table 4 - Comparable Residential Land Sales 36.1 Table 5 - Comparable Open Space/Agricultural Land Sales 37.1 Table 6 - Summary of Aggregate Retail Values 37.2 Table 7 - Discounted Land Valuation 39.1 Table 8 - Comparable Building Sales 43.1 Table 9 - Comparable Leases 49.1 Table 10- Stabilized Net Operating Income Statement 50.1
7 TABLE OF EXHIBITS, CONTINUED LIST OF MAPS Regional Map facing 6 Neighborhood Map facing 7 Site Plan facing 12 Zoning and Use Map facing 14 Site Plan facing 18 Building Site Plans facing 21 Floor Plans following 21, 22 Comparabe Land Sales facing 30.1, 30.2 Comparable Residential Land Sales facing 36.1 Comparable Open Sapce Land Sales facing 37.1 Comparable Building Sales facing 43.1 Comparable Rentals facing 49.1
8 ADDENDA Title Report Subject Building Photographs Comparable Sale Photographs Comparable Rent Photographs Unbuildable Hillside Area Map Building Synopsis Assessment District cost Estimate Table Qualifications of Appraisers 9 Appraisal: Triad Business Park, Livermore, CA Page 1 - ----------------------------------------------------------------------------- I. REPORT SUMMARY A. Property Appraised The subject property appraised is the as-is fee simple interest in 27 vacant land sites in the Triad Business Park and the as-is leased fee interest in the 219,818 square feet of office and office/flex buildings occupied by Triad Systems, assuming the entire holding is sold in a single transaction. The subject is located on the north side of Interstate 580 at Airway Boulevard in the City of Livermore, Alameda County, California. The subject is identified as Lots 1 through 25 and the Triad Systems Corp. buildings shown on the Triad Park site plan presented later in this report. The subject lots and building improvements are identified by the Alameda County Assessor's office as portions of Assessor's Parcel Numbers 905-9-2, 3, 7, 8, 9, 10, 11, 12, 18-1, 19, 21, 22-3, 29, 30, 31, 32, 33, 34, 35, 44, 47, and 48. The vacant sites are divided into the planning and use categories of residential, industrial/office flex, retail, and open space. The residential portion is divided into three lots and contains approximately 25 usable acres. The industrial flex portion is divided into 12 lots and contains approximately usable 92 acres. The retail/commercial oriented portion is divided into 10 lots and contains approximately usable 27 acres. The total usable area for these lots is approximately 144 acres. In addition, there are two lots, one of approximately 110 acres designated for open space or agricultural use and one of 4.54 acres dedicated for transportation improvements. Approximately half the required offsite improvements are in place, funded through a combination of assessment bonds and community facility bonds. The construction of the remaining offsite improvements are expected to be funded through additional community facility bonds and are planned with the sale of the subject lots. The building improvements consist of 3 buildings that contain a total area of 219,818 square feet on a 15-acre site. All of the buildings are of concrete tilt-up construction and were built in 1987. Building G is a two-story office building containing approximately 70,986 square feet. Buildings K and F are single story industrial flex buildings with 74,064 and 74,768 square feet. The office build-out in these buildings is 90 percent and 40 percent respectively. This appraisal assumes that the buyer will succeed to the rights and obligations of Triad under the existing Subdivision Improvements Agreement. Further, relative to the building improvements, this appraisal assumes the proposed lease amendment between Triad Systems as tenant and 3055 Triad Drive Corp., as landlord has been executed and is in effect at the stated terms therein. 10 Appraisal: Triad Business Park, Livermore, CA Page 2 - ----------------------------------------------------------------------------- B. Subject Property Identifications Zoning PUD. 108 (Business and Commercial) PUD 116 (Service, Retail and Industrial) PUD 117-94 (Residential) Census Tract Number Tract 4507.21, Block 2 Earthquake Zone (Not in Alquist Priolo) N/A Flood Zone (Insurance Not Required) X Thomas Map References Page 39, Grid E4
C. Purpose and Function of Appraisal This appraisal was requested by Mr. Larry McReynolds, Manager Real Estate and Facilities of Triad Systems Corporation. The purpose of this appraisal is to estimate the as-is market value of the subject property. The intended use (function) of this appraisal is for the exclusive use by Triad Systems Corporation, for documentation as to market value concerning a proposed transaction, for the calculation of taxable income for the proposed transaction to be reported by the Internal Revenue Service, for evaluation of possible offers as to fairness and will (at least in part) be included as an exhibit to an information statement to be sent to all Triad stockholders and filed with the Securities Exchange Commission. D. Scope of Appraisal The scope of this appraisal report is to utilize the appropriate approaches to value in accordance with Uniform Standards of Professional Appraisal Practice (USPAP) to arrive at a market value conclusion. Specific steps include the inspection of the subject property and the research and analysis of comparable data to arrive at value indications as put forth in the following report. This is a complete appraisal in a self-contained report. E. Date of Appraisal and Date of ReportDate of Appraisal and Date of Report The effective date of valuation is November 1, 1996, the last date of inspection of the subject property. 11 Appraisal: Triad Business Park, Livermore, CA Page 3 - ------------------------------------------------------------------------------ The date of the appraisal report is November 18, 1996. F. Definition of Terms 1. Definition of Market Value (OCC 12 CFR 34.42 (f)) (OTS 12 CFR, Part 564.2 (f)). Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: a. Buyer and seller are typically motivated; b. Both parties are well informed or well advised, and acting in what they consider their own best interests; c. A reasonable time is allowed for exposure in the open market; d. Payment is made in terms of cash in US dollars or in terms of financial arrangements comparable thereto; and e. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. G. Valuation Summary Based on the research and analysis contained within this report and subject to the assumptions and limiting conditions contained herein, it is the opinion of the appraisers that the cash equivalent market value of the fee simple and leased fee interest in the subject property, in as-is condition, assuming sale in a single transaction, as of November 1, 1996, is: THIRTY ONE MILLION EIGHT HUNDRED THOUSAND DOLLARS ($31,800,000) Further, it is our opinion that the property could be sold at the above market value within a 12-month exposure period. 12 Appraisal: Triad Business Park, Livermore, CA Page 4 - ------------------------------------------------------------------------------ H. Specific Limiting Conditions 1. A current title report was not provided to the appraisers. This report assumes no easements or restrictions have been recorded which would affect the market value of the subject, other than as noted in the report. 2. This appraisal assumes that the buyer will succeed to the rights and obligations of Triad under the existing Subdivision Improvements Agreement. 3. The appraisal report assumes the assessment bond projections accurately reflect the necessary remaining costs to complete the subject vacant lots. 4. This appraisal assumes the proposed lease amendment between Triad Systems as tenant and 3055 Triad Drive Corp., as landlord has been executed and is in effect at the stated terms therein. I. General Limiting Conditions 1. It is the client's responsibility to read this report and to inform the appraiser of any errors or omissions of which he/she is aware prior to utilizing this report or making it available to any third party. 2. No responsibility is assumed for legal matters. It is assumed that title of the property is marketable and it is free and clear of liens, encumbrances and special assessments other than as stated in this report. 3. Plot plans and maps are included to assist the reader in visualizing the property. Information, estimates, and opinions furnished to the appraiser, and contained in the report, were obtained from sources considered reliable and believed to be true and correct. However, no responsibility for accuracy of such items furnished the appraiser is assumed by the appraiser. 4. All information has been checked where possible and is believed to be correct, but is not guaranteed as such. 5. The appraiser assumes that there are no hidden or unapparent conditions of the property, subsoil, or structures, which would render it more or less valuable. The appraiser assumes no responsibility for such conditions, or for engineering which might be required to discover such factors. It is assumed that no soil contamination exists as a result of chemical drainage 13 Appraisal: Triad Business Park, Livermore, CA Page 5 - ----------------------------------------------------------------------------- or leakage in connection with any production operations on or near the property. 6. In this assignment, the existence (if any) of potentially hazardous materials used in the construction or maintenance of the improvements or disposed of on the site has not been considered. These materials may include (but are not limited to) the existence of formaldehyde foam insulation, asbestos insulation, or toxic wastes. The appraiser is not qualified to detect such substances; the client is advised to retain an expert in this field. 7. Any projections of income and expenses in this report are not predictions of the future. Rather, they are an estimate of current market thinking of what future income and expenses will be. No warranty or representation is made that these projections will materialize. 8. The appraiser is not required to give testimony or appear in court in connection with this appraisal unless arrangements have been previously made. 9. Possession of this report, or a copy thereof, does not carry with it the right of publication. It may not be used for any purpose by any person other than the party to whom it is addressed without the written consent of the appraiser, and in any event only with the proper written qualification, only in its entirety, and only for the contracted intended use as stated herein. 10. Neither all nor part of the contents of this report shall be conveyed to the public through advertising, public relations, news sales, or other media without the written consent and approval of the appraiser, particularly as to the valuation conclusions, the identity of the appraisers, or any reference to the Appraisal Institute or the MAI designation. 11. The Americans with Disabilities Act (ADA) became effective January 26, 1992. We have not made a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey of the property, together with a detailed analysis of the requirements of the ADA, could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect upon the value of the property. Since we have no direct evidence relating to this issue, we did not consider possible noncompliance with the requirements of ADA in estimating the value of the property, other than as noted in the report. Facing Page 6 - "Regional Map" Road map of the greater San Francisco Bay Area with location of subject property marked with an arrow indicating "SUBJECT." 14 Appraisal: Triad Business Park, Livermore, CA Page 6 - ------------------------------------------------------------------------------ II. AREA AND NEIGHBORHOOD DESCRIPTION A. Alameda County Alameda County is one of the five counties of metropolitan San Francisco, also known as the San Francisco-Oakland Standard Metropolitan Statistical Area. The western portion of the county, which contains most of the population and economic activity, is situated on the flatland adjacent to San Francisco Bay. The northwestern cities of Alameda including Berkeley, Oakland and San Leandro, are older and most of the growth in the 1980s and early 1990s has occurred in the southern and central cities of Alameda County. The eastern portion of the county is mountainous and largely undeveloped. Alameda County is the traditional manufacturing, transportation and warehousing center for the San Francisco Bay Area. The county has an advantageous location on the eastern side of San Francisco Bay. Transportation facilities include three transcontinental railroads, the Port of Oakland, extensive freeways, and the Bay Area Rapid Transit (BART) system. The county is linked to San Francisco and the west side of the bay by three bridges. The population is slowly growing. The 1990 Census reported the Alameda County population to be 1,279,182, an increase of 15.7 percent over the 1980 population. According to the Association of Bay Area Governments (ABAG), the population is expected to be 1,518,700 by the year 2005. The California Department of Finance reported the population as of January 1, 1996 to be 1,356,100. Total employment in Alameda County has grown steadily in recent years. The leading employment sector in the county is Service with nearly 36 percent of the jobs. Unemployment for Alameda County has been between 4.0 and 6.0 percent over the past year. According to the State Department of Employment Development, the unemployment rate for Alameda County was 5.3 percent in February 1996, compared with 5.6 percent one year earlier. Several military base closings are expected to slightly offset net employment growth until the year 2000. B. The City of Livermore The City of Livermore, incorporated in 1969, is in Alameda County, approximately 40 miles southeast of San Francisco. Livermore is on the eastern perimeter of the Tri-Valley area, roughly seven miles east of the cities of Pleasanton and Dublin, along Interstate 580. Facing Page 7 - "Neighborhood Map" Road map of the Livermore Area with location of subject property marked with an arrow indicating "SUBJECT." 15 Appraisal: Triad Business Park, Livermore, CA Page 7 - ----------------------------------------------------------------------------- According to the DOF, From a 1980 population of 49,612, Livermore grew 14 percent to 56,400 residents as of 1990. The community had a population of 65,400 as of January 1996, which represents an approximate 16.0 percent increase from the 1990 population. By the year 2005, the population of Livermore is projected to increase another 33.0 percent from current levels, to 87,000. Compared to other Tri-Valley cities, Livermore's growth has been gradual. This is due in large part to its peripheral location in the eastern Tri-Valley area, and the city's stated goal to limit population growth to 2.5 percent annually. According to the ABAG, employment in Livermore is projected to increase 67 percent from 1990 to 2010. A major factor contributing to Livermore's relatively high employment growth rate is the city's two governmental research laboratories. These facilities provide a relatively high proportion of the area's total employment, and have remained relatively unaffected by the current economic recession and governmental budget cuts. The Lawrence Livermore Laboratory employs 9,000 people and the Sandia National Laboratory employs 1,100. Both laboratories were established in Livermore after World War II and have been major inducements for area development. Major private sector employers in Livermore include Triad Systems, Inc., Intel Corporation and Hexel Corporation. Although population and employment growth has been gradual within the city of Livermore, the growth of the industrial segment of the market has expanded more rapidly. While the communities of Pleasanton and San Ramon have captured the bulk of the office space users, development in Livermore has centered around industrial users, especially warehousing and distribution. C. Subject Neighborhood The subject property is in a light industrial and commercial area of Livermore, northeast of the Livermore Municipal Airport in the northwestern portion of the city. The greater subject neighborhood is generally bounded by Doolan Road and the City of Livermore limits to the west, Airway Boulevard to the south, the Chabot College Livermore Campus and the City of Livermore Limits to the east and the hills of Alameda County to the north. The boundaries of the immediate subject environs are the boundaries of Triad Business Park. Downtown Livermore is approximately two miles to the southeast of the subject. The subject neighborhood was developed in the late 1980s as Triad Business Park. The master plan for the area at the time of inception was for strictly light industrial uses. Due to changed market conditions since its inception, a broader group of uses have been developed and planned for the neighborhood. In addition to light 16 Appraisal: Triad Business Park, Livermore, CA Page 8 - ----------------------------------------------------------------------------- industrial uses, service commercial/retail has been developed and residential is planned. The southern half of the neighborhood, below North Canyons Parkway, has been developed with commercial oriented uses including a gas station, hotel, and a Costco retail warehouse. An additional hotel is currently under construction and a motorcycle dealership is also planned for this area. The northern half of the neighborhood abuts the hills of Alameda County and is vacant except the Triad Headquarters buildings. However, Microdental (a dental appliance manufacturer) is planning a light industrial facility on North Canyons Parkway at Triad Drive and Lincoln Properties is planning a 150,000 square foot speculative flex industrial building on North Canyons Parkway. Residential development is planned for the northeast corner of the subject neighborhood. The first phase is to be 176 townhouse-style residential units followed by 54 duet-style residential units. The area south of Interstate 580 is improved with the Las Positas Golf Course, Livermore Municipal Airport and several light industrial developments. The western portion of this general neighborhood is improved with Las Positas Golf Course and the Livermore Reclamation Plant. The Livermore Municipal Airport adjoins the golf course to the east. The eastern and southeastern portions of the neighborhood are improved with several light industrial parks and developments. The Livermore Airport is designated by the FAA as a reliever airport with a class designation of "basis transport." Constructed in 1965, it has a 4,000 foot runway with instrument landing system, as well as hangars, a restaurant, taxi ways and a parking lot. There is also an auxiliary runway of 2,600 feet and plans for a future 1,200 foot extension of the main runway. The subject neighborhood is considered one of the superior industrial locations in Livermore. Zoning is oriented toward high end, or low intensity, light industrial uses. Good freeway access from Airway Boulevard enhance its appeal. The area also has good proximity to the Livermore Airport and is the closest industrial area in Livermore to Pleasanton and the greater San Francisco Bay Area. 17 Appraisal: Triad Business Park, Livermore, CA Page 9 - ----------------------------------------------------------------------------- III. MARKET TRENDS A. Industrial Flex and Office Markets Similar to most parts in the Bay Area, the Tri-Valley Area experienced over building in the early 1980s. This led to high vacancy rates that lasted from the late 1980s through the early to mid-1990s. However, the lack of new construction, coupled with a stronger local economy resulted in strong absorption of all types of office and industrial space in the Tri-Valley area. It appears the market reached its supply and demand equilibrium in 1995. In 1996, the demand for space has continued and there is an upward pressure on rental rates. The Third Quarter 1996 market survey prepared by Grubb & Ellis shows a total overall vacancy rate for office, industrial and flex product of 4.7 percent and a year total absorption of 382,877 square feet. Both real estate brokers and active investors are estimating rental increases greater than 10 percent. This is supported by pending and recent leases in the market at rates between 5 and 10 percent higher than leases signed in 1995. The strength of the market has led developers to construct some limited new speculative industrial and office product. An example close to the subject is the Airport Business Center at Wright Brothers Circle, which has constructed several speculative industrial condominiums. Another example within the subject business park is Lincoln Property's planned 150,000 square foot speculative flex building. The broker for this property reports pro-forma rents of approximately $1.05 NNN for fully built-out office space. In the recent past industrial space was typically rented on an industrial gross basis, with rental rates ranging from $0.50 to $0.85 per square foot. B. Commercial/Retail Market Livermore is a growing city which has significant freeway frontage but has never had a large amount of retail space. The only retail space in the city has been an older style downtown and scattered community and neighborhood shopping centers. During the late 1980s and early 1990s, several ambitious shopping centers were planned for Livermore. The largest proposed and constructed are adjoining Interstate 580. The retail leasing market in the city of Livermore continues to recover after several years of greater supply than demand. Market rents declined in the early 1990s, but have stabilized. The vestiges of overbuilding remain, such as the vacant and boarded up Vineyard Factory Outlet Center at Greenville Road and Interstate 580. The project was constructed on a speculative basis and was not able to attract sufficient tenants. 18 Appraisal: Triad Business Park, Livermore, CA Page 10 - ----------------------------------------------------------------------------- In contrast, stand-alone destination retail uses with freeway frontage have been more successful during the last four years. Examples include automobile dealerships, restaurants, hotels and "big box" retailers such as Costco and Walmart. The uses have a broader retail draw and depend on the high Interstate 580 traffic count. C. Residential Market In past years, Alameda County has been the beneficiary of strong housing demand due to its proximity to major Bay Area employment centers. This demand, coupled with a limited supply of available land for residential development, has put significant upward pressure on residential values within Alameda County and has pushed growth outward into the east county area. Even in eastern Alameda County, despite relatively abundant vacant land, demand factors have historically put upward pressure on residential values. After 1990, however, residential values in the east county have declined. An abundant supply of new East County housing, a slowdown in the residential resale market, and recessionary factors, all contributed to the general market downturn experienced over the past several years. More recent market factors indicate that demand for single family residences in the area is showing signs of improvement. In summary, demand for housing has been historically strong within both the County and City. However, recent recessionary factors and past years' price increases have reduced affordability. This led to declining finished unit absorption and pricing from about 1990 through 1995. More recently, the market has shown signs of improvement as reflected in absorption and pricing. D. Conclusions The improved economy coupled with the lack of new construction during the last four years has resulted in positive absorption of nearly all types of real estate in 1995 and 1996. Rental rates and sale prices for industrial, office, retail and residential uses are trending upward. Investors and developers are gaining confidence that current market conditions are sustainable and improving. Speculative construction of office and industrial space is being considered; and, the Livermore market may have reached the point where rental rates justify the cost of construction for these uses. The absorption rate for land and buildings appears to be improving. Industrial and office leasing statistics combined indicate a decline in vacancy rates from more Than 10 percent to 4.7 percent as of the third quarter of 1996, according to statistics compiled by Grubb & Ellis. In terms of land, approximately 40 acres have been 19 Appraisal: Triad Business Park, Livermore, CA Page 11 - ----------------------------------------------------------------------------- sold in the subject business park during the last year. In addition, much of the remaining land in the subject park has been optioned by a first right of refusal. The investment market for real estate is also improved. The market is active and a variety of institutional and private investors are seeking to purchase properties of all types. Yield and capitalization rates appear to be trending downward as investors anticipate increased rental rates. Facing Page 12 - "Site Plan" Engineers plan drawing labeled "Triad Park, City of Livermore, California, September 1996" showing Subject Property and neighboring lots. 20 Appraisal: Triad Business Park, Livermore, CA Page 12 - ----------------------------------------------------------------------------- IV. PROPERTY IDENTIFICATION A. Subject Property Description Legal description of the subject property is included in the preliminary title report issued by Transamerica Title Insurance Company, dated June 8, 1987, the most recent available. A copy of this report is reproduced in the Addenda. The title report Assessor's Parcels do not correspond with the current Assessor's Parcels for the subject and the legal description encompasses sites sold to others that are not included in this appraisal. The subject lots and building improvements are identified by the Alameda County Assessor's office as portions of Assessor's Parcel Numbers 905-9-2, 3, 7, 8, 9, 10, 11, 12, 18-1, 19, 21, 22-3, 29, 30, 31, 32, 33, 34, 35, 44, 47, and 48. The subject property is more specifically identified by the Site Numbers on the Triad Park Site Plan presented later in this chapter. The site number and corresponding tentative or final tract map number is presented on the table on the following page. B. Ownership According to a review of public records, ownership in the subject property is currently held by Triad Systems Corporation. The subject property was purchased in 1984 as vacant parcels and the existing improvements were constructed by the current owner. No other transfers have occurred in the past three years. Several of the subject lots are in escrow in the subject park and most of the remaining sites are under a first right of refusal contract. Triad Park Lot Number 15 is under contract to be sold. The buyer is Prakash and Subhash Patel. The price was $625,000 if escrow closed prior to September 30, 1996 and is $669,735 if escrow closes prior to December 31, 1996. The price if escrow closes prior to March 31, 1997 is $714,400. The buyer also assumes the obligation of the current and future assessment bonds. The sale is contingent upon the buyer obtaining the necessary approvals for a hotel. The seller's representative reports the likely close of escrow will not be until the March 31, 1997 date. The seller is providing 75% financing at 2 percent above the prime rate, amortized over 240 months and due in 84 months. Lot 4 at the northeast corner of Triad Drive and North Canyons Parkway is in escrow to J.S. Kendall for $900,385 or $3.90 per square foot plus assessments. Escrow is scheduled to close June 15, 1997. The terms are cash to the seller. The buyer is a local contractor that plans an industrial flex building. Following page 12, Table 1: "SITE NUMBER AND IDENTIFICATION" Identification key to Site Plan map facing page 12 listing Size, Usable percantage and zoning information by map location number. 21 Appraisal: Triad Business Park, Livermore, CA Page 13 - ----------------------------------------------------------------------------- Lots 1 and 2 are in escrow to Gibson Speno Company with escrow to close March 31, 1997. The purchase price is $1,662,000 for Lot 1 and $1,238,000 for Lot 2. The total price is $2,900,000. The purchaser has agreed to pay for the current and future bond assessments for these lots as well as the bond assessments for Lot 3. The total future bond assessments are estimated at $1,488,706 and capped by the sales agreement at $1,500,000. In addition to the sites currently in escrow, Lincoln Property has an option to purchase Lots 9 and 9A (adjacent to their recently purchased site) at $3.99 per square foot plus current and future bonded assessments. The option price increases 5 percent per year starting September 1996, and is pro-rated. Lincoln Property also has the first right of refusal to purchase Lots 7, 8, 9, 9A, 10, and Lots 21-24. This right is for a term of 5 years. Lincoln is given the right to purchase the lots encumbered at an equivalent price if a purchase offer is made by another party. An option to purchase Lot 7 on the Site Plan has been granted to Micro Dental (the recent purchaser of an adjacent parcel) at $3.60 per square foot plus assessments for a 24-month period beginning September 1996. The option price increases to $5.50 per square foot for months 24 to 36 of the option period. C. Easements and Restrictions According to the preliminary title report and discussions with the owner's representatives, the subject property is encumbered by development and subdivision improvement agreements with the City of Livermore, and Covenants, Conditions and Restrictions (CC&Rs) for Triad Business Park. CC&Rs are typical for industrial parks, and generally set development standards to maintain the appeal of the park. The subject development agreements and CC&Rs were reviewed and no unusual items were noted. The subject park has also relinquished access rights to the freeway, which is a common requirement for sites adjacent to freeways. The current access to the freeway is adequate and the relinquishment is not considered significant. The unusual easements and restrictions affecting the subject are discussed below. The subject owners are required to dedicate Lot 14 to the City of Livermore for transportation improvements as part of the terms of granting approval. No other compensation was negotiated. The owner's representative reports that if the City does not continue to use the freeway interchange land west of Lot 14 on the other side of Airway Boulevard, (shown on the site plan as the freeway interchange), it would trade the other property for Lot 14. However, it is considered unlikely by the owner's representative and the appraisers that the City will not use both parcels. Facing Page 14 - "Zoning And Use Map" Engineers plan drawing labeled "Triad Park, City of Livermore, California, September 1996" showing Zoning of Subject Property and neighboring lots. 22 Appraisal: Triad Business Park, Livermore, CA Page 14 - ----------------------------------------------------------------------------- The development of the southeast corner of the subject property requires a stream to be put underground. The path of the undergrounded stream will be along the southern edge of Lots 25 and 24 and then along the western edge of Lots 23 and 22. The easement for the stream will be within the required yard set back for the site and no impact is noted. The development agreement also requires the construction of a riparian greenbelt, referred to in the agreement as a "critter path." The greenbelt is to be approximately 50 feet wide and allow native wildlife a 7 foot deep waterway and a surface path through the property. This greenbelt requirement affects Lots 25, 23, and 22 on the Triad site plan. The greenbelt's impact on the utility of these sites is considered later in the valuation section of the report. The greenbelt is located on the eastern periphery of these sites and is less than the required yard setback on front or side streets of 70 feet. It is only slightly greater in width than the required rear and side yard landscaping setback in the park of 25 feet. The tentative and final parcel maps were reviewed for other easements and no unusual easements are noted. Tentative Parcel Map 6577, which pertains to Lots 16 through 25, shows a 50-foot wide sewer and storm drain easement from North Canyons Parkway to the Collier Canyon extension that affects Lot 24, 19 and 20. The easement is generally on the edge of these sites and is only considered to have a slight negative impact on the utility of these sites. Based on a review of the Tentative Parcel Map 6577, several right of way and public utility easements for paper streets (that are no longer proposed) will be abandoned because of the most recent lot configuration changes. An important restriction that affects the subject lots along the northern side of the property is the development limit line, established by the Scenic Route Element Resolution 167-83 of the City of Livermore. This line follows the contours of the hillside and restricts development to those areas below the line. This development limit line significantly impacts the net useable area of the subject property and will be considered in the later valuation sections of the report. The remaining easements shown on the Parcel Maps for the subject sites are on the periphery of the lots and are considered typical of other development sites. D. Zoning The subject properties have three zoning designations by the City of Livermore, light industrial, retail/commercial and residential. The lots above Collier Canyons Parkway, Lots 4 through 12 are within the Triad Park PUD #108. The permitted uses include R&D facilities, professional and administrative offices, experimental and testing laboratories, manufacturing and distribution from previously prepared materials, manufacturing of pharmaceuticals and manufacturing of electric 23 Appraisal: Triad Business Park, Livermore, CA Page 15 - ----------------------------------------------------------------------------- and electronic circuits and devices. Motels, restaurants and convenience stores are allowed as Conditional Uses. The height is limited to 35 feet and with a Conditional Use Permit, a maximum of one hundred feet is allowed. The minimum lot area is twenty thousand square feet with a minimum width of one hundred feet. Front yards of 100 feet are required on major streets, 70 feet on North Canyons Parkway and Collier Canyon Road and 30 feet on other roads. The rear and side yard setback is 25 feet. The maximum building coverage area is forty five percent. Landscaping is required on yards next to streets, allowing for sidewalks and driveways. Landscaping is also required. The subject building improvements appear to conform to all zoning regulations. The lots below North Canyons Parkway, Lots 13 through 25, are within the Triad Park PUD #116 designation. This designation is for retail, office and compatible light industrial uses. The uses are restricted to a floor area of 5,000 square feet or greater. A variety of retail uses are permitted. A conditional use permit is required for fast food restaurants, automobile related businesses, commercial amusement facilities such as miniature golf, medical care facilities, hotels, and institutional uses. The minimum site size is 150,000 square feet for industrial uses, and 40,000 square feet for commercial uses. The maximum coverage is 30 percent for service commercial and retail uses, 40 percent for office uses and 45 percent for light industrial uses. Setback requirements are similar to those for the PUD #108. The allowable height is based on protecting the scenic view corridor and varies for each parcel according to elevation. Lots 1, 2 and 3 are within the Triad Park PUD #117-94, residential. This zoning designation is to "provide and environment exclusively for and conductive to the development and protection of condominium residential development." Multiple family dwelling units are permitted at a density no less than 18 units or greater than 22 dwelling units per net site acre. A 30-foot front set back and 20 foot side and rear yard set back is required. The maximum site coverage is 35 percent. The height limit is 45 feet. Parking is required at a ratio of 2.25 stalls per unit. The site plan attached to the PUD #117-94 shows the lower portion of Lot 1 dedicated to a recreation facility including a pool, spa, and playing courts. Given the narrow and irregular shape of this portion of the site, the recreational use is considered a good adaptation for this portion of the residential zone. The Lot 3 property is relatively steep and affected by the hillside building restriction. The owner's representative reports that the Planning Department has given verbal approval for a low density development on this portion of the subject 24 Appraisal: Triad Business Park, Livermore, CA Page 16 - ----------------------------------------------------------------------------- park as a buffer between the higher density townhouse and duet developments planned for Lots 1 and 2, and the 110 acres of open space above Lot 3. Based on the irregular shape and steep terrain the appraisers estimate an effective useable area of approximately 2 acres and a maximum of 8 units on this site. The open space 110 acre parcel is on the hillside directly north of the residential sites. The use of this site is restricted to low intensity agricultural uses and is currently used for grazing cattle. E. Utilities The property is served with typical urban utilities, including public water and sewer systems. Local companies supply electricity, gas and telephone service. Conversations with representatives of the subject owner indicate that the supply of water and sewer facilities is currently inadequate for a user with a high demand for water, such as in a manufacturing process. However, the water and sewer capacity will be increased with the construction of planned offsite improvements proposed for the eastern side of the subject park. These improvements are expected to occur in conjunction with the absorption of the remaining lots in the park (the subject property). F. Environmental Observations Inspection of the subject did not suggest the presence of any toxic contamination. Further a representative of the owner did not report any toxic contamination of the site. No other environmental observations are made. However, the reader is referenced to the Environmental Hazard Limiting Condition of Chapter I of this report, which assumes the property is clean of any contamination. G. Flood Zone, Seismic, Census Tract and Map Page Grid Information According to the flood insurance map Panel Number 060008-005A, effective July 3, 1990, the subject is in Flood Zone X, which are areas outside the 500-year flood plain. This flood designation does not require flood insurance. According to governmental geological evaluations, the entire San Francisco Bay Area is in a seismic zone. No active faults, however, are known to exist on the subject property. As similar seismic conditions generally affect competitive properties, no adverse impact on the subject property is considered. The subject property is not in an Alquist Priolo Special Studies Zone. The subject property is in Census Tract 4507.21, Block 2. It is found on Thomas Map Grid 39, E4. 25 Appraisal: Triad Business Park, Livermore, CA Page 17 - ----------------------------------------------------------------------------- H. Assessed Valuation and Real Estate Taxes The subject property has been assessed for ad valorem tax purposes for the fiscal year 1996 - 1997 as shown on the table on the following page. Under California law a real property assessment can only be increased a maximum 2 percent per year. Reassessment is permitted upon change of ownership, typically based on the estimated market value multiplied by a tax rate of 1 percent plus any outstanding bonded assessments. The tax rate for fiscal year 1996 - 1997 for the subject is 1.1849 percent. The total assessed value is $38,500,761. Base taxes including minor special assessments total $595,206.88. Based on the total appraised value in this report, the assessed value is higher than the concluded market value for the subject. The subject is also encumbered by an assessment district and community facilities district obligations. The total current obligations amount to approximately $1.20 per square foot. In addition, the subject owner's representative estimates that an additional $1.28 per square foot of total area will be spent to complete the remaining required offsite improvements at the subject property. The cost of the improvements are planned to be paid by additional community facilities district funding. For the purposes of this report, the assessments are considered financing and the concluded values exclude consideration of the bonds. Following page 17, Table 2: "Assessed Value and Taxes" Assessed valuation of Subject Propery and surroundings by APN number Facing Page 18 - "Zoning And Use Map" Engineers plan drawing labeled "Triad Park, City of Livermore, California, September 1996" showing ownership of Subject Property and neighboring lots. 26 Appraisal: Triad Business Park, Livermore, CA Page 18 - ----------------------------------------------------------------------------- V. PROPERTY DESCRIPTION A. Existing and Proposed Site Improvements The subject property consists of 27 vacant land parcels and a parcel improved with the Triad Headquarters buildings. The lots total 312.97 gross acres and range in size from approximately 0.75 to 110.8 acres. The offsite improvements are partially in place. The existing offsite improvements are typical of industrial or business park and include curbs, gutters and storm drains and typical utilities. The site plan is shown on the facing page. The streets on the northern side of the site need to be improved, including North Canyons Parkway west of Airway Boulevard, Doolan Road, Republic Drive, Constitution Drive (cul-de-sac), and Independence Drive (cul-de-sac). These improvements are relatively minor. The major improvements required prior to developing the remaining lots are in the southeast corner of the site. This portion of the site requires extension of Collier Canyon Road around the southeastern corner of the site, the extension of the southern portion of Triad Drive and placing an existing stream underground. Based on engineering and construction cost estimates, the subject owner's representative has estimated $14,650,000 in remaining offsite costs are required in the subject park. A copy of the Triad Park Assessment District and Community Facilities District Cost Estimate table is reproduced in the Addenda of this report. The table shows the original principal amount of the existing and proposed indebtedness. As shown in the Total District Bond Amount "Estimate" section, the 1993 and 1990 bonds total $11,505,000 and $2,350,000, or $1.00 and $0.20 per square foot respectively. The 1997, 1999, and 2001 Community Facilities District bonds have not been issued. These bonds are estimates by the owner of the remaining required offsite construction cost of $14,650,000, or $1.28 per square foot, based on the total 263.73 acres in the Triad Park Assessment District. The 110 acre parcel and the Lot 14 parcel are not included in the assessment district. In addition, the assessment district encompasses the other lots in the park that are not part of this appraisal. The total offsite improvement costs for the subject park are $28,505,000, or $2.48 per square foot of gross land area. On a per square foot of land area basis, the total costs are in-line with the offsite costs for other business parks in the Pleasanton and Livermore area. The owner's representative reports that the estimates are intended to cover potential contingencies and that actual construction costs might be lower. Nonetheless, in an improved economy, construction costs may increase and this is also a 27 Appraisal: Triad Business Park, Livermore, CA Page 19 - ----------------------------------------------------------------------------- consideration. Overall, the remaining offsite construction cost estimate of approximately $1.28 per square foot appears reasonable and is used in this report. In addition to this cost, Collier Canyon Road in the vicinity of the residential lots needs to be widened and a slightly less than 1 acre portion of a neighboring property owner's land needs to be utilized for this purpose at a negotiated price of $35,000. The projected interest rate for the future community facilities bonds is shown at 9.0 percent. Relative to current interest rates, the future bond interest rate does not appear to be favorable, but the Triad representative stated this interest rate was conservative (i.e. high) for disclosure/planning purposes. The columns on the lower half of the table represent the principal and interest payoff schedule during the life of the bonds. The far right columns show the annual cost per square foot of land area and the annual principal and interest cost per acre. As stated earlier in the Assessed Value section of this report, for the purposes of this report, the assessments are considered to be financing and the concluded value excludes consideration of the bonds. B. Site Layout and Description As shown on the site plan, North Canyons Parkway bisects the park in an east-west direction. Smaller streets and cul-de-sacs connect with North Canyons Parkway in a north-south direction. Collier Canyon Road surrounds the property along the freeway frontage and on the eastern border of the park. Access to the subject lots is from Airway Boulevard. The topography of the subject lots slopes upward from the southern end to the north. The slope is gradual from the freeway to North Canyons Parkway. The gradient increases to the north and the northern portion of the subject lots is legally unbuildable. A slope site plan is presented in the addenda of the report that gives the reader a visual representation of the unbuildable areas of the subject property. North Canyons Parkway curves within the subdivision and creates some slightly irregular lot shapes. Further, some lots in the southeastern portion of the park appear to be configured for a retail shopping center and have irregular shapes. Lots 1, 2, and 3 are the residentially zoned sites. Lot 1 has an irregular shape with a long and narrow portion on the southern portion of this site. The long and narrow portion contains approximately 2.6 acres and is planned for a recreational use as part of the 176 residential unit condominium development on the remainder of Lot 1. Lot 2 is basically rectangular and contains approximately 5.5 acres. It 28 Appraisal: Triad Business Park, Livermore, CA Page 20 - ----------------------------------------------------------------------------- is planned for a 54-unit duet residential development. Lot 3 is also basically rectangular shaped; however, approximately 61 percent of the site is unbuildable due to the slope restriction. The remaining site shape is highly irregular and relatively steep. It is considered inefficient for multiple family development and a single family development is considered to have greater physical and economic feasibility. Lots 4 through 12 are zoned for light industrial use and are located north of North Canyons Parkway. Lots 4 and 6 are in the range of 5 acres and have good access, topography and site shape. Lot 5 is situated on a plateau above the Triad Systems Headquarters buildings. This site currently shares the same Assessor's Parcel with Lots 7 and 8 and access to this site is planned from a proposed easement over lots 7 and 8 if it is sold separately. Although Lot 5 has a rectangular shape, only 45.2 percent of the site is buildable due to the slope restriction. The remaining site shape is irregular and considered to reduce the utility of this site somewhat. Lot 7 has a regular shape and is slightly sloping. Lot 8 has a slightly irregular shape, but the northern half of the site is unbuildable due to the slope restriction. The estimated usable area is 4.29 acres. Similar to Lot 5, if this lot is sold separately from Lot 7, an access easement will be created over Lot 7. Lot 9A is a 5.6 acre site accessed from the end of the Independence Drive cul-de-sac. This lot has a slightly irregular shape and limited frontage. The topography slopes upward to the north. Lot 9 is a larger parcel with frontage on North Canyons Parkway and Constitution Drive. It is approximately 98.5 percent usable with a net area of 13.57 acres. Lots 10, 11 and 12 are in the northwest corner of the park and are all impacted by the slope restriction. Lot 10 is approximately 58.5 percent usable with a net area of 9.4 acres, Lot 11 is approximately 48.9 percent usable with a net area of 9.89 acres. Lot 12 is approximately 79.5 percent usable with a net area of 7.77 acres. The buildable area remaining for these sites is generally regular in shape except a small portion of Lot 10 and Lot 12. The remaining subject lots are in the southern half of the subdivision and are predominantly zoned for retail/commercial use. Lot 13 is in the southwest corner of the park. It is a regular shaped parcel with approximately 3.5 acres. The site plan shows access from a freeway frontage road. This road does not currently exist and is no longer planned. Access to the site will be from the extension of North Canyons Parkway. Following page 20: Overhead Plan Drawing of Landscape Development Plan: "Phase One, The Triad Center" Facing Page 21: Elevation Plan Drawing "Phase One, The Triad Center" 29 Appraisal: Triad Business Park, Livermore, CA Page 21 - ----------------------------------------------------------------------------- Lot 15 is on the east side of Constitution Drive between the freeway and North Canyons Parkway. The site contains approximately 4.1 acres and is generally level. Lots 16 through 20 are grouped on the east side of Independence Drive across from the Costco retail warehouse and directly north of the freeway. These sites have irregular shapes and ranges from 0.75 acres to 3.0 acres. Based on the group configuration, these sites appear to be planned for a shopping center where each retailer would own its own site. Lots 21, 22 and 23 are in the southeast corner of the park. Lot 21 is a small parcel with freeway frontage. Lot 22 is an irregular shaped parcel with limited freeway exposure. This site also has the required green belt restriction and is slightly impacted by a sewer easement in its southwestern corner. Lot 23 is accessed from the extension of Collier Canyon Road along the eastern side of the park. It does not have any freeway frontage. Lots 24 and 25 have frontage along North Canyons Parkway. Lot 24 is 10.5 acres and Lot 25 is 5.5 acres. These sites have regular shapes and are generally level. The Triad Systems headquarters buildings are situated on a 15.06 acre site that is rectangular in shape. The site slopes slightly from North Canyons Parkway and is accessed from a cul-de-sac from Triad Drive. A soil survey prepared by Peter Kaldveer and Associates dated February 10, 1987 indicates that the subject soils are suitable or can be remedied for construction of a variety of industrial and commercial developments. Overall, the subject sites are functional for construction of standard building improvements. C. Building Improvements The subject building improvements are the headquarters of Triad Systems Corporation and consists of three buildings totaling 219,818 square feet. The buildings are situated on a 15.06 acre site and are identified as Building G, Building K and Building F. Building G is a 70,986 square foot headquarters office building with a street address of 3055 Triad Drive. Building K is a 74,064 square foot research and development building with a street address of 3077 Triad Drive and Building F is a 74,768 square foot manufacturing and warehouse building with an address of 3011 Triad Drive. A synopsis of the building improvements provided by the owner's representative is reproduced in the addenda of this report. The site plan is shown on the facing page. As shown on the site plan the buildings are situated toward the rear of the site with parking in the front. There are a total of 689 parking spaces of which 209 are compact, 471 are full size and 9 are Following page 21: Overhead Interior Plan Drawings: "3055 Triad Drive, First Floor, Building One" and "3055 Triad Drive, Second Floor, Building One" 30 Appraisal: Triad Business Park, Livermore, CA Page 22 - ----------------------------------------------------------------------------- designated for disabled access. The parking ratio is 3.1 spaces for every 1,000 square feet of building area. The parking area is attractively landscaped with mature trees and special paving that leads to the headquarters office building, Building G. The areas between the buildings are improved as open courtyards, fenced with iron gates for controlled access. The buildings have a similar exterior appearance characterized by a clay tile mansard style roof that overhangs exterior walls. Approximately 80 percent of the exterior walls are improved with anodized aluminum frame windows. The office building is two stories in height while the other buildings, on either side of the office building, are single story. All of the buildings are of tilt-up concrete construction with wooden roof structures supported by glu-lam beams. The roofs have built-up style coverings except the sloped area covered by tile. Although the buildings were designed for owner occupancy, their design is intended to be flexible to allow multi-tenant occupancy. In general, the restrooms are centrally located so the buildings can be divided into quadrants. All of the buildings have fire sprinklers and all of the buildings were constructed in 1987. 1. Building G The headquarters office building is centrally located at the rear of the site, flanked by the other buildings on the east and west side. Schematic floor plans of the first and second floors are shown on the facing pages. The main entrance to the building is centrally located and leads to a reception area. The ground floor of the building is divided in an east west direction by a central hallway. A combination of offices and open work areas are on either side of the central hallway. The employees' cafeteria and kitchen are in the eastern side of the ground floor. The second floor has a largely open floor plan except for executive offices and central work areas. Half height movable partitions create individual work stations. According to the building synopsis provided by the owner's representative and verified with the building plans and inspection, the space utilization breakdown is 1,150 square foot lobby, 40,571 square foot open offices, corridors and stairs, 3,330 square foot enclosed offices, 1,750 square foot conference room, 1,000 square foot executive board room, 5,200 square foot class rooms, 3,500 square foot lab space with additional electric, 1,070 square foot computer room with raised floor and halon fire prevention system, 1,500 square foot dispatch communications center, 1,260 square foot studio, 6,375 square foot cafeteria, 1,980 square foot restrooms and 950 square foot exercise room, and 1,350 square foot mechanical room. Following page 22: Overhead Interior Plan Drawings: "3011 Triad Drive, Building 3" and "3077 Triad Drive, Building 2" 31 Appraisal: Triad Business Park, Livermore, CA Page 23 - ----------------------------------------------------------------------------- The interior is finished with acoustical tile ceilings, painted sheetrock walls, and a combination of carpeting, carpet squares and vinyl tile. Lighting is provided by florescent fixtures and the building has air-conditioning. Inspection of the building indicated the interior improvements are in good condition for their age. Overall, Building G appears to be of good quality construction and design. The improvements appear to be functionally well designed. While it is designed for a single user, it could potentially be subdivided into quadrants, providing adequate flexibility for a variety of office users. 2. Building K The product development and marketing building is west of the headquarters building. This building is nearly fully built-out with office and work space. The floor plan is open except for a few perimeter offices and central work areas. The building is designed for flex/industrial use, but as of the date of inspection the loading door was only used for refuse collection. Although the building is improved with dropped ceilings, the potential clear height is 35 feet. Thus, there appears to be potential to add a mezzanine level in the building if needed. The interior tenant improvements are similar to the headquarters building. It has dropped acoustical tile ceilings, finished sheetrock walls, and a combination of carpeting, carpet squares and vinyl tile. The space breakdown is as follows: 770 square feet of lobby, 45,095 square feet of open offices and corridors, 1,250 square feet of private offices, 5,878 square feet of conference rooms, 15,275 square feet of tiled lab space, 1,750 square foot computer room with raised floor and halon fire prevention, 855 square foot machine shop, 650 square foot break room, 1,670 square foot rest rooms and shower, 861 square foot mechanical rooms. 3. Building F The manufacturing and warehouse building is east of the headquarters building. This building is basically identical to Building K in construction, but its interior build-out is only 40 percent improved. The interior improvements are similar to the other buildings including acoustical tile ceilings, painted sheet rocked walls and a combination of carpeting and vinyl tile floors. The remainder is used for warehousing. In addition, this building has 2 grade-level doors and 5 truck doors, two with hydraulic dock 32 Appraisal: Triad Business Park, Livermore, CA Page 24 - ----------------------------------------------------------------------------- leveling ramps. The improved areas have air-conditioning and the warehouse is cooled by evaporative coolers. The concrete in the warehouse floor is designed for heavy loads and the 35-foot clear height allows 4 level pallet racks. The specific area breakdown is 1,000 square foot lobby, 12,200 square foot open offices and corridors, 575 square foot conference room, 15,200 square foot lab and assembly space, 1,100 square foot maintenance shop, 200 square foot break room, 1,570 square foot restrooms and showers and 42,923 square foot warehouse area. The building improvements are of good quality construction, and are in good condition. 4. Summary In addition to the buildings, the sites are improved with landscaping and parking. During inspection of the property, no signs of deferred maintenance or physical deterioration were noted. The improvements appear to be functionally well designed, providing adequate flexibility for a variety of industrial users. Overall, the subject is considered typical of the market in terms of functional utility, flexibility, design and appearance. D. ADA ComplianceADA Compliance The subject property appears generally in compliance with ADA standards. In as much as the comparables are also affected by ADA compliance issues, no impact is noted. However, the reader is directed to the ADA compliance limiting condition presented in the beginning of the report. 33 Appraisal: Triad Business Park, Livermore, CA Page 25 - ----------------------------------------------------------------------------- VII. HIGHEST AND BEST USE AND APPRAISAL METHODOLOGY A. Highest and Best Use (The Appraisal of Real Estate, 10th Edition, 1992, p.275) Highest and best use is that use, from among reasonably probable and legal alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value. The four criteria utilized in determining the subject's highest and best use are legal and political permissibility, physical possibility, financial feasibility and maximum profitability. 1. As Vacant a. Legal Permissibility Under the subject property's current zoning, it is divided into three PUD districts, that generally allow industrial, commercial/retail, and residential uses. The City of Livermore is flexible in allowing various uses, but the improvements are required to have a good quality exterior finishes. The hillside areas of the subject are not legally buildable and decrease the usable area of the subject sites. Further, the 110 acre open space parcel is not legally buildable. However, other than these exceptions, a variety of uses are legally permissible according to zoning. b. Physical Possibility The subject sites generally have regular shapes except for some of the smaller retail sites and the narrow portion of the residential site. The utility of the irregular shaped sites is decreased, but development is not precluded. For example, the narrow portion of the residential site is planned for a recreational component to the 174 unit residential development. The remaining offsite improvements can be installed at the subject to allow for the construction of improvements. Overall, a variety of uses are physically possible on the sites. c. Financial Feasibility The subject has a good location in Livermore, east of the Pleasanton Office and light industrial market. Its location benefits from the strong market conditions in the Tri-Valley area. Rental rates are increasing and small scale speculative development is beginning to 34 Appraisal: Triad Business Park, Livermore, CA Page 26 - ----------------------------------------------------------------------------- occur. Although the current demand does not appear to justify large scale projects such as the subject on a purely speculative basis, rents have reached the level where new construction is feasible. Therefore, after the remaining offsite improvements are constructed to complete Triad Park, the construction of a light industrial or office flex project with substantial pre-leased space is considered financially feasible. The subject lots on the southern side of the site have freeway visibility. Further, the retail potential of these sites is positively impacted by the proximity of the Costco retail warehouse and a freeway oriented commercial or office use is considered financially feasible on these sites. The residential market in Livermore has also improved. There has been a lack of much new construction during the past three years. The improved economy and strong job creation has created increased demand for residential projects. Absorption of new housing stock is strong and a residential development is considered financially feasible on the residentially zoned portion of the subject. The Livermore area is under served with multi-family housing and the subject site benefits from views of the valley below, and proximity to employment, freeway access and shopping. A residential use is considered financially feasible on the subject site. d. Maximum Productivity The maximum productive use of the subject is to first complete the remaining offsite improvements. Thereafter, a largely pre-leased light industrial or office flex use is considered financially feasible on the subject sites zoned for these uses. In addition, a freeway oriented commercial use is considered financially feasible on the sites with this zoning. Therefore, the maximally productive use of the subject site is the construction of industrial or office/flex industrial buildings on the northern portion of the park and freeway oriented commercial use on the southern sites. The maximally productive use of the residential zoned portion is construction of a residential development to the density allowed by the zoning. e. Highest and Best Use Conclusion - As Vacant Overall, based on these factors, the highest and best use of the subject property as vacant is to complete the remaining offsite improvements, followed by the development of industrial or 35 Appraisal: Triad Business Park, Livermore, CA Page 27 - ----------------------------------------------------------------------------- office/flex industrial buildings on the northern sites, freeway oriented commercial uses on the southern sites, and residential uses on the residentially zoned sites. 2. As Improved In considering the highest and best use of the subject property as improved, the same tests are applied and considered relative to the Triad Systems campus. The improvements appear to be in conformance with the general plan designation and existing zoning regulations for the sites. The subject properties are three well-designed office and flex light industrial complexes completed in 1987. The improvements are in good condition. The subject properties are well located with good freeway access close to the Livermore Airport. The buildings are functional and well suited for their existing use. They are also consistent with surrounding uses. There are a variety of large office and technology related users seeking space in the subject market. These users are attracted by existing technology firms in the Tri-Valley area and by the relative affordability of the Livermore market. The concluded value of the subject building improvements is substantially higher than the value of the underlying land, indicating the improvements have remaining economic life. The existing improvements contribute value to the subject sites. Demolition is therefore not warranted. The improvements are well suited for their existing uses and expansion or modification of the improvements is not warranted. Based on these factors, the highest and best use of the subject properties as improved is considered their existing uses. The most likely buyer of the entire subject property is an investor. B. Methodology The valuation of any parcel of real estate is derived principally through three approaches to the market value. From the indications of these analyses, and the weight accorded to each, an opinion of value is reached. Each approach is more particularly described below. 36 Appraisal: Triad Business Park, Livermore, CA Page 28 - ----------------------------------------------------------------------------- 1. Cost Approach This approach is the summation of the estimated value of the land, as if vacant, and the reproduction of replacement cost of the improvements. From these are deducted the appraiser's estimate of physical deterioration, functional obsolescence and economic obsolescence, as observed during inspection of the property and its environs. The Cost Approach is based on the premise that, except under most unusual circumstances, the value of a property cannot be greater than the cost of constructing a similar building on a comparable site. 2. Direct Sales Comparison Approach This approach is based on the principal of substitution, i.e., the value of a property is governed by the prices generally obtained for similar properties. In analyzing the market data, it is essential that the sale prices be reduced to common denominators to relate the degree of comparability to the property under appraisal. The difficulty in this approach is that two properties are never exactly alike. 3. Income Approach An investment property is typically valued in proportion to its ability to produce income. Hence the Income Approach involves an analysis of the property in terms of its ability to provide a net annual income. This estimated income is then capitalized at a rate commensurate with the risks inherent in ownership of the property, relative to the rate of return offered by other investments. Land is typically valued by the Direct Sales Comparison Approach. In the following chapters, the individual and aggregate retail value of the subject lots are estimated, followed by the discounted bulk value and the as-is value of the subject lots. The discounted bulk value of the subject lots is estimated using a residual analysis. A residual analysis estimates the land value by discounting revenues generated from selling finished lots, after deducting the cost of sale and a profit. Further, the as-is value is estimated by deducting the cost of the remaining lot improvements. The first step in the analysis, presented in the following chapter, is the estimation of the retail value of the subject lots assuming all offsite improvements are in place. The building improvements are valued by the Direct Sales Comparison and Income Approaches. Due to the subjective nature of estimating accrued depreciation on 37 Appraisal: Triad Business Park, Livermore, CA Page 29 - ----------------------------------------------------------------------------- three buildings constructed to suit the occupant, and because the Cost Approach is not typically used by market participants, the Cost Approach is not included. The market value of the building improvements is correlated at the end of the report. 38 Appraisal: Triad Business Park, Livermore, CA Page 30 - ----------------------------------------------------------------------------- VII. RETAIL VALUATION - FINISHED LAND The subject vacant sites are divided into industrial, retail, residential and open space use components. In this chapter, the industrial and retail land values are concluded first. The retail value of the residential and open space components are concluded subsequently. The retail values for all of the subject sites are summarized at the end of this chapter. A. Comparable Sales - Industrial and Retail Sites The tables on the following pages present comparable land sales. The land sales are segmented between commercial-oriented sales and industrial-oriented sales. Combined, they show a wide range between approximately $4.79 and $7.95 per square foot. After adjusting for various factors, including financing terms, conditions of sale, sale date, location, shape/topography, size zoning and other factors, an appropriate unit value can be selected for the subject sites. The primary factors affecting land value are physical characteristics, zoning, location and access. Corner parcels are typically worth more than interior ones, and smaller sites typically sell for higher unit values than larger ones. Visibility of the site from major thoroughfares also enhances the values of sites. In addition, market conditions have been steadily improving over the last two years. Older sales require an upward adjustment for market conditions. Comparable 1 is a 7.99 acre parcel at the southwest corner of Kitty Hawk and Nissen Drive in the Airway Business Park, across Interstate 580 from the subject. The comparable has freeway frontage and visibility and is at street grade. The California State Automobile Association purchased this property in June 1996 for $7.75 per square foot and assumed minor assessments of approximately $0.20 per square foot, for a total purchase price of $7.95 per square foot. A claims center is currently under construction. Relative to the subject sites, this comparable is considered a good indicator for the sites with freeway frontage. Comparable 2 is on the east side of Constitution Drive south of North Canyons Parkway. The site is part of the subject property and is identified as Lot 15 on the site plan. It is rectangular shaped except for a triangular shaped portion along its southern border. It contains approximately 4.15 acres. The buyer is Prakash and Subhash Patel. The price was $625,000 if escrow closed prior to September 30, 1996 and is $669,735 if escrow closes prior to December 31, 1996. The price if escrow closes prior to March 31, 1997 is $714,400. The buyer also assumes the obligation of the current and future assessment bonds. The sale is contingent upon the buyer obtaining the necessary approvals for a hotel. The seller's representative reports the likely close of escrow will not be until the March 31, 1997 date. The Following page 30: 1) Site Plan Map of Triad Park labled "Comparable Land Sales" 2) Table 3: Two page chart detailing Comparable Land Sales Data for Triad Business Park. 3) Street Map of Livermore Area showing location of Subjetc property and comparable sales outside of Triad Park. 39 Appraisal: Triad Business Park, Livermore, CA Page 31 - ----------------------------------------------------------------------------- seller is providing 75% financing at 2 percent above the Prime rate, amortized over 240 months and due in 84 months. Based on a close of escrow between December 1996 and March 1997, the purchase price will be $3.95 per square foot plus current and estimated future assessments of approximately $2.48 per square foot. The total price will be approximately $6.43 per square foot. This comparable is considered a good indicator for the subject sites with moderate commercial potential. Comparable 3 is on the east side of Constitution Drive at the freeway frontage road. This is a triangular shaped site that contains approximately 1.8 acres. The site has good freeway frontage and visibility. In September 1996, Triad Systems Corporation sold this property to the D'Ambrosio Brothers for $4.06 per square foot. The buyer also assumed existing and future assessments estimated at $2.48 per square foot. The total cost to the buyer therefore equates to $6.54 per square foot. The terms of the sale included $240,000 (75 percent) seller financing at 9% amortized over a 20 year period and due in 59 months. The buyer plans to construct a restaurant building. This comparable is considered a good indicator for the subject sites with retail potential. Comparables 4 and 5 are two adjacent parcels that sold in May of 1996. Comparable 4 is a 1.99 acre parcel that sold from Boulangerie De France to Brahma Enterprises for $465,000. The seller was reportedly motivated by a pending foreclosure action. The seller paid the existing assessment district debt of approximately $1.00 per square foot. The buyer assumed approximately $0.20 per square foot in existing community facilities bond debt and approximately $1.28 per square foot in estimated future bond indebtedness. The total purchase price is approximately $6.85 per square foot. The terms of the sale included short term seller financing at rates reported to be market oriented. The buyer is building a hotel on the site. This comparable is considered to be a good indicator for the comparables with retail potential. Comparable 5 is a 2.42 acre site that sold for $575,000 to Livermore Partners L.L.C.. The seller paid the existing The seller was reportedly motivated by a pending foreclosure action. The seller paid the existing assessment district debt of approximately $1.00 per square foot. The buyer assumed approximately $0.20 per square foot in existing community facilities bond debt and approximately $1.28 per square foot in estimated future bond indebtedness. The total purchase price is approximately $6.94 per square foot. The buyer plans to construct a motorcycle dealership on the site. The buyer is currently marketing 1.4 acres at an asking price of $10.00 per square foot. This comparable is considered to be a good indicator for the comparables with freeway visibility. 40 Appraisal: Triad Business Park, Livermore, CA Page 32 - ----------------------------------------------------------------------------- Comparable 6 is at the northwest corner of North Canyons Parkway and Independence Drive. This is a 11.02 acre site that has a curved shape along North Canyons Parkway, but is generally regular in shape. In September 1996, Triad Systems Corporation sold this site to Lincoln Properties for $3.41 per square foot plus current and proposed assessments of approximately $2.48 per square foot. The total purchase price equates to $5.89 per square foot. The buyer plans to construct a 150,000 square foot speculative industrial flex building. The terms of the sale also included the first right of refusal to purchase Lots 7, 8, 9, 9A, 10, and Lots 21 through 24 for a five year period. The terms also included the option to purchase Lots 9 and 9A at $3.99 per square foot plus assessments, or approximately $6.47 per square foot. The option price increases 5 percent per year over a 5 year period. This comparable is considered a good indicator for the subject lots north of North Canyons Parkway. A slight downward adjustment is warranted for the terms of sale which included the right of first right of refusal for most of the remaining lots in the subject park. Comparable 7 is on the east side of Constitution Drive and south of North Canyons Parkway. The site is generally rectangular and contains approximately 3.44 acres. The site is adjacent to two hotels across Constitution Drive and close to the Costco retail warehouse. The site does not have freeway visibility. In August 1996, Triad Systems Corporation sold this property to Duffel and Kendall for $3.00 per square foot plus existing and estimated future assessments of $2.48 per square foot. The total price is $5.48 per square foot. The terms of the sale included $337,155 (75 percent) seller financing at 2 percent over the prime rate, amortized over a 30 year period and due in five years. The interest rate is not considered favorable, but the terms were considered to facilitate the sale. A downward adjustment is warranted for the terms of the sale. This comparable is considered to bracket the upper end of the range for many of the sites above North Canyons Parkway. Comparable 8 is a 9,916 square foot site at 171 Rickenbacker Circle that sold in April 1995 for $4.79 per square foot. The comparable is on the south side of Interstate 580 near the airport and Airway Business Park. Although this site is small, an upward adjustment is warranted for market conditions. Comparable 9 is at the northeast corner of Independence Drive and North Canyons Parkway. This is a 9.18 rectangular shaped site adjacent to the southwest corner of the Triad Systems site. In September 1996, Triad Systems Corporation sold this property to HHH Investments for $3.47 per square foot plus estimated current and future assessments of $2.48 per square foot, for a total of $5.95 per square foot. 41 Appraisal: Triad Business Park, Livermore, CA Page 33 - ----------------------------------------------------------------------------- The terms of the sale include $1,041,815 (75 percent) seller financing at 2 percent over the prime rate amortized over 20 years and due in 5 years. The buyer also has an option to purchase Lot 7 at $3.75 per square foot plus current and estimated assessments of $2.48 per square foot for a total of $6.23 per square foot, if exercised by September 1997. The option price increases to $5.50 per square foot plus assessments in 1998. This comparable is considered a good indicator for the sites with good configuration above North Canyons Parkway. Comparable 10 is the current escrow of Lot 4 at the northeast corner of Triad Drive and North Canyons Parkway to J.S. Kendall for $900,385 or $3.90 per square foot plus assessments. The total price is approximately $6.38 per square foot. Escrow is scheduled to close June 15, 1997. The terms are cash to the seller. This comparable is a good indicator for Lot 6 which is similar in location and size. Comparable 11 is a 2.79 acre site at the southeast corner of Bennett and South Front in the eastern portion of Livermore. The comparable site has good freeway access from First Street and is close to the Plaza 580 shopping center. It sold in June 1996 for $5.51 per square foot with the buyer assuming a small assessment of approximately $0.23 per square foot. The total cost the buyer is therefore approximately $5.74 per square foot. The buyer plans to construct a 75,000 square foot warehouse. The comparable location is slightly inferior to the subject location, but the comparable zoning classification allows a wider variety of uses including heavy industrial. In addition, a higher density is allowed. The planned building has a coverage ratio of approximately 62 percent compared to a maximum coverage at the subject park of approximately 45 percent. This comparable is considered a good indicator for the industrial/flex sites at the subject. B. Analysis and Conclusions Industrial and Commercial Lots The lots valued in this section are 4 through 25, except Lot 14 which is the freeway dedication parcel. Values are based on net usable land area and are inclusive of all assessments for offsite improvements. The lots located above North Canyons Parkway have a light industrial zoning classification. The comparable sales considered the best indicators for these lots include Comparables 6 through 11. These comparables show a per square foot sale price range from $4.79 to $6.38 per square foot. Lots 4 and 6 are adjacent to the Triad Systems headquarters buildings and are relatively small sites with good configuration. A unit value at the high end of the range of the non-retail comparables is warranted. Lot 4 is currently in escrow at $6.38 per square foot to a local contractor. The current escrow price is considered 42 Appraisal: Triad Business Park, Livermore, CA Page 34 - ----------------------------------------------------------------------------- the best indicator for this site and an equivalent market value is concluded. Lot 6 is slightly smaller and a unit value of $6.40 per square foot is concluded for this site. Lot 5 is behind the Triad Systems headquarters buildings. The net buildable area of this site has a poor configuration considering the development limit line. This site also has relatively poor access compared to other sites in the park. This site is also relatively large with a net area of 10.12 acres. For these reasons, a unit value slightly below the low end of the range of $4.50 per net square foot is concluded for Lot 5. Lots 7, 8 and 9A are grouped at the end of Independence Drive. The Micro Dental and Lincoln Property comparables are in front of these parcels. Lot 7 has a good site shape and is behind Micro Dental. Although Micro Dental has an option to purchase Lot 7 for nearly $6.25 per square foot, it paid only $5.95 for its site, Comparable 9. The Micro Dental site has superior frontage and visibility and a lower unit value is warranted. Based on the other comparables including Comparable 7 that sold for $5.48 per square foot, a unit value of $5.50 per square foot is concluded for Lot 7. Lot 8 is located behind Lot 7 and lacks direct street access. An easement will be required if it is sold separately. The site shape has an irregular curve after slope restriction that reduces its utility. In addition, the slope will require more grading than the sites along North Canyons Parkway. Based on these factors, a unit value of $5.00 per square foot is concluded for this parcel. Lots 9 and 9A are adjacent and behind the parcel purchased by Lincoln Properties for $5.89 per square foot. The Lincoln parcel has superior frontage and visibility than Lot 9A and is not as deep a site as Lot 9. A lower unit value is warranted. While it is acknowledged that Lincoln has an option to purchase these sites at a price slightly less than $6.50 per square foot, little weight is placed on the option price because it has not been exercised. The Comparable 7 sale at approximately $5.50 per square foot is considered to be a good benchmark for Lots 9 and9A. The Comparable 7 property is smaller and is considered to have a superior configuration. A lower unit value is warranted for these subject sites and $5.25 per square foot is concluded for both Lots 9 and 9A. Lots 10, 11, and 12 are in the northwest corner of the park. The slope restriction decreases the utility of the northern side of these sites and these sites will require more grading or foundation work because of their slightly greater slope. These sites are considered similar in desireability to Lots 9 and 9A and a unit value of $5.25 per square foot is concluded for these parcels. 43 Appraisal: Triad Business Park, Livermore, CA Page 35 - ----------------------------------------------------------------------------- Lots 13 through 25 have a retail/commercial/light industrial zoning classification. The best comparables for the sites with freeway visibility and/or commercial appeal are Comparables 1 through 5. These comparables show a range from $6.43 to $7.95 per square foot. The high end of the range is Comparable 1. This property is outside the subject park and relative to the recent sales in the subject park, appears to be a market anomaly. A lower unit value is warranted for the subject lots. Lot 13 is on the southwest corner of the park. It has freeway visibility, but access will be from North Canyons Parkway rather than a freeway frontage road. Further, west bound travelers will not see the comparable until after the freeway exit and thus, it is considered to have inferior visibility compared to the other freeway sites in the park. The unit value of this comparable is considered to be bracketed between Comparable 2 at $6.43 per square foot and Comparable 3 at $6.54 per square foot. Based on the good site shape of Lot 13, $6.50 per square foot is concluded. Lot 15 is the site currently in escrow with an expected sale price of $6.43 per square foot based on close of escrow prior to March 1997. The expected escrow price is bracketed by the other sales with commercial potential in the park and appears reasonable. The escrow unit value appears to be at market levels and is concluded for this parcel. Lots 16 through 21 are in a group along the east side of Independence Drive at the freeway. These sites are relatively small and benefit from freeway visibility and their proximity to the Costco retail warehouse. Based on these factors, a unit value toward the upper end of recent sales in the subject park of $7.00 per square foot is concluded for these lots. Lot 22 has some limited freeway frontage. However, it has an irregular shape and is negatively impacted by the greenbelt easement and by a sewer easement. A unit value of $6.50 per square foot is concluded for this parcel. Lot 23 is impacted by the greenbelt easement and lacks the visibility of a North Canyons Parkway location. Lots 24 and 25 have commercial zoning classifications, but are considered to have less retail potential. Lot 24 is relatively large at more than 10 acres. The Comparable 7 sale at slightly less than $5.50 per square foot is used as a benchmark for these lots. A unit value of $5.50 per square foot is concluded for Lots 23 and 24. Lot 25 is smaller than Lot 24 and is across North Canyons Parkway from Lot 4 which is in escrow for $6.38 per square foot. This site is negatively impacted by the underground stream easement and the greenbelt easement. A unit value of $6.00 per square foot is concluded for this lot. 44 Appraisal: Triad Business Park, Livermore, CA Page 36 - ----------------------------------------------------------------------------- C. Residential Lots The subject Lot 1 and Lot 2 parcels are currently in escrow to the Gibson Speno Company with escrow to close March 31, 1997. The purchase price is $1,662,000 for Lot 1 and $1,238,000 for Lot 2. The total price is $2,900,000. The purchaser has agreed to pay for the current and future bonded assessments for these lots as well as the bonded assessments for Lot 3. The total future bonded assessments are estimated at $1,488,706 and capped by the sales agreement at $1,500,000. Based on the current and estimated future assessments for Lot 1, the escrow price equates to $5.05 per square foot. Similarly, the escrow price for Lot 2 equates to $11.12 per square foot. Based on the number of units approved the Lot 1 escrow price is $17,374 per unit and the Lot 2 price is $47,566 per unit. The wide variance in prices on a per square foot and per unit basis is related to the difference in site utility. The Lot 1 property includes the irregular narrow appendage along its southern side that decreases its utility. The table on the following page presents residential land sales in Livermore and eastern Contra Costa County. It also shows the current escrow price for the subject Lot 1 and Lot 2. Residential sites are most often considered on a price per residential unit basis. The per unit prices paid typically reflect differences in density. Developments with low density typically sell for higher per unit prices and developments with higher density typically sell for lower per unit prices. The comparable sales show a wide range from $11,333 per unit to $59,154 per unit. The wide range reflects the differences in density, location and date of sale. The best indicators for the subject Lot 1 are its current escrow price and the comparables on the low end of the range. The comparables on the low end of the range are Comparables 3 and 4. Comparable 4 is an older sale in Livermore with a similar density (net of the 2.6 acre recreation parcel) as the subject Lot 1. This property is considered to have a superior location. However, market conditions have improved substantially since 1992. Further, the comparable has a higher density than the subject and a higher unit value is warranted for the subject Lot 1. Comparable 4 sold for $13,462 per unit. It is in Brentwood, which is considered inferior to the subject location. In spite of its lower density, a higher unit value is warranted for the subject. The current escrow price is considered the best indicator for the subject Lot 1 and an equivalent market value is concluded of $17,374 per unit, or $5.05 per square foot. The Lot 2 property is considered most similar to Comparables 1 and 2 which sold for $52,000 and $59,154 per unit respectively. Comparable 1 has a much lower density and a superior location relative to the subject and a downward adjustment is warranted. Comparable 2 has a similar density but a superior location. It also Following page 36: 1) Street map of Livermore area labeled "Comparable Residential Land Sales" showing location of subject property and comparables. 2) Table 4: Chart detailing comparable residential land sales data for Triad Business Park. 45 Appraisal: Triad Business Park, Livermore, CA Page 37 - ----------------------------------------------------------------------------- does not require the grading likely for Lot 2. A downward adjustment is warranted. Similar to the Lot 1 property, the current escrow price is considered to be the best indicator for this property. An equivalent unit value is concluded of $47,566 per lot, or $11.12 per square foot. The Lot 3 property has a steep slope and is negatively impacted by the slope restrictions. As shown on the Usable Land Map presented earlier in this report, the remaining buildable portion has a very irregular shape. The irregular shape coupled with the steep topography is considered to decrease the utility of the site substantially. As estimated earlier in the zoning section of the report, a total of approximately 8 units is estimated for this lot. While the effective density is low, the grading and site preparation costs will be higher than the comparable properties. The Comparable 1 property had required grading and sold for $52,000 per unit. The subject has a slightly inferior location and utility and $50,000 per unit is concluded. 4. Open Space The subject also has 110 acres of dedicated open space that is north of the residential sites. The topography is relatively steep and the use of the site is considered limited to agricultural. The table on the following page presents three sales of land purchased for open space. The high end of the range, Comparable 1 at $4,429 per acre, is the sale of a property with some future development potential. The subject is considered most similar to the remaining two comparables that sold for $1,400 and $1,874 per acre. The subject is closest to Comparable 2 at the low end of the range and $1,400 per acre is concluded for this portion of the subject. E. Summary The unit values for the subject use components are summarized on the Summary of Aggregate Retail Values table. The aggregate retail value for the subject is shown at the bottom of the table. Following page 37: 1) Road map of Southern Contra Costa and Eastern Alameda Counties centered on Dublin, California, area labeled "Comparable Open Space Land Sales" showing location of subject property and comparables 2) Table 5: Chart detailing data on Comparable Open Space / Agricultural land sales for Triad Business Park. 3) Table 6: Chart labeled "Summary of Aggregate Retail Values" 46 Appraisal: Triad Business Park, Livermore, CA Page 38 - ----------------------------------------------------------------------------- VIII. DISCOUNTED (BULK) VALUE CONCLUSION The discounted (bulk) value is estimated by using a residual analysis. In a land residual analysis, all costs and revenues associated with selling the finished lots, as well as a profit factor, are taken into account over the time projected to sell the subject parcels. The present value of the net cash proceeds is then calculated by applying a discount rate commensurate with the risk of development. The projection of the net cash proceeds involves several steps. The first is the projection of the retail value that could be achieved for the subject parcels assuming retail sale, which was presented in the preceding chapter. The absorption period for the property is then estimated. Overhead and marketing costs, as well as a profit factor, are then deducted from the gross revenue sales over the marketing period to calculate the net cash proceeds. These net cash proceeds are then discounted over the absorption period to an estimate of present worth using a market derived yield rate. The current as-is value of the subject property, is estimated by deducting the remaining construction costs for the remaining offsite improvements necessary to construct buildings on the subject lots. As stated previously in this report, the existing assessment and community facilities district bonds are considered a type of financing. A. DCF Assumptions The DCF on the following page shows the calculation of the present value of the subject net cash flows over the projected absorption period. Assumptions concerning absorption, appreciation, profit and the appropriate discount rate, are discussed below. 1. Absorption Period Absorption statistics have been reviewed from various office parks in the Tri-Valley and Bay Area. The absorption projections for the subject take into account all components of demand for land including owner/users and developers of speculative projects, as well as that segment which buys and holds vacant land for investment, inflation hedge, or future expansion purposes. The estimated absorption period for the subject parcels is based on market factors as well as the actual absorption experienced at the subject in the past year. The subject owners have sold or placed in escrow a total of nearly 35 acres during the last year. An additional 4.4 acres have been sold by 47 Appraisal: Triad Business Park, Livermore, CA Page 39 - ----------------------------------------------------------------------------- other parties in the subject park. The absorption rate for the 1996 year is therefore approximately 40 acres. The absorption of land is closely tied to the absorption of the existing office and office/flex space. A total of 382,788 square feet has been absorbed in the Tri-Valley market during the first three quarters of 1996. The strong absorption trend coupled with the limited of new construction during the past three to four years suggests the existing product can be leased in approximately 1 year. Further, there are few large spaces available. Thus it is possible that a large user would not be able to find sufficient space presently. There are approximately 144 usable acres of vacant land in the subject property excluding the 110-acre agricultural parcel. Of this total, approximately 29 acres are in escrow to be sold in early 1997. Thus, if the escrows close as scheduled, there will be approximately 115 acres remaining exclusive of the agricultural parcel. The owner's representative has prepared a 7-year plan to sell the remaining lots in the subject park. Based on the 144 usable acres, this represents an average absorption rate of 20.6 acres per year. Given the 29 acres already in escrow, the absorption rate for the remaining 115 acres over the 7-year period equates to an average of 16 acres per year. Based on the most recent absorption trend, coupled with improving land development conditions and market oriented asking prices, a superior absorption rate appears to be achievable. Based on these considerations, a 5-year absorption period is concluded. This indicates an absorption of 28.8 usable acres per year of the subject. This is considered supportable given the projected improvement in the economy and real estate markets, realistic pricing, and aggressive marketing. 2. Cost of Sales Costs related to the sale of the finished parcels included marketing, overhead and real estate taxes. The subject owners have paid commissions of approximately 6 percent of the sale price net of the existing $1.10 in assessments, and 4 percent of the net sale price for the residential land excluding all assessments. Based on the weighted average total retail value of the residential, and commercial portions of the subject including assessments, the average commission is approximately 4 percent. The Following page 39: Table 7: Chart labled "Discounted Land Valuation" detailing assumptions and Net Present Value analysis of vacant land parcels. 48 Appraisal: Triad Business Park, Livermore, CA Page 40 - ----------------------------------------------------------------------------- owner's representative reports that with improved market conditions, the commission structure will likely be renegotiated. Considering that many of the sales will be direct, a total marketing and overhead expense of 3 percent appears reasonable. Therefore, for purposes of this analysis, three percent of gross annual sales has been allocated for sale costs. The land is assumed to be absorbed on a straight-line basis over the term with property taxes and other minor assessments deducted each year based on the assessed value. The assessed value is the retail value of the property. 3. Profit Entrepreneurial profit is the compensation earned by the developer for successful completion of a real estate development venture. With land development, profit is normally quantified in one of two ways. Profit is either included in the discount rate, or as a separate line item deduction. The latter is often referred to as a bifurcated rate. Residential subdivision investors/developers who use a bifurcated rate typically use 15 to 20 percent of gross sales revenues for profit. Office/industrial land is a riskier investment than residential subdivision land. These factors support a rate toward the high end of the range. The marketing of parcels requires time, effort and risk. The market would therefore also anticipate an entrepreneurial profit for such an undertaking. Typically, developers require a profit level from 10 to 20 percent. The subject properties include retail, industrial, residential and open space land uses. In addition, not all of the offsites are in place. Therefore, a developer would require a sufficient profit level to compensate for the risk involved. Also, the developer receives a greater proportion of the return toward the end of the absorption period. This increases the risk, warranting a higher profit. Thus, a profit level at the high end of the range of 20 percent of sales is concluded. 4. Annual Sales Price Increases The virtual absence of new construction during the last five years has led to dramatic rental rate increases in inner Bay Area locations. In 49 Appraisal: Triad Business Park, Livermore, CA Page 41 - ----------------------------------------------------------------------------- anticipation of continued increased demand, developers and owner-users are acquiring land for potential new development. Land values are showing strong appreciation from 1994 and 1995 price levels. Appreciation has been much greater than 10 percent during the past two years. However, Livermore is on the periphery of Bay Area and Tri-Valley development. Appreciation in the Livermore market has historically occurred subsequent to other markets closer to Silicon Valley. Land and rental rates have appreciated substantially in closer-in markets and appreciation in Livermore is expected to continue through 1997. The rate of appreciation is projected to be slightly higher than an inflation estimate of 5 percent annually. 5. Discount Rate In order to estimate the price a knowledgeable developer would be willing to pay for the subject today, it is necessary to discount the net cash flow results at a yield rate commensurate with the risks of land development. This process adjusts for the fact that money received at future dates is worth less than corresponding amounts received today. The net cash flow after holding costs is discounted at 13.5 percent. The discount rate is based on the weighted average cost of funds, assuming a 60 percent first mortgage at slightly less than three points over prime of 8.25 percent, or 11.0 percent. The remaining 40 percent of the required purchase price would be funded by a combination of second deed of trust money, which is considerably more expensive, and equity investment. Second trust deed money is available in the market today for high risk properties at a rate of approximately 15 percent. However, only an estimated additional 20 percent of the total cost could be financed through this mechanism as even second trust deed lenders today want equity contribution to projects. Finally, the last 20 percent of the required funds would likely come from equity money requiring an even higher yield rate. The equity funds would most likely require a return of 20 percent in order to attract an investor to the property. The blended rate is 60 percent of the funds at 11 percent, 20 percent of the funds at 15 percent and 20 percent of the funds at 20 percent. The total blended discount rate is 13.6 percent, which is rounded to 13.5 percent. The selection of a discount rate is also sensitive to the appreciation projection. The appreciation rate used in the DCF is at the low end of growth rate projections. Thus, a discount rate toward the low end of the 50 Appraisal: Triad Business Park, Livermore, CA Page 42 - ----------------------------------------------------------------------------- range is indicated, and the concluded discount rate appears reasonable and used in this analysis. B. Bulk Value Conclusion Discounting the net annual income stream for the sale of the subject lots over the absorption period, results in the bulk value of the subject property, which is rounded to a market value conclusion of $20,460,000. As a check of reasonableness, the IRR is calculated using the above value conclusion as a cash outflow at time zero and the net proceeds before profit over the next ten years, as cash inflows. The result is an indicated IRR of 23.5 percent, which is consistent with overall yields required by investors for a comparatively risky venture like land development. It therefore supports the discounted land valuation. C. As-Is Value In order to reach the current as-is value of the subject lots, all remaining lot improvement costs must be deducted from the discounted bulk value. As discussed previously in the report, there are remaining offsite costs necessary for the development of the subject lots that equate to approximately $1.28 per gross square foot. This per square foot cost is essentially the amount the owner plans to fund through four future community funding districts. This unit cost is multiplied by the 182.57 acres, or 7,952,749 square feet which results in a total remaining cost of $10,179,519 for the subject lots. In addition, the cost of utilizing the Collier Canyon 1 acre parcel for street widening is included at the negotiated price of $35,000. The total as-is deductions equate to $10,214,519. The as-is value is calculated as follows: Bulk Value Conclusion $20,460,000 Less Remaining Site Finishing Costs ($10,179,519) Less Collier Canyon Road Parcel Cost ($35,000) ----------- As-Is Value Conclusion $10,245,481 Rounded $10,250,000
51 Appraisal: Triad Business Park, Livermore, CA Page 43 - ----------------------------------------------------------------------------- IX. VALUE OF TRIAD BUILDINGS - DIRECT SALES COMPARISON APPROACH In this approach, the value of the subject property is established by a comparison to other comparable properties which have sold in the recent past. The table on the following page summarizes comparable sales. The comparables are further discussed in the following paragraphs. The comparable properties were selected primarily based on their location and leased status. The subject is leased to Triad Systems on an absolute net basis for a five-year term with a five-year option. The lease is discussed in detail later in the Income Approach. The first comparable was selected because it is a good quality R&D facility in San Ramon that sold fully leased. The next three comparables were selected because they are R&D facilities that sold with a single tenant in place on a triple net basis. The remaining comparable was selected because it is a good quality project close to the subject that sold 90 percent leased. A. Comparable Building Sales COMPARABLE 1 is the Norris Tech Center at Bishop Ranch in San Ramon. This property consists of two tilt-up concrete and one steel frame office/flex buildings at 2300 Camon Ramon, 4550 Norris Canyon Road and 4600 Norris Canyon Road. The concrete tilt-up buildings are two stories and the steel frame building is three stories. The buildings contain a combined building area of 260,480 square feet. The improvements were constructed in 1990 and 1984 and 1985 and are improved with approximately 72 percent office space. The improvements show a coverage ratio of 35.4 percent. Parking is available at a ratio of 4 spaces for every 1,000 square feet of building area. The 2300 Camino Ramon building is 100 leased to AT&T Network Systems until July 2000. The 4550 Norris Canyon Road building is leased to three tenants with 10 years remaining terms and the 4600 Norris Canyon Road building is leased to two tenants for 10 years remaining terms. In September of 1996, Highridge Partners sold this property to William Wilson & Associates for a reported price of $30,000,000 or $115.17 per square foot of building area. Based on the combined pro-forma net income for the buildings, and including a vacancy and collection loss of 5 percent, the net operating income is $2,919,665. The indicated capitalization rate is 9.7 percent. COMPARABLE 2 is the sale of a building located at 1210 California Circle in Milpitas. This is a 120,576 square foot, one story, concrete tilt up facility in average condition. It was constructed in 1987 on a 411,642 square foot site, reflecting a floor area ratio of 209 percent. The interior is improved with approximately 40 percent office space. The remainder of the space is warehouse which is access by 9 dock high doors and 4 grade level doors, has a clear height of Following page 43: 1) Road map of Greater San Francisco Bay Area labeled "Comparable Building Sales" showing location of subject property and comparables 2) Table 8: Chart detailing data on Comparable Building Sales for Triad Business Park. 52 Appraisal: Triad Business Park, Livermore, CA Page 44 - ----------------------------------------------------------------------------- 24 feet, and 4,000 amp power. Parking is provided at a ratio of 3.7 spaces per 1,000 square feet of building area. In June 1996, this comparable was sold for an all cash price of $12,550,000. This is equivalent to a unit value of $104.08 per square foot of building area. At the time of sale, the entire building was leased to LAM Research. This lease was singed in February 1996 for a ten-year term with annual rent escalations of four percent on a triple net basis. As of the date of sale the reported net operating income was $1,159,170. Compared to the sale price, this indicates an overall rate of 9.2 percent. COMPARABLE 3 is the sale of 103,060 square foot R&D building located at 45757 Northport Loop in Fremont. This one-story concrete tilt up building was constructed in 1983 and is in average condition. The underlying land area is 283,140 square feet, indicated a floor area ratio of 36 percent. The interior is built out with approximately 70 percent office space. The remaining warehouse space includes one dock high door and three grade level doors, a 16-foot clear height, and 2,000 amp power. Parking is provided at a ratio of 3.0 spaces per 1,000 square feet of building area. In April 1996, this building sold for an all cash price of $9,278,000. This is equivalent to a unit value of $90.03 per square foot of building area. At the time of sale the entire building was leased to LAM Research. This lease was signed in October 1995 for a ten-year term at an effective rental rate of $0.72 per square foot per month on a triple net basis. Net operating income at the time of sale was reported at $857,700. Compared to the sale price, this indicates an overall rate of 9.2 percent. This building was on the market for approximately 3 months prior to this transaction. COMPARABLE 4 is located at 330-350 Twin Dolphin Drive in Redwood City. This is a two-building 121,194 square foot, good quality, concrete tilt-up office/R&D complex. There is one, 45,792 square foot structure which contains nearly 100 percent finished office and one, 75,402 square foot structure that contains approximately 50 percent office and 50 percent manufacturing/warehouse with partial dropped ceiling. The building improvements were constructed in 1994 and are in good condition. The buildings are situated on a 9.274 acre site, reflecting an FAR of 30 percent. In February 1996, this property transacted for a cash-equivalent purchase price of $17,364,0000, equivalent to a unit value of $143.27 per square foot of building area. At the time of sale, the property was 100 percent leased to Harris Corporation who commenced on a 12 year triple net lease in August 1995. The 53 Appraisal: Triad Business Park, Livermore, CA Page 45 - ----------------------------------------------------------------------------- initial contract rental rate was $1.12 per square foot per month with annual $0.05 per square foot per month escalations. The leased rate was based on a $25.00 per square foot tenant improvement allowance to the building shell. Gross annual income based on the first rent escalation equates to $1,701,564. After deducting five percent for vacancy and two percent for triple net expense, net operating income is estimated at $1,584,156. The overall rate indicated by the transaction is 9.1 percent. COMPARABLE 5 is the Signature Center property located at 4900 and 5000 Hopyard Road just west of the Hacienda Business Park in Pleasanton. This property consists of one, three-story and one, four-story, steel frame office buildings, which were constructed in 1985. They are of excellent quality and in good condition. Also included is a two-story parking garage on a separate parcel which provides parking at a ratio of 4.0 spaces per 1,000 square feet of rentable area. Total rentable building area is approximately 255,000 square feet. In August 1995, Principal Mutual Life Insurance Company purchased the property from Calprop L.P. for a cash price of $24,500,000, or $96.08 per square foot of building area. The seller had previously purchased the property, with a portfolio of other properties, early in 1994. The building had been marketed for approximately 6 months, and had fallen out of escrow with another buyer. In addition to the purchase price, the purchaser assumed approximately $3,000,000, or approximately $11.76 per square foot of building area, in assessment bonds. At the time of sale, the property was approximately 90 percent leased, with the stabilized net operating income at the time of sale approximately $2,352,320 including a deduction for the assessment bond payments. Based on this net income, the indicated capitalization rate from this transaction is 9.6 percent. B. Analysis The comparables show a range from $90.03 to $143.27 per square foot of building area. They range in size from approximately 103,060 to 260,480 square feet. Adjustment for location, quality, physical characteristics, income and terms of sale result in appropriated unit value indication for the subject property. At the low end of the range is the 45757 Northport Loop comparables at $90.03 per square foot. The comparable has a superior Fremont location and a downward adjustment is warranted for location. However, the comparable property has a much lower level of interior buildout and an unattractive exterior facade. The low build-out and inferior quality is reflected in the lower rental rate for the comparable property. A higher unit value is warranted for the subject. 54 Appraisal: Triad Business Park, Livermore, CA Page 46 - ----------------------------------------------------------------------------- The high end of the range is the 330-350 Twin Dolphin Drive comparable at $143.27 per square foot. The comparable's Redwood Shores location is significantly superior to the subject's location. In terms of interior build-out, the subject and the comparable are similar. The exterior finish for the comparable is slightly superior. A significant downward adjustment is warranted for superior leased status of the comparable versus the subject. The comparable is long-term leased to Harris Corporation at a rental rate significantly higher than achievable at the subject. A lower unit value is warranted for the subject. The remaining comparables are in the middle of the range. Comparable 1 at 4550 Norris Road in Bishop Ranch sold for $115.17 per square foot. The comparable has a superior location in Bishop Ranch along the 680 Corridor. The comparable location was the first in the subject's greater market to report improving market conditions. The comparable also has a superior leased status with most of tenants having remaining terms of at least 10 years. The quality of improvements is considered similar to the subject improvements. Overall, a lower unit value is warranted for location and leased status. Comparable 2 at 1210 California Circle in Milpitas sold for $104.08 per square foot. The comparable location is considered significantly superior to the subject location and a downward adjustment is warranted. The comparable building is slightly inferior in quality and interior build-out. However, it is leased on a long term basis to LAM Research with annual rent increases. A lower unit value is warranted for the subject property. Comparable 5 the Signature Center on Hopyard Road sold for $107.84 per square foot. This is the oldest sale and an upward adjustment is warranted for improved market conditions subsequent to this sale. The comparable location in Pleasanton is considered superior to the subject's location and a downward adjustment is warranted. The comparable improvements are superior in quality and build-out relative to the subject and a downward adjustment is warranted for this factor. Overall, a downward adjustment is warranted, which is somewhat offset by improved market conditions. In summary, the unit value of the subject is considered to be significantly below the comparables on the high end of the range. It is considered to be bracketed by Comparable 3 at $90.03 per square foot and Comparables 2 and 5 at $104.08 and $107.84 respectively. In reaching a final value conclusion, the subject's superior build-out and quality relative to the Comparable 3 property is considered and $100.00 per square foot is concluded. The indicated value is as follows: 219,818 square feet x $100.00 per square foot = $21,981,800 Rounded $21,980,000
55 Appraisal: Triad Business Park, Livermore, CA Page 47 - ----------------------------------------------------------------------------- X. VALUATION BY THE INCOME APPROACH In the Income Approach, property is valued by estimating a stabilized net operating income for the subject and then applying an overall capitalization rate commensurate with the risk inherent in the ownership of the property. A. CURRENT LEASING STATUS ORIGINAL LEASE TERMS AND TENANT SYNOPSIS The subject property is fully leased by Triad Systems Corporation, which primary business is to develop software sales and inventory management systems for the automotive and hardware industries. These systems and the related ongoing support are then sold or leased to individual customers. The Triad financial report for fiscal year 1996, that ended in September 1996, shows that revenues in 1996 were relatively flat at $175.7 million versus 175.1 million in 1995. The report also notes that Triad is being purchased by a newly formed and jointly owned company formed by Hicks Muse, a private investment company and Cooperative Computing, a company that provides information-management solutions to large warehouse distributors. An analysis prepared by Standard and Poor's of the company shows a 1.3 percent decline in operating revenues over the past year and notes a $9,000,000 writeoff related to an automotive product issue and realignment of the automotive aftermarket operations. However, the report also notes that Triad, prior to the recent write off, had not recorded an operating loss since the third quarter of 1989. Standard and Poor's gives Triad's stock an average risk rating, a high strength rating and a B- earnings/dividend ranking. The landlord is 3055 Triad Drive Corp., which we are informed by the owner's representative is a related entity of the tenant. The original lease is dated August 1, 1988 with a term through August 31, 2003. The rent is $2,505,720 per year, flat for the entire term of the lease. The terms require the tenant to pay for all expenses including replacement if the buildings are destroyed. PENDING LEASE AMENDMENT The appraisers are in receipt of an unsigned document entitled First Amendment to the Project Lease Agreement which is included in the Addenda of the appraisal. The pending lease amendment will change the expiration date of the lease to December 31, 2001 and grant the tenant one - 5 year option to renew. The rental 56 Appraisal: Triad Business Park, Livermore, CA Page 48 - ----------------------------------------------------------------------------- rate is also changed. Beginning January 1, 1997 through December 31, 1998 it is $2,505,924 per year, or $0.95 per square foot per month. The rent for the remaining three years of the term is the "fair market rental value" but no less than the rent at the time of negotiation and no greater than 120 percent more. If the parties cannot agree on the fair market rental, the lease has provisions for retaining real estate brokers in the market. If the real estate brokers cannot agree to the rental rate, a third broker is retained. The three brokers are unable to agree, the three opinions of the fair market rental are added and averaged. The specific language of the lease is as follows: "Within (30) days after the selection of the third Broker, a majority of the Brokers shall set the Annual Base Rental for the remaining term. If a majority of the Brokers is unable to set the Annual Base Rental within the stipulated period of time, Landlord's Broker shall arrange for simultaneous exchange of written opinions of value from each of the Brokers and the three (3) opinions of value shall be added together and the total divided by (3); the resulting quotient shall be the Annual Base Rental for the Premises during the remaining term. If, however, the low opinion of value and/or the high opinion of value are/is more than ten percent (10%) lower and/or higher than the middle opinion of value, the low opinion of value and /or the high opinion of value shall be disregarded. If only (1) opinion of value is disregarded, the remaining two (2) opinions of value shall be added together and their total divided by two (2); the resulting quotient shall be the Annual Base Rental for the Premises during the remaining term. If both the low opinion of value and the high opinion of value are disregarded as stated in this Section, the middle opinion of value shall be the Annual Base Rental for the Premises for the remaining term." The rent during the five year option period is established in a similar manner but if the parties are unable to agree, real estate appraisers instead of brokers are appointed to establish the rental rate. As stated in the agreement, the rental rate cannot be less than the rent at the time of the option period. The remaining terms of the original lease are not changed. 57 Appraisal: Triad Business Park, Livermore, CA Page 49 - ----------------------------------------------------------------------------- B. LEASE SURVEY AND ANALYSIS The table on the following page presents comparable leases of single tenant triple net leased research and development projects. The subject is the only large single tenant occupied research and development facility in Livermore and the search for comparable properties was broadened to include western Alameda County. As shown, the comparables are all on a triple net expense basis. The leases typically include escalations during the term. The comparables indicate a range from $0.60 per square foot to $1.10 per square foot on a triple net expense basis. Most of the leases are relatively recent and thus reflect current market conditions. The only dated comparable, Comparable 7, Cellotape, is adjusted upward for market conditions. Rents for R&D space have been increasing in this market during the last 12 months. Regarding quality of construction, condition, and appeal, the comparables vary greatly in terms of the percentage office improvements. In general, higher rents are paid for building with greater office improvements. The high end of the range are the leases to ProBusiness, a payroll service company, Robert Half International, a recruiting company, and Pacific Bell Communications. These leases were fully built-out for the tenants and the relatively high rental rate reflects the quality of the space and the comparables superior location in Pleasanton. A lower rental rate is warranted for the subject. The remaining comparables show rental rates from $0.60 to $0.78 per square foot. These properties have superior locations in Fremont, but have lower levels of office build out. These comparables are considered more indicative of the market rental rate for the subject property. The superior office improvements at the subject property is considered to be offset by the subject's location. Overall, the comparable properties are similar to the subject except for location. Based on the comparables identified above, and with consideration for the subject's size, specific location, interior build out, condition and appeal, market rent is estimated at $0.80 per square foot per month, triple net. This represents a starting rent for a typical five-year term with no free rent nor other concessions. The contract rent for the subject is currently equivalent to $0.95 per square foot. Assuming 3.5 annual increases in market rental rates it will take approximately 5 years for the current contract rent to equal market rents. Thus, it is unlikely that the rent will be increased as of the adjustment date on January 1, 1999. Following page 49: 1) Road map of Southern Contra Costa and Eastern Alameda Counties, centered on Dublin, California Labeled "Comparable Rentals" showing location of subject property and comparables. 2) Table 9: Chart detailing data on Comparable Leases for Triad Business Park. 58 Appraisal: Triad Business Park, Livermore, CA Page 50 - ----------------------------------------------------------------------------- C. STABILIZED INCOME STATEMENT A summary of the estimated stabilized income for the subject property is presented on the table on the following page. 1. Income The subject has five years remaining of its rental term. Although the contract rental rate is renegotiated after two years, the terms of the lease do not allow the contract rent to be lowered from its current level. Based on an annual rent appreciation rate of 3.5 percent, the contract rent will continue until the end of the first lease term. Therefore, contract rent is used in this analysis. Gross potential income is estimated on an annualized basis at $2,505,924. In estimating the stabilized value, a provision for vacancy is considered appropriate to account for tenant turnover, uncollectible rent and the potentially unoccupied periods during the investment term. The estimated loss of income due to vacancy and collection loss is estimated at 5 percent, or $125,296. Subtracting vacancy and collection loss from gross potential income results in an effective gross income of $2,380,628. 2. Operating Expenses The survey of leases in the area indicates that most leases are on a triple net basis. The tenant is responsible for all utilities, taxes, insurance and maintenance expenses. The only costs incurred by the lessor are management fees and reserves. Management fees are estimated based on 2.0 percent of effective gross income, and reserves are estimated based on 1.0 percent of effective gross income, for total expenses of $71,419. 3. Net Operating Income Subtracting operating expenses from the effective gross income results in a net operating income of $2,309,209. Following page 50: 1) Table 10: Stabilized Net Operating Income Statement for Triad Business Park showing Stabilized Net Operating Income of $2,309,209.00, capitalized at 10.5% for a total stabilized value of $21,990,000. 59 Appraisal: Triad Business Park, Livermore, CA Page 51 - ----------------------------------------------------------------------------- 4. Capitalization Rate Selection The appropriate rate of capitalization for the subject is based on the quantity, quality, durability and general risk associated with the estimated stabilized net income. Also considered is the demand for and supply of competing properties with regard to the location, size and quality of the subject relative to other buildings within the market area. The most effective method of derivation of the capitalization rate is abstraction from the comparable sales data. The sales indicated capitalization rates between 9.1 and 9.7 percent. The low end of the range is represented by Comparable 4 at 330-350 Twin Dolphin Drive that sold with a 9.1 percent capitalization rate. The comparable location is considered superior to the subject location and the comparable lease terms are superior to the subject lease terms. A higher capitalization rate is warranted. Comparable 3 at 45757 NorthPort Loop in Fremont is also at the low end of the range at 9.2 percent. This property also has a superior location with a superior lease term. A higher capitalization rate is warranted. Comparable 2 at 1210 California Drive sold with a 9.2 percent capitalization rate. The superior lease term and location of this comparable warrant a higher capitalization rate for the subject. The high end of the range is represented by Comparables 1 and 5. These are both multi-tenant properties that have a combination of triple net and serviced tenants. This investment type is less attractive than a single tenant net leased investment. However, both comparables have a superior location and the tenants in these complexes have longer remaining terms to their leases. Because the subject lease has only five years remaining, a capitalization rate slightly above this range is indicated. In spite of a recent loss due to an expense write off, the tenant has shown steady operations over the past several years and is considered to be of average creditworthiness. The building was constructed as the tenant's headquarters and the evidence points to the possibility of a tenancy beyond the initial term. Based on these factors, a relatively high capitalization rate of 10.5 percent is concluded for the subject. 60 Appraisal: Triad Business Park, Livermore, CA Page 52 - ----------------------------------------------------------------------------- D. VALUE CONCLUSION Applying the capitalization rate to the estimated net operating income results in the following value conclusion: Market Value: $21,992,466 Rounded: $21,990,000
61 Appraisal: Triad Business Park, Livermore, CA Page 53 - ----------------------------------------------------------------------------- XI. RECONCILIATION AND CONCLUSION - BUILDING IMPROVEMENTS The values indicated by the approaches used in this report were as follows: Sales Comparison Approach $21,980,000 Income Approach $21,990,000
The Sales Comparison Approach used recent building sales. The comparable sales were related to the subject on a price per square foot basis. There was good market data for comparison. However, none of the comparables were exactly like the subject. This factor was adjusted for and this approach is considered valid. The Income Approach relied on contract rental information. There was good information regarding capitalization rates. Overall, there was good information available for this approach. The subject property is fully leased for the next five years with the potential of the tenant renewing in five years. It is considered to have greatest appeal to the investor market which considers the Income Approach as a primary value indicator. The subject is considered to most likely be purchased by an investor. These purchasers often use the Sales Comparison Approach weight the risk to the income stream. In reaching a final value conclusion for the subject property, most weight is placed on the Income Approach. The final value for the subject building improvements is: $21,990,000 62 Appraisal: Triad Business Park, Livermore, CA Page 54 - ----------------------------------------------------------------------------- XII. FINAL VALUE CONCLUSION The values concluded for the subject components are as follows: As-Is Bulk Value - Vacant Land $10,250,000 As-Is Value - Headquarters Building $21,990,000 Total Value Conclusion $32,240,000
The subject property consists of more than 185 acres of vacant land that requires offsite improvements and a triple net leased headquarters complex. The subject is appraised assuming it is sold in a single transaction. The number of buyers that would seek to purchase both property types in a single transaction is considered limited. The vacant land would disinterest many potential purchasers of the leased buildings. The likely buyer of the subject is considered to be an entrepreneurial development firm that would purchase the property and sell portions to another investor. A slight discount from the total aggregate value is warranted to provide a buyer with the impetus to purchase both property types. The brokerage commission to resell the buildings is estimated in the range of 2 percent and this discount to the value of the office building is considered appropriate for this analysis. The resulting as-is value is shown as follows: Aggregate Total Value $32,240,000 Less two percent of office value ($439,800) As-is Value Conclusion $31,800,200 Rounded $31,800,000
Based on the research and analysis contained within this report and subject to the assumptions and limiting conditions contained herein, it is the opinion of the appraisers that the cash equivalent market value of the fee simple and leased fee interest in the subject property, in as-is condition, assuming sale in a single transaction, as of November 1, 1996, is: THIRTY ONE MILLION EIGHT HUNDRED THOUSAND DOLLARS ($31,800,000) 63 Appraisal: Triad Business Park, Livermore, CA Page 55 - ----------------------------------------------------------------------------- XIII. EXPOSURE/MARKETING PERIOD A. EXPOSURE PERIOD (UNIFORM STANDARDS OF APPRAISAL PRACTICE, P.71, THE APPRAISAL STANDARDS BOARD OF THE APPRAISAL FOUNDATION) The estimated length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal; a retrospective estimate based upon an analysis of past events assuming a competitive and open market. Based on discussions with brokers active in the subject's immediate market area, the exposure period for the subject is expected to be within twelve months. Specific examples of exposure period vary from property to property. Properties will sell relatively quickly at a market oriented price. Peter F. Korpacz & Associates, Inc. prepares a quarterly survey of real estate investors covering all types of commercial real estate on a national basis. Their study shows that all buildings surveyed require an average marketing period of 9.9 months in order to sell, as of the second quarter of 1996. The exposure period for the subject is concluded to be within 12 months. B. MARKETING TIME (THE DICTIONARY OF REAL ESTATE APPRAISAL, THIRD EDITION, (CHICAGO: APPRAISAL INSTITUTE, 1993), PP. 220-221 1. "The time it takes an interest in real property to sell on the market subsequent to the date of an appraisal." 2. "Reasonable marketing time is an estimate of the amount of time it might take to sell an interest in real property at its estimated market value during the period immediately after the effective date of the appraisal; the anticipated time required to expose the property to a pool of prospective purchasers and to allow appropriate time for negotiation, the exercise of due diligence, and the consummation of a sale at a price supportable by concurrent market conditions." Based on the forecast stable market conditions, the marketing time is also concluded to be within 12 months. 64 February 18, 1997 Mr. Larry D. McReynolds Manager Real Estate and Facilities Triad Systems Corporation 3055 Triad Drive Livermore, CA 94550-9559 Re: 97-ASF-68, Appraisal Proposed LLC Per Share Market Value Dear Mr. McReynolds : At your request and authorization, Carneghi-Bautovich & Partners, Inc. has appraised the estimated market value per share of a proposed Limited Liability Company (LLC). The LLC is being formed for the sole purpose of managing, maximizing the value of, and liquidating certain real estate assets of Triad Systems Corporation. The underlying real estate assets of the proposed LLC were previously valued by Carneghi-Bautovich & Partners, Inc. in a complete appraisal/self-contained report identified as 96-ASF-359 dated November 18, 1996. That appraisal concludes that the market value of the fee interest in the real estate as of November 1, 1996 was $31,800,000. That appraisal report is incorporated herein by reference and is an integral part of the LLC per share valuation which follows. Since the appraisal was completed, one parcel of the subject property land has been sold and transferred. Parcel 15, a 4.15 acre parcel, was sold for $576,351 net and closed in December 1996. The buyer also assumed $198,372 in existing assessment bonds and is obligated to assume an additional $230,833 in future assessment bonds for a gross price of $1,005,556. The gross retail market value of the parcel in the appraisal was estimated at $1,161,537 (Table 6, page 37.2). The transfer price was 13.4 percent less than the appraised value. The seller's representative stated that this is because a cash discount was given in order to motivate a close of escrow by the end of the year. The actual net proceeds of this sale are deducted from the appraised value in order to adjust the value to reflect the remaining real estate assets of the LLC. The future assessment bonds to be assumed by the buyer have already been deducted from the $31,800.000 value conclusion of the appraisal while the existing bond debt is deducted in the net asset value calculation discussed below. Ownership shares in the LLC are to be distributed to the existing Triad Corporation shareholders. The total anticipated shares are 19,800,000 and the date of issue is anticipated to be March 15, 1997, which is also the prospective date of the per share value. The first step in the per share market valuation is a calculation of the net asset value of the underlying assets. The components of the valuation are the underlying real estate assets, less existing debt, plus any other assets such as cash and receivables. The net asset value per share can be calculated as follows: 65 Market Value of the Real Estate - Based on Appraisal $31,800,000. Less Net Proceeds from Parcel 15 (sold after the Appraisal Date) (576,351.) ------------ Gross Market Value of Real Estate $31,223,649. Plus Receivables (Owed by the City Livermore) 2,100,000. Plus Estimated Cash in the LLC 100,000. Less Bond Assessment Debt (9,470,000.) Less Real Estate Mortgage Debt (9,850,000.) ------------ Net Asset Value $14,103,649. Net Asset Value Per Share (19,800,000 shares) $0.71
The above calculations are purely mathematical and do not deal with the issue of how the market would respond to the shares offered for sale in the LLC. The vast majority of the assets in the LLC are real estate. Typically shares in real estate based companies are valued relatively close to the net asset value. Discounts or premiums in the market are based on the collective market judgement as to how much risk versus upside potential the individual real estate holding have. At the current time, REIT's typically sell at a slight premium to the net asset value; presumably because the stock buyer believes that management can increase the yields in the future. REIT's, however, are by nature income focused vehicles intended for operation indefinitely. The LLC which is the subject of this valuation is planned to operate for the next several years but only for purposes of maximizing and then liquidating the assets of the company to the shareholders. Further, the LLC is relatively highly leveraged and a major portion of the real estate assets are vacant land, which has inherently more risk than an improved property with an income stream. Publicly traded real estate development firms with a large amount of vacant land, including locally based Catellus and Newhall Land, are generally acknowledged to trade at approximately 70% of the underlying asset value, in part because there is less liquidity in the assets and greater risk in holding and developing vacant land. The LLC will have real estate valued in an independent appraisal at $31,800,000 gross before consideration of debt. The total debt including real estate mortgages and assessment district bond debt is approximately $19,320,000. Hence, the debt to equity ratio is 61%, which is high for a publicly traded company. The real estate assets of the LLC are made up of vacant land and improved income producing office and manufacturing buildings. The vacant land makes up approximately 32% of the total. The vacant land has the potential to appreciate but it does not generate income to pay the debt or for continuing operations. Although the income from the improved properties will generate operating income, using this income to carry the land debt will dilute the market expected yield (capitalization rate) from the improved property. Also, the LLC income producing property is 66 Mr. Larry D. McReynolds 3 February 18, 1997 all in a single location and leased to a single tenant, thereby concentrating exposure and eliminating the portfolio diversification that investors seek in REIT and similar investments. There is no way of measuring precisely how the market will respond to the LLC shares. However, a discount to the net asset value per share is suggested by a review of the factors affecting the LLC. These factors can be summarized as follows: 1. The assets are made up of a large amount of vacant land which the market recognizes as being more speculative and having higher risk than the improved property. Although there is improved income producing property it is concentrated in a single location and leased to a single tenant thereby eliminating portfolio diversification. 2. The LLC is relatively highly leveraged with a 61% debt to equity ratio. 3. Although the improved property net income will fund debt service and operations, this means a large portion of the investors return is dependent on appreciation of the vacant land. 4. The appraised value of the underlying vacant land is based on a projected five year sell out period, a 13.5% discount rate and other assumptions. Small changes in these assumptions will result in differing value conclusions, again illustrating the greater risk in the raw land portion of the subject. 5. Most stock market real estate investors in vehicles such as REIT's are motivated by income considerations and as a mean of diversifying a stock portfolio. While the improved portion of the LLC real estate assets accomplishes this, the vacant land portion does not. Based on all these factors, it is my opinion that the LLC shares will likely trade at a discount from the underlying asset value at least in the first 6 months to a year of the LLC operations as investors weigh the likely success of the vacant land sell out. Given the overall strength of the real estate markets at the current time, I am of the opinion that a 10 to 20 percent discount is likely. Using the mid-point of 15, my opinion of the per share value of the LLC at initial trading, estimated to be March 15, 1997 is as follows: Net Asset Value Per Share (19,800,000 shares) $0.71 Discount 15% Estimated Per Share Trading Price on March 15, 1997 $0.60
The purpose of this appraisal is to estimate the initial per share trading price of the LLC. The intended use of this appraisal is for income tax related issues and possible review by the Internal 67 Mr. Larry D. McReynolds 4 February 18, 1997 Revenue Service. IT IS NOT THE INTENDED THAT THE USE OF THIS APPRAISAL BE TO PROVIDE INVESTMENT ADVICE TO ANY SHAREHOLDERS OR ANY OTHER PARTIES TO THE LLC OR RELATED REAL ESTATE OR OTHER ASSETS. The above value conclusion is predicated on the accuracy of the above accounting numbers for which the appraiser takes no responsibility; namely the receivables, cash, bond assessment debt and real estate mortgage debt. These accounting numbers were obtained from Leon J. Moore, Director of Taxation with Triad Systems Corp. and Karl D. Detweiler, Partner Tax, Coopers & Lybrand LLP. I, the undersigned hereby certify that, to the best of my knowledge and belief: the statements of fact contained in this report are true and correct; the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions; I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest or bias with respect to the parties involved; my compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event; the appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan; my analyses, opinions, and conclusions were developed, and this report has been prepared in conformity with the Uniform Standards of Professional Appraisal Practice, Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute; I have made a personal inspection of the property that is the subject of this report; no one provided significant professional assistance to the person signing this report. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. As of the date of this report Chris Carneghi has completed the requirements under the continuing education program of the Appraisal Institute. In accordance with the Competency Provision in the USPAP, I certify that my education and knowledge is sufficient to appraise the type of property being valued in this report. I am pleased to have had this opportunity to be of service. Please contact me if there are any questions regarding this appraisal. Sincerely, CARNEGHI-BAUTOVICH & PARTNERS, INC. /s/ CHRIS CARNEGHI ------------------ Chris Carneghi, MAI EX-27.1 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1996 AND CONSOLIDATED STATEMENT OF INCOME AND STATEMENT OF CASH FLOW FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS SEP-30-1996 SEP-30-1996 0 0 0 0 0 0 22,966 4,795 43,094 0 19,464 0 0 0 23,630 43,094 0 6,301 0 2,778 1,092 0 1,857 574 53 521 0 0 0 521 0 0
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