-----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, Gb+QOJaVIp2itrrKIVWllGisI2WlMGJALSxCknhByBDaGQFbDi26omG1lG7fliZ6 zfHS/oLsza5VAaodHmmUXQ== 0000950115-00-000254.txt : 20000307 0000950115-00-000254.hdr.sgml : 20000307 ACCESSION NUMBER: 0000950115-00-000254 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TECHNOLOGIES INC CENTRAL INDEX KEY: 0001093229 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 232997171 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-92087 FILM NUMBER: 560137 BUSINESS ADDRESS: STREET 1: 7722 EAST GRAY RD CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 4807184065 MAIL ADDRESS: STREET 1: 7722 E GRAY RD CITY: SCOTTSDALE STATE: AZ ZIP: 85260 SB-2/A 1 AMENDMENT NO. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, VIA EDGAR ON MARCH 2, 2000 REGISTRATION NO. 333-92087 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- CNF TECHNOLOGIES, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 3577 23-2997171 -------- ---- ---------- (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) Incorporation or Organization) Classification Code Number)
CNF Technologies, Inc. 7722 East Gray Road Scottsdale, Arizona 85260 (480) 718-4065 -------------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive office and principal place of business) Mr. David G. Thompson 7722 East Gray Road Scottsdale, Arizona 85260 (480) 718-4065 -------------------------------------------------------------------- (Name, address, including zip code, and telephone number, including area code, of agent for service) with a copy to: Stephen M. Cohen, Esquire Buchanan Ingersoll Professional Corporation Eleven Penn Center, 14th Floor 1835 Market Street Philadelphia, PA 19103 (215) 665-3873 ---------------------------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable following effectiveness of this Registration Statement. ----------------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement in the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Title of Each Class Amount to be Offering Price Per Aggregate Amount of of Securities to be Registered Registered(1) Share(2) Offering Price(2) Registration Fee(2) ------------------------------ ------------- ------------------ ------------------ ------------------- common stock, .0001 par value 3,106,623(3) $6.03 $18,732,937 $4,946
(1) Represents shares of the Company's common stock which may be offered by certain selling security holders. (2) Estimated pursuant to Rule 457(c) for the purpose of calculating the registration fee. Based on the average of the high and low sale prices per share of the Company's common stock as reported on the National Quotation Bureau Pink Sheets on February 23, 2000, the last day prior to March 2, 2000 for which a trade was reported. (3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this registration statement also includes additional shares of common stock issuable upon stock splits, stock dividends or similar transactions. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. The selling security holders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MARCH 2, 2000 PRELIMINARY PROSPECTUS CNF TECHNOLOGIES, INC. 3,106,623 shares of common stock The selling security holders identified in this prospectus, may offer and sell, from time to time, up to 3,106,623 shares of common stock of CNF Technologies, Inc. The shares were issued by us in private placement transactions. The selling security holders may sell all or a portion of their shares on a best efforts basis through public or private transactions at prevailing market prices or at privately negotiated prices. We will not receive any part of the proceeds from sales of these shares by the selling security holders. Our common stock is traded on the National Quotation Bureau Pink Sheets under the symbol "CNFT". The last reported sale price of our common stock on February 23, 2000 on the Pink Sheets was $6.00 per share. Investing in our common stock involves a high degree of risk. See "RISK FACTORS" beginning on page 4 of this prospectus. Neither the Securities and Exchange Commission nor any State Securities Commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this preliminary prospectus is March 2, 2000.
TABLE OF CONTENTS Page ---- Prospectus Summary................................................................................................1 The Offering......................................................................................................2 Summary Consolidated Financial Data...............................................................................3 Risk Factors......................................................................................................4 Use Of Proceeds...................................................................................................8 Market For Our Common Stock And Related Stockholder Matters.......................................................8 Capitalization...................................................................................................11 Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................11 Description Of Business..........................................................................................19 Management.......................................................................................................28 Certain Relationships And Related Transactions...................................................................33 Security Ownership Of Certain Beneficial Owners And Management...................................................35 Description Of Securities........................................................................................37 Selling Security Holders.........................................................................................39 Plan Of Distribution.............................................................................................41 Legal Matters....................................................................................................42 Experts..........................................................................................................42 Where You Can Get More Information...............................................................................43 Financial Statements............................................................................................F-1
i PROSPECTUS SUMMARY About this prospectus This prospectus is part of a registration statement we filed with the United States Securities and Exchange Commission. You should rely only on the information provided in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The selling security holders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Applicable SEC rules may require us to update this prospectus in the future. This preliminary prospectus is subject to completion prior to this offering. About CNF Technologies, Inc. We design, manufacture and market portable computer peripherals and accessories for laptop computers to original equipment manufacturers, wholesale distributors, computer resellers, computer retail stores and corporate end users throughout the United States, Canada, Australia, Japan and Europe. Our principal products consist of internal high-capacity removable storage devices, portable DVD-ROM and CD-ROM drives, patented universal bay replicators branded as deviceDOCK(R) and universal port replicators. We plan to introduce a universal docking station within the next six to nine months. These devices are designed to bring the functionality and power of a desktop computer to users of any make or model of a portable computer. Corporate information We were incorporated under the laws of Florida on September 23, 1996 as JLL Ventures Corp. and on April 1, 1999, reincorporated into the State of Delaware. Thereafter, our wholly owned subsidiary acquired CNF, Inc., a California corporation, by merger and assumed the historic operations of CNF, Inc. In connection with the merger, we changed our name to CNF Technologies, Inc. and changed the name of our wholly owned subsidiary to CNF Mobile Solutions, Inc. Prior to the merger, we were an inactive company and our shares were listed for quotation on the OTC Bulletin Board. Our principal executive offices are located at 7722 East Gray Road, Scottsdale, Arizona 85260 and our telephone number is (480) 718-4065. 1 THE OFFERING Common stock offered by the selling security holders: 3,106,623 shares Common stock currently outstanding: 11,975,063 shares which includes 1,000,000 shares which are subject to possible cancellation upon the terms set forth in an escrow agreement entered into in connection with our merger with CNF, Inc. The number of outstanding shares of common stock does not include: o 3,675,537 shares issuable upon the conversion of 3,675,537 outstanding shares of our Series A Convertible Preferred; o 780,091 shares issuable upon exercise of outstanding options to purchase 780,091 shares of Series A Preferred Stock at exercise prices ranging from $.24 to $1.21 per share which vest over a four (4) year period commencing on the date of grant; and o 266,667 shares issuable upon exercise of outstanding warrants. Common stock to be outstanding after the offering: 12,625,063 shares as a result of the conversion of 650,000 shares of our Series A Preferred Stock Use of Proceeds: We will not receive any of the proceeds from the sale of shares by the selling security holders. Trading Symbol (National Quotation "CNFT" Bureau Pink Sheets): - ---------------------------------------- 2 SUMMARY CONSOLIDATED FINANCIAL DATA Statement of Operations Data:
Year Ended March 31 Nine Months Ended December 31 ----------------------------- ------------------------------ 1999 1998 1999 1998 ----------- ---------- ---------- ----------- Revenues $9,425,947 $7,726,484 $8,510,873 $7,578,878 Gross Profit 3,337,398 3,265,540 2,462,701 2,512,317 Loss before income taxes (3,119,725) (58,167) (5,824,690) (1,887,883) Net Loss (3,074,525) (79,267) (5,824,690) (1,887,883) Basic and Diluted loss per share: (2) (1.23) (0.03) (0.69) (0.76) Basic and Diluted Weighted average number of shares outstanding: 2,500,250 2,500,000 8,490,496 2,500,000
Balance Sheet Data:
As of As of March 31, 1999 December 31, 1999 -------------- ----------------- Actual Actual ----------- ----------- Working capital (deficiency) $(3,062,743) $(1,736,116) Total assets 3,538,687 3,919,551 Total liabilities 6,265,324 5,227,159 Stockholders equity (deficit) (2,726,637) (1,307,608)
3 RISK FACTORS You should not rely on any of the forward-looking statements contained in this prospectus. The words "may," "will," "expect," "anticipate," "believe," "continue," "estimate," "project," "intend," and similar expressions used in this prospectus are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may differ materially from those included within the forward-looking statements. We are in need of substantial additional financing to execute our business plan and we cannot assure you that we will be able to raise the necessary financing. We currently have very limited cash resources and need approximately $5,000,000 to execute our business plan. In order to raise such financing, we will likely need to issue additional debt or equity securities. We cannot assure you that any such financing will be available or whether it will be available on terms that are acceptable to us. In addition, we are required to obtain the consent of two of our shareholders prior to issuing any additional shares of our common stock or other securities convertible into shares of our common stock. This may make it more difficult for us to raise the necessary financing. Unless our level of operations increases, we will require significant additional capital, and anticipate that our losses will continue for the foreseeable future. During the fiscal year ended March 31, 1998 we sustained a net loss of $79,267. During the fiscal year ended March 31, 1999 we sustained a net loss of $3,074,525. This trend continued during the nine months ended December 31, 1999 as we sustained additional net losses of $5,824,690. Our operating losses will likely continue at these levels if operations remain at current levels. Our business plan assumes a significant increase in sales as we expect our new products to achieve commercial acceptance and gain market share. This plan requires us to make significant investments in operations to support technological development as well as marketing and sales activities. This will result in continued and substantial increases in our operating expenses. To execute this plan we need to generate significant additional revenue from new products and raise substantial additional capital. Since we are uncertain that we will be able to secure any financing or generate sufficient cash flow from operations, our operating losses may continue. Our negative net worth, negative cash flow and history of losses raise substantial doubt about our ability to sustain operations. As of March 31, 1999, our current liabilities exceeded our current assets by $3,062,743 and our total liabilities exceeded our total assets by $2,726,637. As a result, our financial 4 condition raises uncertainty as to our ability to continue as a going concern. Our long-term viability will depend upon our ability to generate sufficient cash flow from operations to meet our current obligations, raise significant additional capital and ultimately attain profitable operations. Due to the novel nature of our key products and rapid technological change in our markets, we can not accurately predict our future revenues and we expect significant fluctuations in our operating results which will make managing our cash flow and financing needs more difficult. We recently introduced one new product and intend to introduce another new product during the next fiscal year. These new products are designed to provide universal connectivity for almost any make or model of a PC-based portable computer. Since there are no similar products widely available in the market, it is difficult or impossible for us to predict the future revenues which could be generated by these products. In addition, given the intense competition, rapid technological change, substantial swings in consumer demand and short product life cycles, the continued acceptance of and the revenues generated by our existing products are difficult or impossible to predict. The development of superior products by our competitors could also render our existing products obsolete. As a result, our revenues and operating results are likely to fluctuate significantly which will make it more difficult to manage our cash flow and assess our financing needs. We may not have the financial and human resources necessary to keep up with rapid technological changes in our chosen markets which may result in our products becoming obsolete. The portable computer industry is characterized by rapid technological change, frequent introduction of new products, continuing changes in consumer demand, short product life cycles and rapidly evolving industry standards. The introduction of products utilizing new technology or the emergence of new industry standards can render existing products obsolete and unmarketable very quickly. Our future success will depend in large part upon our ability to satisfy changing customer needs by continuing to develop new products and upgrade existing products as quickly and efficiently as possible. Any failure by us to anticipate or respond to such technological developments or shifting consumer requirements or any significant delay in product development or introduction could substantially and adversely impact our competitive position in the market. We can not assure you that we will have the financial and human resources necessary to do this. A decline in the demand for laptop computers would result in a decrease in our sales. Our future success is dependent not only on our own growth rate but also the growth rate of the portable computer notebook industry. Even though notebooks are one of the fastest growing segments of the personal computer market, we are uncertain whether this growth will continue. An overall decrease in the demand for portable computers would result in a decrease in our revenues. 5 We can no longer rely on CD-ROM sales to sustain our business and unless we develop replacement products such as DVD technology and realize substantial sales from our new universal port replicators and docking stations, our revenues are likely to decrease. Our CD-ROM sales have historically constituted a substantial percentage of our sales (4% during the nine months ended December 31, 1999, 49% during the nine months ended December 31, 1998, 41% during fiscal year ended March 31, 1998 and 38% during the fiscal year ended March 31, 1999.) Two market factors indicate that the product life of external CD-ROM is coming to an end. First, most major notebooks come standard with an internal CD-ROM, making the need for an external one unnecessary. In fact, Sherwood Research estimates that only 10% of the notebooks currently being manufactured are shipped without internal drive capabilities. Second, there appears to be a shift from CD-ROMs to DVD. Since these trends reduce the demand for CD-ROMs, our sales of CD-ROMs will continue to decrease. We are currently attempting to respond to these market forces by focusing on DVD technology. Our future success will, to some extent, depend upon our continued development of products that incorporate DVD technology and the commercial acceptable of our new universal port replicators and docking stations. Since we rely on two suppliers to provide critical components and we do not have long term contracts with either of them, if we do not maintain our relationship with these companies we will not be able to satisfy our customers' orders. We are currently dependent on two main product lines (CD-ROMs and Zip(R) drives) which accounted for approximately 71% of our revenue during the nine months ended December 31, 1999 and approximately 73% of our revenue during the fiscal year ended March 31, 1999. One supplier provides the main component for CD-ROMs and another provides the main component for Zip(R) drives. We purchase these components under purchase orders and do not have a long-term contract with either supplier. Any termination or disruption of our relationship with either supplier or any material adverse change to the financial condition of either supplier would prevent us from filling customer orders. Although we believe that our relationships with these suppliers are good, we cannot assure you that these relationships will continue or whether these suppliers will continue to be able to provide our components in a timely and cost efficient manner. Although alternate suppliers are available, there are a limited number of such suppliers and finding and qualifying replacement suppliers could take several months. We are also dependent upon these suppliers to manufacture and deliver components that are free from defect, competitive in functionality and cost and in compliance with our specifications, all of which are beyond our control. Zip(R) is a registered trademark of Iomega Corporation. We do not have contracts with any of our customers and the loss of any of our four key customers would result in a material decrease in our revenues. We derive a substantial portion of our product sales from distributors. We do not maintain an exclusive distributorship with any significant distributor and our distribution agreements can be terminated at any time. Accordingly, our distributors are not obligated to purchase products from us in the future and may sell competing lines of products. As a result, the ultimate distribution of our products to end-users is beyond our control. In addition, four customers directly or indirectly accounted for 84% of our revenues during the nine months ended 6 December 31, 1999 and 65% of our revenues during the fiscal year ended March 31, 1999. A loss of any of these customers could substantially reduce our sales. Although we believe our relations with these distributors are good, we cannot assure you that any or all of them will continue to do business with us in the future. We depend on our key employees and we can not assure you that we will be able to keep these employees. A loss of one or more of our current officers or key personnel could severely and negatively impact our operations. Although we have employment contracts with most of our key personnel, these contracts do not prevent them from resigning. Effective product development and innovation is dependent upon our ability to attract and retain talented technical and marketing personnel. The market for such persons is extremely competitive. We cannot assure you that we will have the financial or other resources to attract and retain such individuals. Our common stock has a limited market and may be adversely effected by the influx into the market of the shares covered by this prospectus which could result in a decrease in the trading price of our shares. The public trading market for our common stock is very thin. Although our common stock has historically traded on the OTC Electronic Bulletin Board, it is currently eligible for quotation only on the less liquid National Quotation Bureau Pink Sheets. Upon the effectiveness of this prospectus, we anticipate that our common stock will once again be eligible for trading on the OTC Bulletin Board. There is minimal supply of shares eligible for public resale (100,000 shares) and trading has been extremely limited. On or about March 15, 2000, an additional 900,000 shares will become eligible for public trading. Accordingly, we are uncertain that a regular trading market for our common stock will develop, and if it develops, whether it can be sustained. By its very nature, trading on the National Quotation Bureau Pink Sheets and OTC Bulletin Board provides very limited market liquidity. The trading market for our common stock may be adversely effected by the influx into the market of the 3,106,623 shares of common stock covered by this prospectus. The ability to trade our shares could be adversely effected if the trading price falls below $5.00 per share which could result in a further decrease to our trading price. The SEC has adopted regulations imposing limitations upon the manner in which certain low priced securities (referred to as a "penny stock") are publicly traded. Under these regulations, a penny stock is defined as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on a national exchange, the Nasdaq National Market System or SmallCap Market and any equity security issued by a company that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000 for the last three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. The regulations also require certain broker/dealers who recommend such securities to persons other than established 7 customers and certain accredited investors to make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. These requirements make it more difficult to effect transactions in penny stocks as compared to other securities. Since our common stock presently trades above $5.00 per share, it is not considered a "penny stock." We are uncertain that trading prices at this level can be sustained. Should trading prices fall below $5.00 per share, our shares could be considered a "penny stock." Our common stock will likely be subject to substantial additional dilution. We are in need of substantial additional financing which will likely entail the issuance of additional shares of common stock or securities convertible into common stock which will have the effect of increasing the number of shares outstanding. In connection with these and other business matters, we will likely undertake the issuance of additional shares of common stock. This may be done in order to, among other things, acquire assets or stock of another business, compensate employees or consultants or for other valid business reasons at the discretion of our Board of Directors. Under applicable Delaware law, we can issue additional shares without notice to, or approval of, existing stockholders. In addition, there are 3,675,537 outstanding shares of Series A preferred Stock and outstanding options to purchase 780,091 shares of Series A Preferred Stock. No later than June 30, 2000, these shares will convert into 3,675,537 shares of common stock and the options could be exercised for up to 331,351 (currently vested) or 780,091 (upon full vesting) additional shares. We also intend to adopt a stock option plan pursuant to which we may grant options to purchase shares of common stock equal to 10% of our then outstanding shares of common stock. A limited number of stockholders have a controlling interest in our stock. As of the date of this prospectus, our officers, directors and a limited number of principal stockholders beneficially own approximately 41.5% of our outstanding voting shares. These stockholders may have the ability to control the election of our directors and the outcome of other corporate matters. In order to issue additional shares of our common stock, we need to obtain the consent of two of our shareholders which may make it more difficult for us to raise the additional financing necessary to execute our business plan. USE OF PROCEEDS We will not receive any proceeds from the sale of common stock by the selling security holders. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information From October 7, 1998 until January 12, 2000, our common stock was listed for quotation on the OTC Bulletin Board under the symbol "CNFT." Since our common stock is not registered under the Securities Exchange Act of 1934, it is no longer eligible for quotation. Upon the 8 effective date of this prospectus, we will be filing a registration statement for the purpose of registering our common stock under the Exchange Act which will be effective upon filing with the SEC. Upon such effectiveness, we intend to apply to reinstate our shares for trading on the OTC Bulletin Board. Our common stock currently trades on the less liquid National Quotation Bureau Pink Sheets. The market for our shares is extremely limited. We are uncertain if a significant trading market for our common stock will develop or, if developed, will be sustained. The following table sets forth the range of the high and low closing bid prices, or last sales prices, per share of our common stock during each of the calendar quarters identified below. The bid prices were obtained from the National Quotation Bureau and do not necessarily reflect actual transactions, retail markups, mark downs or commissions. The transactions include inter-dealer transactions. Based on the very limited public float and trading in our common stock, we believe that such data is anecdotal and may bear no relation to the true value of our common stock or the range of prices that would prevail in a liquid market. 1998 High Low ---- ---- --- 4th Quarter * * 1999 High Low ---- ---- --- 1st Quarter * * 2nd Quarter $6.00 $5.50 3rd Quarter $6.4375 $4.00 4th Quarter $6.375 $5.00 2000 1st Quarter (through February 23, 2000) $6.50 $.001 *No bids reported - ------------------------------ The last price of our common stock as reported on the Pink Sheets by the National Quotation Bureau on February 23, 2000 was $6.00 per share. Holders As of February 23, 2000, we had approximately 95 stockholders of record, although we believe that there are additional beneficial owners of our common stock who own their shares in "street name." Dividends We have not paid any cash dividends, to date, and we have no intention of paying any cash dividends on our common stock in the foreseeable future. The declaration and payment of dividends is subject to the discretion of the Board of Directors and to certain limitations imposed under the General Corporation Law of the State of Delaware. The timing, amount and form of 9 dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. Shares Eligible for Public Sale and Registration Rights As of the date of this prospectus, there are 11,975,063 outstanding shares of our common stock. Of these shares, 100,000 are eligible for public trading. Assuming that we comply with the adequate public information disclosure requirements of SEC Rule 144 promulgated under the Securities Act, a substantial number of additional shares will be eligible for public resale under Rule 144 on the dates and in the amounts set forth below: o March 15, 2000 - 900,000 shares o June 10, 2000 - 8,167,500 shares o August 15, 2000 - 424,081 shares o November 2, 2000 - 675,000 shares o November 26, 2000 - 1,086,250 shares o February 2, 2001 - 500,000 shares We have agreed to register the public resale of 3,773,290 of the shares identified above; 3,106,623 of which are being registered for public resale hereunder. We have agreed to file a registration statement with the SEC permitting the public resale of 666,667 shares of our common stock identified above by no later than on or about August 26, 2000 and 266,667 additional shares issuable upon exercise of warrants issued or issuable to our placement agent by no later than November 26, 2000. Shares Issuable Upon Exercise or Conversion of Outstanding Options, Warrants and Preferred Stock We have issued options to purchase an aggregate of 780,091 shares of Series A Preferred Stock of which 331,351 are currently exercisable. The remaining options vest in ratable monthly installments over a three (3) year period. We have also issued warrants to purchase an aggregate of 266,667 shares of common stock all of which are currently exercisable. Finally, we have issued an aggregate of 3,675,537 shares of Series A Preferred Stock which will convert into 3,675,537 shares of common stock by no later than June 30, 2000. 10 CAPITALIZATION December 31, 1999 Actual ----------------- Long -term debt $230,508 Preferred Stock 416 Common Stock 1,145 Additional paid in capital 7,250,658 Accumulated deficit (8,559,827) Total stockholders' equity (deficiency) (1,307,608) ----------- Total capitalization $(1,077,100) =========== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This Management's Discussion and Analysis of Financial Condition and Results of Operation and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. OVERVIEW We design, manufacture and market computer peripheral devices and accessories. Our product lines include: o internal Zip(R) and SuperDisk(TM) drives o universal bay replicators branded as deviceDOCK(R) o portable optical storage devices including DVD and CD-ROM drives o external numeric keypads o monitor stands o auto adapters o universal port replicators and docking stations We have in the past derived most of our revenue from the sale of internal Zip(R) and SuperDisk(TM) drives and CD-ROMS. We believe that our future growth will be in our universal docking products. These products enable users of almost any make or model of PC based portable computer to essentially turn their portable computer into a desktop computer allowing them to link portable computers to a network, a full-size monitor, keyboard, mouse and an array 11 of external and internal peripherals. Principal among this product line is the universal port replicator and the planned introduction of a universal docking station during the next fiscal year. SuperDisk(TM) is a trademark of Imation Enterprises Corporation. In fiscal 1999 (April 1, 1998 to March 30, 1999) and the first nine months of fiscal 2000 (April 1, 1999 to December 31, 1999), 73% and 71%, respectively, of our revenue was derived from sales of the InnerBay(R) Notebook Zip(R) drives and CD-ROMs. We believe that these product lines will decrease as a percentage of our revenue as our recently introduced universal port replicator achieves market acceptance. Current trends indicate that the CD-ROM product life is coming to an end. While we believe that sales of InnerBay(R) Notebook Zip(R) drives will continue to account for a significant portion of our revenue and gross profit, our future results of operations will be highly dependent upon the success of our universal docking products. We market and sell our products worldwide through multiple indirect channels, primarily distributors and resellers, and a substantial majority of our revenue in fiscal 1999 and the first nine months of fiscal 2000 was derived from sales to distributors and resellers. Certain of our products, in particular our InnerBay(R) Notebook Zip(R) drives, and deviceDOCK(R) products, are sold to original equipment manufacturers and we intend to increase our sales to original equipment manufacturers in the future. We support our indirect channels with our own sales and marketing organization. Our key distributors include Ingram Micro and Merisel America. In fiscal 1999, sales to Ingram Micro accounted for 14% of our revenue. In the first nine months of fiscal 2000, sales to Ingram Micro accounted for 27% of our revenue and sales to Merisel America accounted for 46% of our revenue. The loss of, or reduction in sales to, any of our key customers could have a material adverse effect on our business and results of operations. We provide price protection rights and limited product return rights for stock rotation to most of our distributors and resellers. We recognize revenue when products are shipped to customers. Our cost of revenue consists primarily of costs associated with components, outsourced manufacturing of certain subassemblies and in-house labor associated with assembly, testing, shipping and quality assurance. Our gross margin is affected by a number of factors including: o product mix o competitive product pricing pressures o manufacturing costs and o component costs We anticipate that our gross margin may decline in the future as a result of shifts in our product mix and competitive pricing pressure. In particular, we expect our gross margin on sales of the InnerBay(R) Notebook Zip(R) drives will decline as a result of a shift in product mix toward lower priced solutions. We seek to mitigate the effects of declining prices by improving product design and reducing costs, primarily manufacturing and component costs. 12 Our operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future on a quarterly and an annual basis. Prior growth rates that we have experienced in revenue should not be considered indicative of future growth rates. Factors that could cause our future operating results to fluctuate include: o the level of demand for our products o our success in developing new products o the timing of new product introductions and product enhancements by us and our competitors o market acceptance of our new and enhanced products o the emergence of new industry standards o the timing of customer orders o the mix of products sold o competition o the mix of distribution channels through which our products are sold and general economic conditions Many of these factors are beyond our control. The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our future success will depend to a substantial degree upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging and evolving industry standards. The introduction of new or enhanced products also requires us to manage the transition from older products in order to minimize disruption in customer ordering patterns, to avoid excessive levels of older product inventories and to ensure that adequate supplies of new products can be delivered to meet customer demand. There can be no assurance that we will successfully develop, introduce or manage the transition to new products. RESULTS OF OPERATIONS Comparison of the Nine Month Period Ended December 31, 1999 to the Nine Month Period Ended December 31, 1998 Total Revenue Revenue for the nine months ended December 31, 1999 amounted to $8,510,873 compared to $7,578,878 for the nine months ended December 31, 1998, an increase of 12%. The increase is attributable primarily to market acceptance of Zip drives and device docks in fiscal 13 2000. The decrease in sales of the CD-ROMs was offset in part by sale of products that incorporate DVD technology, as well as the introduction of our universal docking products. Gross Profit and Cost of Revenue Gross profit and cost of revenue remained relatively constant during the nine months ended December 31, 1999 as compared to the nine months ended December 31, 1998. Specifically, gross profit and gross profit percentage during the nine months ended December 31, 1999 amounted to $2,462,701 and 29%, respectively, as compared to $2,512,317 and 33%, respectively during the nine months ended December 31, 1998. Our cost of revenue for the nine months ended December 31, 1999 was $6,048,172 or 71% of revenue as compared to $5,066,561 or 67% of revenue during the nine months ended December 31, 1998. Research and Development Research and development expenses generally consist of salaries and other personnel costs of our research and development teams, product supplies and tooling costs. Research and development expenses amounted to $849,123 during the nine months ended December 31, 1999 as compared to $800,894 during the nine months ended December 31, 1998, an increase of 6%. The increase in research and development costs is primarily due to the development of the universal docking station, and the release of the universal port replicator during fiscal 2000. We expect research and development expenses to increase in the future, although such expenses may vary as a percentage of revenue. Sales and Marketing Expenses Sales and marketing expenses generally consist of salaries, commissions and other personnel costs of our sales, marketing and support personnel, advertising, promotions and travel. Marketing and sales expenses during the nine months ended December 31, 1999 amounted to $806,325 as compared to $672,912 during the nine months ended December 31, 1998, an increase of 20%. The increase was primarily attributable to promotional costs associated with the introduction of the universal port replicator and trade shows. We expect marketing and sales expense to increase in the future, although such expenses may vary as a percentage of revenue. General and Administrative Expenses General and administrative expenses primarily consist of salaries, facility costs, depreciation and other general operation costs. General and administrative expenses increased to $4,170,091 during the nine months ended December 31, 1999 from $2,951,046 during the nine months ended December 31, 1998. As a percentage of revenue, general and administrative expenses increased from 39% to 49%. This increase is primarily attributable to increased salaries and wages, employee recruitment costs, insurance and legal fees. Other Expense, Net Other expense, net in the nine months ended December 31, 1999 increased by $2,486,504 to $2,461,852 from $24,652 of other income in the nine months ended December 31, 1998. The 14 increase in other expenses was attributable to $2,473,296 of interest expense, which includes $2,056,383 attributable to equity incentives associated with bridge financing beginning in April 1999. Fiscal Year Ended March 31, 1999 compared to 1998 Total Revenue Revenue for the year ended March 31, 1999 ("Fiscal 1999") amounted to $9,425,947 compared to $7,726,484 for the year ended March 31, 1998 ("Fiscal 1998"), an increase of 22%. The increase in revenue was principally due to increased unit sales of ZIP(R) drives and increased unit sales of monitor stands. As a percentage of revenue, sales of our CD-ROMs amounted to 38% in Fiscal 1999 and 41% in Fiscal 1998, respectively. We believe that unit sales of CD-ROMs will continue to decline as the product life cycle comes to an end. Revenue from this product line is expected to decline as a percentage of our revenue as our other products achieve market acceptance. While we believe that sales of DVD's will replace some of the decrease in revenue attributable to CD-ROM's, our future results of operations will be highly dependent upon the success of our universal docking products. Gross Profit and Cost of Revenue Gross profit and gross profit percentage during Fiscal 1999 amounted to $3,337,398 and 35%, respectively, as compared to $3,265,540 and 42%, respectively, during Fiscal 1998. Our cost of revenue for Fiscal 1999 was $6,088,549 or 65% of revenue as compared to $4,460,944 or 58% of revenue during Fiscal 1998. The decrease in gross profit and corresponding increase in cost of revenue during Fiscal 1999 was principally due to a shift in our product mix to lower gross profit products, primarily ZIP(R) drive products. The decrease was offset, in part, by increased sales of monitor stands, which provide a higher gross profit. Research and Development Research and development expenses amounted to $1,200,939 during Fiscal 1999 as compared to $890,944 during Fiscal 1998. As a percentage of revenue, research and development costs remained relatively constant. The increase in research and development expenses during Fiscal 1999 was principally due to increased personnel costs associated with the development of new products such as the port replicator and device dock as well as the continuing development of ZIP(R) products for new notebooks. We expect research and development expenses to increase in the future, although such expenses may vary as a percentage of revenue. Sales and Marketing Expenses Sales and marketing expenses during Fiscal 1999 amounted to $1,086,265 as compared to $480,170 during Fiscal 1998, an increase of 126%. As a percentage of revenue, such expenses increased from 6% in Fiscal 1998 to 12% in Fiscal 1999. The increase in marketing and sales expenses during Fiscal 1999 was due primarily to the increase in personnel and promotional 15 activities. We expect marketing and revenue expenses to increase in the future, although such expenses may vary as a percentage of revenue. General and Administrative Expenses General and administrative expenses increased to $3,960,673 during Fiscal 1999 from $1,916,877 during Fiscal 1998. As a percentage of revenue, general and administrative expenses increased from 25% to 42%. This increase is primarily attributable to increased personnel costs. Technical personnel, sales representatives, and a management team were hired in order to guide us through our projected growth. We also moved our headquarters from Morgan Hill, CA to Scottsdale, AZ. Our new location contains over 40,000 square feet; 16,000 square feet of office space and 24,000 square feet of manufacturing and inventory stockroom. This location is substantially larger than our prior offices. We expect general and administrative expense to increase in the future, although such expenses may vary as a percentage of revenue. LIQUIDITY AND CAPITAL RESOURCES We have historically funded our operations primarily through cash generated from operations and lending institutions. More recently, we have funded our operations through the sale of debt and equity securities. Net cash used in operating activities amounted to $4,474,588 during the nine months ended December 31, 1999 and $60,729 during the nine months ended December 31, 1998. The increase in cash used in operating activities is primarily attributed to an increased net loss. Net cash used in operating activities amounted to $702,828 during Fiscal 1999 and $444,212 during Fiscal 1998. This 58% increase was primarily the result of an increased net loss and an increase in inventory and other assets. Accounts receivable were $834,383 at March 31, 1999, compared to $1,084,527 at March 31, 1998. Days sales outstanding were 37 days at March 31, 1999 compared to 34 days at March 31, 1998. We expect that accounts receivable will increase as revenue increases and as revenue from international and original equipment manufacturers customers represent a higher percentage of our total revenue. While to date we have not experienced significant losses related to accounts receivable, there can be no assurance that we will not experience losses related to accounts receivable in the future. Net cash used in investing activities amounted to $123,615 during the nine months ended December 31, 1999 and $195,454 during the nine months ended December 31, 1998. The decrease is primarily attributable to a reduction in property and equipment purchases. Net cash used in investing activities amounted to $211,044 during Fiscal 1999 and $273,929 during Fiscal 1998. The decrease primarily reflects the net purchase of property and equipment used in operations. Net cash provided by financing activities amounted to $4,415,040 during the nine months ended December 31, 1999 and $28,263 during the nine months ended December 31, 1998. The increase was primarily due to an increase in notes payable, the June 8, 1999 merger with JLL Ventures (Delaware) Corp. and the closing of a private placement transaction resulting in gross proceeds of $2,000,000. Net cash provided by financing activities amounted to $869,116 during 16 Fiscal 1999 and $620,195 during Fiscal 1998. The increase was primarily due to an increase in notes payable. As of March 31, 1999, we had two collateralized bank-revolving lines of credit with balances of $83,000 and $599,120 bearing interest at the lender's prime rate plus 2.0% and 3.5%, respectively. The lines of credit were paid in full on October 6, 1999. Prior to the merger, CNF, Inc. issued promissory notes in the aggregate principal amount of $1,775,000 at an interest rate of 10% per annum paid annually in arrears. The holders of $1,375,000 principal amount of these notes have converted such notes into common stock. The $200,000 outstanding principal amount of these notes are due on January 30, 2001. After the merger, we issued additional promissory notes in the aggregate principal amount of $778,259 at an interest rate of 10%. Holders of $547,253 of these notes have converted such notes into common stock. The $250,000 outstanding principal amount of these notes are due January 30, 2001. Finally, during July and August 1999, we issued promissory notes in the aggregate principal amount of $650,000 at an interest rate of 10%. The holders of $350,000 principal amount of these notes have converted such notes into common stock. The $300,000 outstanding principal amount of these notes are due on January 30, 2001 Upon completion of the merger with CNF, Inc., we obtained $1,000,000; representing the proceeds from the sale of common stock prior to the merger. The merger agreement provided for the completion of a private placement to yield gross proceeds of $2,000,000 to $6,000,000 (including for this purpose the conversion of certain indebtedness). In this connection, we commenced a private offering of shares of our common stock and on November 26, 1999, we conducted a closing resulting in gross proceeds of $2,000,000 from the sale of 666,667 shares of common stock. On February 2, 2000, we issued an additional 250,000 shares of our common stock in a private placement transaction and realized gross proceeds of $500,000. We believe that our existing negative working capital and borrowing capacity, coupled with the funds generated from our operations, will be insufficient to fund our anticipated working capital, capital expenditures and debt payment requirements through March 31, 2000. We will require an additional $5,000,000 in a combination of new capital and the conversion of indebtedness to execute on our operations plan. In the longer term, unless we can generate significantly greater cash flow from operations, we will require additional sources of liquidity to fund future growth. Such sources of liquidity may include additional equity offerings or debt financing. In order to issue additional shares of common stock or securities convertible into common stock we are required to obtain the consent of two of our stockholders, Deremie Enterprises and Discretionary Investment Trust. In the normal course of business, we evaluate acquisitions of businesses, products and technologies that complement our business. We intend to continue to pursue strategic investment in products, technologies or distribution networks in order to broaden our product lines and to provide a more complete solution to the mobile computer user. We may acquire businesses, products or technologies in the future. There can be no assurance that we will not require additional financing in the future or, if we were required to obtain additional financing in the future, that sources of capital will be available on terms favorable to us, if at all. 17 YEAR 2000 COMPLIANCE To address "Year 2000" issues, we established a Year 2000 Project Team which completed a five-phase plan to assess the Company's Year 2000 compliance. In executing this plan, we tested our current products and products under development, completed an evaluation, analysis and testing of our core internal systems and assessed the readiness of third-party business partners, including significant vendors and customers and concluded that there was no significant risk of noncompliance. Even where assurances were received from third parties there remains a risk that the failure of systems and products of other companies on which we rely could have a material adverse effect on us. In addition, there can be no assurance that certain previous releases of our products, which are no longer under support, will prove to be Year 2000 compliant. We have not incurred any material costs and do not expect to incur future material costs as a result of the Year 2000 problem for our systems and products. Accordingly, at this time, we do not expect of any material impact to our financial position, results of operations and cash flows as a result of Year 2000 problems. Since no material non-compliance has been detected, no contingency plans have been developed. Because many companies may need to upgrade or replace computer systems and software to comply with Year 2000 requirements or remedy Year 2000 problems, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies continue to expend significant resources to upgrade their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such as those offered by us, which could have a material adverse effect on our business, results of operations and cash flows. SEASONALITY We believe the markets for our products are somewhat seasonal, with a higher proportional share of total sales occurring in the fourth fiscal quarter (first calendar quarter) and a sales slowdown commonly occurring during the first fiscal quarter (second calendar quarter). INFLATION We do not believe that inflation has to date had a material impact on our operations. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued, which establishes accounting and reporting standards for derivative instruments and hedging activities which are required for fiscal quarters beginning after June 15, 1999. On May 20, 1999, the FASB issued an exposure draft, which would have the effect of deferring the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. On July 7, 1999, the FASB adopted the exposure draft SFAS No. 137. This statement requires balance sheet recognition of derivatives as assets or liabilities measured at fair 18 value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. On a preliminary basis, we do not believe that eventual adoption will have a significant impact on our financial statements. DESCRIPTION OF BUSINESS General Development of Business and Overview CNF, Inc. was incorporated under the laws of the State of California in 1988 to design, manufacture and market computer peripheral devices and accessories. Over time our business has evolved so that we currently focus our resources exclusively on peripherals and accessories for laptop computers. Our operations are conducted from offices in Scottsdale, Arizona. Prior to our relocation to Scottsdale, Arizona in July 1998, we operated in Morgan Hill, California. From inception in 1988 until the Merger with JLL on June 8, 1999, we operated as a independent privately held corporation. By virtue of the Merger, we became a non-reporting public company whose shares are eligible for quotation on the OTC Bulletin Board. We design, manufacture and market portable computer peripherals and accessories. We provide a broad range of affordable, easy-to-use devices that make the functionality and power of desktop computers available to portable computer users. Our current products include: o internal high-capacity removable storage devices for various notebook computers (including Zip(R) and LS/120 SuperDisk(TM) drives) o portable DVD-ROM drives o portable CD-ROM drives o universal bay replicators branded as deviceDOCK(R) o monitor stands o numeric keypads o proprietary and universal auto adapters o universal port replicators o universal docking stations (planned introduction during the next fiscal year) Universal Port Replicator and Docking Systems The universal port replicator and universal docking station enable users of almost any make or model of PC based portable (laptop) computer to essentially turn their laptop computer into a desktop computer. These devices link portable computers to a network, a full-size monitor, keyboard, mouse, an array of external and internal peripherals using parallel, serial, USB, SCSI-2, EIDE, etc. connections. The universal docking stations will also include PCI expansion capability. Prior to our introduction of universal docking solutions all existing docking stations were compatible with only one particular PC model. Such "proprietary" docking solutions are more expensive and less flexible than our universal docking products. We believe that our universal docking products will expand the overall size of the estimated docking market for a number of 19 reasons. First, several notebook manufacturers have removed the proprietary docking connector from their notebooks (e.g., IBM ThinkPad 240 and Toshiba Satellite 2500). Accordingly, the only way to "dock" with these notebooks is through a universally compatible product such as ours. Second, since a universal product requires a retailer to only carry one product, we believe that retailers can add incremental revenue by offering universal docking solutions to their customers without stocking a multitude of different products. Third, we believe that universal solutions open up entirely new applications for docking such as multi-brand notebook environments, guest offices, hotel rooms, conference centers, service bureaus and kiosks. Industry Background According to International Data Corporation ("IDC"), a market research firm, the portable computer market is the fastest growing segment of the personal computer industry. Growth in this market has been fueled by advances in computer technology and the increasing demand for computer mobility. IDC predicts that the portable computer market (excluding handheld devices) will grow at a compounded annual rate of 15% from 14.1 million units in 1997 to approximately 25 million units in the year 2001. In addition, the handheld companion market (as defined by IDC) is expected to grow at a compounded annual rate of over 40% from 3 million units in 1997 to approximately 13 million units by 2001. We believe this translates to an addressable potential market of at least $2 billion per year for portable peripheral products. Coupled with this trend toward portability, there is an increased demand for computers that are smaller and lighter but have functionality and convenience similar to the traditional desktop computer. To meet this demand, there has been an increased use of peripherals and accessories such as high capacity storage devices, DVD drives, CD-ROM drives, keypads, auto adapters, monitor stands, port replicators, docking stations, and Universal Serial Bus (USB) devices which enable users to maximize their computer's portability while enhancing its functionality. To make these smaller computers more convenient to use in the office and home, port replicators and docking stations have been developed to allow users easy connections to networks, full-size monitors, keyboards, and other peripheral devices providing portable computer users with all of the features and functionality of a traditional desktop computer. IDC reported that 74% of all notebook computers sold in 1997 served as the users' primary computer. Sherwood research reported that 19% of all notebook buyers use a Docking Station and 22% of users use a Port Replicator. Port replicators provide users with ports for utilizing peripherals such as a standard-size keyboard, mouse and monitor, as well as connecting to other devices such as an Ethernet network, printer, modem, etc. The main function of a port replicator is to connect peripherals to a notebook in a fast and convenient manner. This allows users to take their notebook home or on the road with maximum convenience. Docking stations include basic port replicator features, as well as more advanced capabilities such as PC card slots, internal drive bays for storage devices, and PCI/ISA slots. Docking stations enable the user to expand the notebook into a virtual desktop computing device. Attaching and releasing the portable computers from the port replicator or docking station is 20 typically a one-step procedure that takes seconds to complete compared to the burdensome task of attaching or releasing each external device separately. When the portable computer is detached from the connectivity product, all external devices connected to the connectivity product stay in place, ready to be reattached. Currently, close to 100% of the docking station market is served internally by the various portable computer Original Equipment Manufacturers. These Original Equipment Manufacturers have historically designed port replicators and docking stations for their makes and models of portable computers and subcontracted these products for assembly to various vendors. Because computer Original Equipment Manufacturers primarily focus on providing the latest technological capabilities with strong price and performance characteristics for portable computers, their development of port replicators and docking stations has often been a secondary focus. The port replicators and docking stations developed by Original Equipment Manufacturers are generally expensive, lack configuration flexibility and are often available only well after the computer model is launched. Additionally, original equipment manufacturers generally retool each generation of portable computers and have not created standardized port replicators and docking stations that are independent of model or manufacturer. Because user demand for high performance portable computers has fueled the growth in the port replicator and docking station markets, there is a large opportunity to provide a complete, cost-effective connectivity solution that is independent of manufacturer and model. In this context, we believe that we have a significant opportunity to create a new mobile computing product category with the introduction of our universal port replicators and docking stations, thereby creating a significant additional market opportunity. We believe that the universal aspects of these products will open new market segments for docking, including hotels, kiosks, guest offices and service bureaus. Our Mission We believe that current industry trends will lead to an increased demand for the use of peripherals and accessories designed to maximize the portability and enhance the functionality of laptop computers and create a substantial potential market for our products. Our overriding mission is to design, manufacture and market peripheral products which can integrate any laptop computer into any network or desktop computer at any time. Our products are designed to permit laptop computer users to rely exclusively on their laptop by eliminating the need to rely on a specific stationary office or network. Our primary focus is to anticipate technological advancements and consumer preference as far in advance as possible, develop new products and improved features to meet such market demands and transform ideas from concept to market as quickly as possible. Our Products We currently offer seven major product lines: (i) internal Zip(R) and SuperDisk(TM) drives; (ii) external bay replicators; (iii) portable optical storage devices like DVD and CD-ROM drives; (iv) external numeric keypads; (v) monitor stands; (vi) auto adapters; and (vii) universal port replicators. During the next fiscal year, we plan to introduce a universal docking station. 21 Product Development We operate in an industry that is subject to rapid technological change and shifting consumer demands. As a result, our future success depends in significant part on our ability to continually develop and introduce, in a timely manner, new products with improved features and to develop and manufacture these products at an affordable cost. Accordingly, in order to maintain our competitive position in the market, we must continually enhance our existing products and develop new products. Two elements drive our product development strategy. First, our ear-to-the-market discipline of proactively exploring which new products are demanded by our customers. Through discussions with an Original Equipment Manufacturer, for example, we developed the idea to design and develop an InnerBay(R) Zip(R) drive for the customer's line of portable computers. The customer had been unable to develop a Zip(R) drive for its line because the Zip(R) drive mechanism was too large to fit into the InnerBay(R) of the portable computer. CNF's InnerBay(R) Zip(R) drives for this customer's line of portable computers began shipping in December 1998. Our development team has also provided novel solutions to similar problems experienced by other Original Equipment Manufacturers. The second element of our product development strategy is an emphasis on bringing new products to market quickly. Our development team can take a new product from concept to prototype in several weeks. Similarly, we believe that, on average, we can take new products from prototype to beta version in several months. Our product development is managed by a team that includes electrical, mechanical and software engineers, marketing and sales personnel, project managers and component buyers, as well as manufacturing and operations representatives. The average industry experience of the team members is in excess of 10 years, and certain members are individually named in over 10 patents and 25 patent applications. Our engineers start the design process in-house using computer aided design workstations. Printed circuit boards are laid out, and the files are sent electronically to partner printed circuit board houses in the United States and Taiwan. These partner companies generally return the printed circuit boards within one to five days. Concurrent with the design of custom printed circuit boards and metal components, we design prototypes for any plastic components in the product. For such plastic prototyping, we use stereolithography, a process that produces an exact replica of a design on a computer aided design workstation in one to four days. The newly formed parts are then painted and have the appearance of a final tooled and molded part. While the hardware components are being designed and manufactured, any software code necessary for the product is developed by our software team, which includes two individuals who have in excess of 17 years experience as software developers. We use product prototypes to begin compatibility testing, regulatory testing, form and fit testing, ergonomic testing, and thermal tests. We also use the prototypes to garner early market/customer feedback before hard tooling takes place. Once any final product changes have been implemented in the design files, the files are sent electronically to a partner company in Taiwan that cuts steel molds using computer aided machines and some hand processing. The 22 molding process utilized generally requires approximately 8 to 10 weeks, which we believe is substantially faster than many of our competitors. After the new product is developed, but before it begins shipping, we test the product in our product assurance lab for various issues, including compatibility, power consumption, drop testing, and software issues. Although we believe we have the human resources to effectively develop new products and respond to market forces, we can give no assurance that we will be successful in developing, manufacturing and marketing new and enhanced products that meet both the performance and price demands of the market. It is uncertain that we will have sufficient capital resources to develop and market new products on a longer-term basis. Manufacturing We focus our manufacturing efforts on producing high-quality products while at the same time minimizing costs. Our manufacturing operations are located at our headquarters in Scottsdale, Arizona and consist mainly of materials procurement, final assembly, testing, quality assurance and shipping. Low-cost suppliers in Taiwan perform the vast majority of the manufacturing of our products. Local manufacturing is used to ramp up new products and to satisfy orders requiring the most immediate delivery. Some of our products, including the monitor stands and external numeric keypads, are manufactured in their entirety by third parties. Our current significant supplier or third-party manufacturing relationships include: Goldteck International, Inc.; Ditron Manufacturing; Iomega; Mitsubishi Electronics; Performance Mold & Engineering; and TYI Systems Limited. We oversee the Taiwanese manufacturers through a liaison. We are also able to monitor the manufacturing lines of one of our key suppliers via live Internet transmissions. Finally, our representatives visit suppliers on a regular basis. Certain select components used in our products are currently available from a limited number of suppliers. Disruption in service by any of our manufacturers or our suppliers could lead to supply constraints or delays in the delivery of our products. This could have a material adverse effect on our business. Sales And Marketing Prior to 1998, we marketed and sold our products primarily through direct sales to Original Equipment Manufacturers and corporate users of portable computers. Since 1998, we have marketed and sold our products primarily through indirect channels, including wholesale distributors, Original Equipment Manufacturers and resellers. Our key distributors include Ingram Micro and Merisel Americas, Incorporated. During the nine months ended December 31, 1999, sales to Ingram Micro accounted for 27% of our revenue and sales to Merisel America accounted for 46% of our revenue. In the year ended March 31, 1999, sales to Ingram Micro accounted for 14% and sales to Merisel America accounted for 5% of our revenues. We intend to increase our sales through distributors in the future. In international markets, we have agreements with 22 distributors located in more than 18 foreign countries. During the nine months ended December 31, 1999, international sales represented 11% of revenues. During the year ended March 31, 1999, international sales represented 10% of revenues. We expect that international sales will continue to comprise a similar proportion of our revenues in the future. 23 We believe that fostering the distribution of our products through cooperation agreements and alliances with a variety of key companies within the computer and consumer electronic industries, is a critical element of our strategic goal of being "the first name you think of once you buy or sell a notebook computer." We work directly with the major portable computer manufacturers to achieve approval of our products as "Standard" or "Approved" products for use with the manufacturers' portable computers. In many cases, we agree to place the logo of the manufacturer of the portable computer for which a given peripheral has been designed on the approved product. We believe that these approvals result in increased sales of our products to corporations, which account for 60-70% of US portable computer sales. Most corporations only allow their employees and purchasing managers to purchase portable computer peripherals that are approved by the manufacturer of the portable computer in question. A significant portion of our products are sold as approved or standardized products of a given portable computer manufacturer. However, in the year ended March 31, 1999, 15% of our revenues were derived from Original Equipment Manufacturers sales, when such sales are strictly defined as direct sales to portable computer manufacturers. The vast majority of our products, even those that bear the logo of the portable computer manufacturer, are primarily sold through indirect industry channels, including distributors and resellers, with the approval of the portable computer manufacturer. We support our direct and indirect channels with our own sales and marketing organization. We manage our sales and marketing activities primarily from our offices in Scottsdale, Arizona. Our field and in-house sales and marketing staff is largely responsible for generating end user demand for our products by soliciting prospective customers, providing technical advice with respect to our products and working closely with distributors to sell our products. Our sales and marketing staff actively participate with distributors and resellers in the selling process, which provides end users with the level of support needed for the successful integration of solutions in enterprise networks. Additionally, our sales force concentrates on providing "Fortune 1000" companies with solutions for their laptop users. Many of these companies use "standards lists" to test and approve products and only allow their employees to purchase products from such lists. The goal of the sales force is to penetrate these "standards lists." We provide some of our distributors and resellers with limited product return rights for stock rotation. We also provide most of our distributors and resellers with price protection rights. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors or resellers if we lower our prices for such products. 24 We believe that our sales strategy of working closely with Original Equipment Manufacturers to approve products, working with the distributors to make the product available, and working directly with the corporate end-users to standardize the product provides us with a competitive advantage. Backlog Because our customers typically require prompt delivery of products and a substantial majority of our sales are booked and shipped in the same quarter, the timing and volume of customer orders are difficult to forecast. Accordingly, we typically operate with a relatively small order backlog. Further, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced or canceled with little or no penalty. We believe that our backlog at any given time is not a meaningful indicator of future revenue. Seasonality And Other Fluctuations Of Revenue We believe the markets for our products are somewhat seasonal, with a higher proportional share of total sales occurring in the fourth fiscal quarter (first calendar quarter) and a sales slowdown commonly occurring during the first fiscal quarter (second calendar quarter). Sales in a given period may also be influenced by new product introductions, component supply availability, working capital availability, and other factors. Revenues and growth rates for any prior quarter are not necessarily indicative of revenues or growth rates to be expected in any future quarter. Service and Support We believe that service and support are critical components of end user satisfaction and the success of our business. Our support includes a toll-free technical support hotline to provide a range of telephone support to our distributors, dealers and end-user customers as well as fax back, e-mail and online Internet support. The service and support group also handles product returns and updates. Competition The market for computer products, in general, is intensely competitive, subject to rapid technological change, and sensitive to new product introductions or enhancements, and marketing efforts by industry participants. The principal competitive factors affecting the markets for our product offerings include price, corporate and product reputation, innovation with frequent product enhancement, breadth of integrated product line, product design, functionality and features, product quality, performance, ease-of-use, and support. We can not assure you that we will be able to maintain our competitive position against current or potential competitors, especially those with greater financial, marketing, service, support, technical or other competitive resources. We currently compete primarily with the internal design efforts of Original Equipment Manufacturers. These Original Equipment Manufacturers, as well as a number of our potential non- Original Equipment Manufacturers competitors, generally have larger technical staffs, more 25 established and larger marketing and sales organizations and significantly greater financial resources than we do. Although we believe that we have a proprietary position with respect to our technologies which could pose a competitive barrier for companies seeking to develop or sell competing products in our markets, we can not assure you that such competitors will not be able to respond more quickly to new or emerging technologies and changes than we can, or develop products that are superior to our products or that achieve greater market acceptance. In addition, we can not assure you that we will be able to compete successfully against our competitors or that the competitive pressures that we face will not have a material adverse effect on our business, results of operations and financial condition. Our competitors include notebook manufacturers such as Toshiba, IBM and Compaq, as well as third party suppliers such as Mobility Electronics, EXP, VST Technologies, Port/Targus, and Extended Systems. Our future success will depend, in large part, upon our ability to increase our share of our target market and to sell additional products and product enhancements to existing customers. Future competition may result in price reductions, reduced margins or decreased sales, which, in turn, would have a material adverse effect on our business, results of operations and financial condition. Proprietary Rights We rely on a combination of patent, copyright and trademark laws, trade secrets, nondisclosure agreements and technical measures to protect our technology. While we currently intend to vigorously enforce our intellectual property rights, we can give no assurance that the steps we take to protect our technology and enforce our rights will be successful or that we will have the resources to do so. We have four patents pending in the United States and eight patents pending in over 21 other countries. The categories of patent applications include: universal docking and port replication solutions, data multiplexing, power management, and external and internal device solutions. In August 1999, we were granted a Notice of Allowance from the United States Patent and Trademark Office for the issuance of a patent for our Digitari(R) Universal Docking and Port Replication Technologies. On or about October 28, 1999 the Australian Patent Office issued us a patent for our Digitari(R) Universal Docking and Port Replication Technolgies. In August 1999, we were issued a patent from the United States Patent and Trademark Office for our Universal deviceDOCK(R) Technologies. The process of seeking patent protection can be expensive and time consuming. We can give no assurance that patents will issue from pending or future applications or that if issued, these patents will not be challenged, invalidated or circumvented, or that the rights granted to us will provide meaningful protection or other commercial advantage. Also, we can give no assurance that any patents that we obtain will provide us with substantial value or protection, that their validity will not be challenged, that affirmative defenses to infringement will not be asserted or that we will have the financial resources to protect such patents. Due to the rapid technological change that characterizes our industry, we believe that the success of our products will also depend on the technical competence and creative skill of our personnel in addition to legal protections afforded our existing drive and disk technology. As is 26 typical in our industry, from time to time, we have been, and may in the future be, notified of claims that may be infringing certain patents, trademarks and other intellectual property rights of third parties. It is not possible to predict the outcome of these claims and we can give no assurance that these claims will be resolved in our favor. If one or more of these claims is resolved unfavorably, we can give no assurance that the outcomes will not have a material adverse effect on our business or financial results. Our industry has been characterized by significant litigation relating to infringement of patents and other intellectual property rights. We can give no assurance that future intellectual property claims will not result in litigation. If infringement were established, we could be required to pay substantial damages or be enjoined from manufacturing and selling the infringing product(s) in one or more countries, or both. In addition, the costs of engaging in intellectual property litigation may be substantial regardless of outcome, and we can give no assurance that we will be able to obtain any necessary licenses on satisfactory terms. Certain technology used in our products is licensed on a royalty-bearing basis from third parties. The termination of a license arrangement could have a material adverse effect on our business and financial results. Facilities Our executive offices and production facilities are located at 7722 East Gray Road, Scottsdale, Arizona. The office space consists of approximately 16,000 square feet of leased space. The production facility consists of approximately 24,000 square feet of leased space and houses two production lines. The warehouse has four overhead truck doors for incoming and outgoing materials as well as an industrial freight lift. Both facilities are leased under an agreement which expires in April, 2001. We believe that our present facilities will provide adequate space for our business activities and production for the foreseeable future. Employees As of February 22, 2000, we had approximately 51 employees (approximately 13 in operations, 15 in engineering, 16 in sales and marketing and 7 in administration). None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good. Legal Proceedings We are not a party to any material legal proceedings, although we are involved from time to time in routine litigation incident to business. 27 MANAGEMENT Directors and Executive Officers The following sets forth certain information regarding each of the directors and executive officers of the Company.
Name Age Position ---- --- -------- Paul Charles 38 Chairman of the Board of Director Carmine F. Adimando 55 Director David Thompson 44 Interim Chief Executive Officer, Chief Financial Officer and Secretary R. Daniel Rudich 29 Vice President of Marketing Frank Layland 42 Vice President of Operations
The following is a brief summary of the business experience of each of the above-named individuals: Paul Charles founded CNF, Inc. in 1988 and currently serves as Chairman of the Company's Board of Directors. Mr. Charles had served as President and Chief Executive Officer of the Company until November 15, 1999. Mr. Charles has been primarily responsible for product design, development and innovation and has been instrumental in the development of each of the Company's principal products. Between 1985 and 1988 Mr. Charles worked for International Business Machines in cost accounting and inventory control management, where he distinguished himself by instituting various cost savings initiatives. Mr. Charles earned a Bachelor's degree in Finance and Accounting from Brigham Young University in 1985. Carmine F. Adimando has served as a Director of the Company since February 15, 2000. Since 1996, Mr. Adimando has been the Chairman and President of CARMCO Investments, LLC, a financial consulting firm specializing in acquisitions, diversitures, investors relations and strategic investments, where he manages the firm's diversified portfolio of public and private companies and specializes in raising capital for start-up and emerging companies. Mr. Adimando is also the Chairman of Cordiller Asset Management, a Denver, Colorado based money management firm. Prior to that, he had a 17 year career at Pitney Bowes, Inc. serving in various executive positions including Vice President-Finance, Treasurer and Chief Financial Officer. Mr. Adimando is a member of the Board of Overseers of the University of Connecticut School of Business as well as the Board of Regents of Sacred Heart University. He earned his Undergraduate Degree from Saint John's University and his MBA from Stanford University's Graduate School of Business. Mr. Adimando serves on the Board as the designee of Imperium Capital Corp. and is a Certified Public Accountant. 28 David Thompson was appointed the Interim Chief Executive Officer of the Company on November 15, 1999. He has served as the Chief Financial Officer and Secretary since January 1998. From January 1996 until joining the Company, Mr. Thompson served as the Chief Financial Officer and Vice President of Information for International Computer Graphics, Inc., a leading wholesale distributor of computer monitors and video cards. Between January 1992 and December 1996, Mr. Thompson operated his own accounting practice where he specialized in working with closely held corporations involved in mergers, acquisitions, private placements and other financing transactions. Mr. Thompson graduated from Eastern Washington University with a Bachelor's degree in Business Administration with an emphasis in professional accounting. R. Daniel Rudich has served as the Company's Vice President of Marketing since December 1997. From 1996 until joining the Company, Mr. Rudich served as the Worldwide Product Manager for notebook Zip(R) products at Iomega Corporation where he was responsible for the development and marketing of the notebook Zip(R) drive. During 1995, Mr. Rudich was a marketing intern at Compaq Computer Corporation. Between 1993 and 1994, Mr. Rudich held various marketing positions with Matrox Electronics, a Canadian graphics card manufacturer. Mr. Rudich graduated from McGill University in Montreal, Canada with a Bachelor of Commerce degree in Marketing and International Business and earned an MBA from Yale University in 1996. Frank Layland has served as the Company's Director of Operations since August 1998. Between 1985 and 1998, Mr. Layland served in various management positions for Lockheed Martin Corporation, including Business Operations Manager and Project Operations Manager where he was principally involved with governmental contracts. Mr. Layland has experience managing subcontractors, monitoring costs, production schedules and quality control. He graduated from Brigham Young University with a Bachelor of Science in Business Management. Board of Directors All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company currently has two directors; Mr. Paul Charles and Mr. Carmine F. Adimando. Mr. Charles has the right to nominate one (1) director, if the Board consists of less than five (5) members, and two (2) directors if the Board consists of five (5) or more members. Imperium Capital Inc. has the right to nominate one (1) director. It is anticipated that additional persons will be appointed to the Board of Directors. Directors Compensation Directors who are also officers of the Company receive no additional compensation for serving on the Board of Directors, other than reimbursement of reasonable expenses incurred in attending meetings. The Company has not yet formulated a policy regarding the compensation, if any, of non-employee directors. 29 Executive Compensation The following table provides certain summary information concerning compensation paid to or accrued by CNF's Chief Executive Officer, and all other executive officers who earned more than $100,000 (salary and bonus) for all services rendered in all capacities to CNF (and its predecessors) during the fiscal years ended March 31, 1997, 1998 and 1999: Summary Compensation Table
Long-Term Compensation Annual Compensation Awards --------------------------------- ---------------------- Restricted Name and Principal Fiscal Other Annual Stock Options/ Position Year Salary Bonus Compensation(1) Awards SARs (#) - --------- ---- -------- ----- ------------ ------ -------- Paul Charles(2) 1999 $150,000 -- -- -- -- President and Chief 1998 $117,243 -- -- -- -- Executive Officer 1997 $110,993 $288,871 -- -- -- David Thompson(3) 1999 $150,000 -- -- -- 339,277(4) Interim Chief Executive 1998 $18,367 -- -- -- -- Officer, Chief Financial Officer and Secretary R. Daniel Rudich(5) 1999 $100,000 -- -- -- 203,565(4) Vice President of Marketing 1998 $ 28,353 -- -- --
- -------------------------- (1) With respect to each of the executive officers named in the table, if not separately reported, the aggregate amount of perquisites and other personal benefits, securities or property received was less than either $50,000 or 10% of the total annual salary and bonus reported for such executive officer. (2) Mr. Charles resigned his position as President and Chief Executive Officer of the Company effective November 15, 1999. (3) Mr. Thompson commenced his employment with CNF on January 1, 1998. Effective November 15, 1999, Mr. Thompson was appointed as the interim Chief Executive Officer of the Company. (4) Consists of options to purchase shares of Series A Preferred Stock which were issued in exchange for options to purchase shares of CNF common stock in connection with the Merger. (5) Mr. Rudich commenced his employment with CNF on December 1, 1997. 30 OPTION/SAR GRANTS TABLE
Option/SAR Grants in the Last Fiscal Year ====================================================================================================================== Individual Grants - ---------------------------------------------------------------------------------------------------------------------- % of Total Options/SARs Granted to Exercise or Options/SARs Employees in Base Price Expiration Name Granted (#)(1) Fiscal Year ($/Sh) Date - ---------------------------------------------------------------------------------------------------------------------- Paul Charles __ __ __ __ Chairman of the Board of Directors - ---------------------------------------------------------------------------------------------------------------------- David Thompson 339,277 41% $.24 April 15, 2008 Interim Chief Executive Officer, Chief Financial Officer and Secretary - ---------------------------------------------------------------------------------------------------------------------- R. Daniel Rudich 203,565 25% $.24 April 15, 2008 Vice President of Marketing ======================================================================================================================
(1) Consists of options to purchase shares of Series A Preferred Stock which were issued in exchange for outstanding options to purchase shares of CNF, Inc. common stock in connection with the merger. Employment Arrangements The Company has entered into employment agreements with Messrs. Charles, Thompson, Rudich and Layland. The employment agreements are for a term of three (3) years commencing May 19, 1999, provide for annual base salaries of, $90,000, $148,000, $85,000 and $85,000, respectively, and an annual merit based discretionary bonus to be determined by the Board of Directors or Compensation Committee. Mr. Thompson's salary, within the Company's discretion, may be increased to $208,000 in the event that the Company reports a net profit during any fiscal quarter ending after February 15, 2000. Mr. Thompson's agreement provides for a mandatory bonus for the fiscal year ending March 31, 2000 equal to $21,000 in the event that the Company achieves the first of the financial performance targets set forth within the Certificate of Designation for the Company's Series A Convertible Preferred Stock and an additional $10,500 for each additional financial performance target the Company's achieves. Mr. Rudich's salary, within the Company's discretion, may be increased to $120,000 in the event that the Company reports a net profit during any fiscal quarter ending after February 15, 2000. Mr. Rudich's agreement provides for the payment of a commission equal to $0.35 for each unit of CNF InnerBay(R) ZIP(R), CNF Digitari(R) products and all products developed by the Company subsequent to January 1, 1998 which are sold and paid for subject to a maximum commission of $200,000 per year. All executives are entitled to participate in the Company's fringe benefit programs, any incentive plan adopted by the Company and to reimbursement for certain company-related travel expenses. Each of the agreements provide for termination "for cause" which includes failure to achieve individual or corporate performance goals as determined by the Board of Directors of the Company or executive management. Commencing on or about May 19, 2000, any 31 executive may be terminated without cause at the discretion of the Board of Directors of the Company. In the event of a termination without cause, certain of the executives are entitled to receive severance pay in the form of salary continuation for an additional period of one year. The agreements contain standard clauses regarding confidentiality, non-compete and non-solicitation of customers, suppliers and employees. The agreements also provide for the executive to disclose all works and inventions to the Company, assign any and all patents to the Company and for all copyrightable material created by any executive during the term of his employment to be the property of the Company. Outstanding Options; Stock Incentive Plan In connection with the Merger, the Company assumed CNF, Inc.'s 1997 Equity Incentive Plan This plan provided for the grant of options to purchase up to 602,026 shares of CNF common stock to employees, officers, directors and consultants of CNF, Inc. It provided for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended and the grant of non-qualified stock options at exercise prices not less than the fair market value at the date of grant in the case of incentive stock options and not less than ninety (90%) of the fair market value at the date of grant for non-qualified options. The plan also provided for the issuance of restricted stock awards. As of the closing of the merger, CNF, Inc. had granted options to purchase an aggregate of 405,658 shares of CNF, Inc.'s common stock to certain officers and employees of CNF, Inc. at exercise prices ranging from $.50 to $2.50 per share. These options were granted during the fiscal year ended March 31, 1999, expire ten (10) years from the date of grant and vest twenty-five percent (25%) after the first year and in ratable installments each subsequent month over the following three (3) years. In connection with the Merger, the Company assumed these options which now represent the right to purchase an aggregate of up to 836,790 shares of Series A Preferred Stock of the Company (of which 44,350 have been cancelled and 12,349 have been exercised) at exercise prices ranging from $.24 to $1.21 per share. At this time, the Company's Board of Directors does not intend to issue any additional options under this plan. The Board of Directors does, however, intend to adopt a stock incentive plan and have such plan approved by the Company's stockholders. It is anticipated that any such plan will cover the grant of incentive and non-qualified options as well as the issuance of restricted stock awards and stock appreciation rights to officers, directors, key employees and consultants of the Company. The proposed plan will likely cover the issuance of options to purchase ten percent (10%) of the total number of then outstanding shares of the common stock of the Company and will be administered by the Board of Directors or a committee thereof. 32 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Loans to Officers In February 1997, we loaned Paul Charles $195,000 under a promissory note payable in full on February 14, 2002 at an interest rate of 8% per annum. This note was paid in full on August 14, 1998. Agreements with Officers and Directors The Company has entered into employment and option agreements with Messrs. Charles, Thompson, Rudich and Layland. Amendments to Merger Agreement Effective June 8, 1999, we acquired CNF, Inc. pursuant to a merger agreement under which we issued 5,163,588 shares of Series A Preferred Stock and options to purchase 836,790 shares of Series A Preferred Stock to holders of all outstanding common shares and options of CNF, Inc. By agreements dated November 1, 1999 and February 2, 2000, by and among the Company, Paul Charles, Synergy Group International, Inc. and others, certain material provisions of the merger agreement were amended. Pursuant to the terms of the initial merger agreement, Mr. Charles received 5,157,000 Series A Preferred Stock and entered into an employment agreement to serve as our Chief Executive Officer. Mr. Charles has resigned his position and surrendered 1,500,000 of the shares of Series A Preferred Stock issued to him in the merger. The initial merger agreement provided for 2,000,000 of the shares of Series A Preferred Stock issued to Mr. Charles to be placed into escrow to secure his indemnification obligations under the agreement. 1,000,000 of these shares were subject to release on or about December 8, 1999 and the remainder were subject to release on or about December 8, 2000. Given that no indemnification claims have arisen to date, and Mr. Charles' agreement to surrender a portion of these shares, we agreed to release the remaining 500,000 shares from escrow in order to permit Mr. Charles to privately transfer such shares. The initial merger agreement required us to conduct a private placement to raise net proceeds of at least $5,000,000 in cash or conversion of indebtedness. In order to secure this obligation, certain of our historic shareholders including Vincent J. Marold and Synergy Group International, Inc., placed 4,000,000 shares into escrow which were subject to cancellation in the event that the required proceeds were not raised within approximately six months of the effective date of the merger. These provisions have been amended to provide for the release of 2,000,000 shares upon us realizing $2,000,000 of such financing, an additional 1,000,000 shares upon realizing an aggregate of $4,000,000 of financing and the remaining 1,000,000 shares upon realizing an aggregate of $6,000,000 of such financing by no later then May 15, 2000. These amendments were the result of extensive negotiation with certain of the historic shareholders and were prompted by certain material changes in our management, other operational issues and delays in raising the financing on terms acceptable to us within the time frame required. 33 The initial merger agreement also contained certain corporate governance provisions requiring a super majority vote of our Board of Directors to approve certain fundamental transactions involving a change in control of the Company or the issuance of a material amount of securities. In addition, certain of our historic shareholders holding an aggregate of 2,100,000 shares of common stock and Mr. Charles agreed to vote their shares to elect a Board of Directors consisting of two designees of Mr. Marold and three designees of Mr. Charles. In connection with Mr. Charles' resignation as our Chief Executive Officer, the corporate governance provisions described above were eliminated and the voting provision was amended to provide for these shareholders to vote for the nomination of Mr. Charles to serve on our board in the event our board consists of less than five members, for Mr. Charles and an additional designee of Mr. Charles in the event that our board consists of five or more members and a designee of Imperium Capital Corporation. 34 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of February 22, 2000 information with respect to the securities holdings of all persons which the company, pursuant to filings with the Securities and Exchange Commission, has reason to believe may be deemed the beneficial owners of more than 5% of the company outstanding common stock. Also set forth in the table is the beneficial ownership of all shares of the company's outstanding stock, as of such date, of all officers and directors, individually and as a group.
Shares Owned Beneficially Percentage of Name and Address and of Record (1) Outstanding Shares ---------------- ----------------- ------------------ Paul Charles 3,157,000(2) 20.9% 7722 East Gray Road Scottsdale, AZ 85260 David Thompson 155,504(3) 1.3% 7722 East Gray Road Scottsdale, AZ 85260 R. Daniel Rudich 93,302(4) * 7722 East Gray Road Scottsdale, AZ 85260 Frank Layland 14,612(5) * 7722 East Gray Road Scottsdale, AZ 85260 Carmine F. Adimando -- -- 47 Cherry Gate Lane Trumbull, CT 06611 Vincent J. Marold 1,477,500(6) 12.3% c/o Synergy Group International, Inc. 3725 East Sunrise Drive Tucson, AZ 85718 Fincord Holding Corp. 725,000 6.1% P.O. Box 4608 Great Neck, NY 11203 William J. Meris 765,000(7) 6.4% 8652 East Carrie Drive Scottsdale, AZ 85200 All Directors 3,420,418 22.2% And Executive Officers as a Group (5 persons)
- --------------- *Represents less than 1% of the outstanding shares of common stock. 35 (1) The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the rules and regulations promulgated under the Exchange Act, and accordingly, may include securities owned by and for, among others, the spouse and/or minor children of an individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which such person has the right to acquire within 60 days after the date of this prospectus pursuant to the exercise of options, or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on 11,975,063 shares of common stock outstanding as of February 22, 2000. (2) Consists of 3,157,000 shares issuable upon conversion of Series A Preferred Stock. (3) Consists of shares issuable upon exercise of options to purchase 155,504 shares of Series A Preferred Stock which shares are convertible into a like number of shares of common stock. Does not include 183,773 shares issuable upon exercise of options to purchase 183,773 shares of Series A Preferred Stock which are subject to vesting. (4) Includes shares issuable upon exercise of options to purchase 93,202 shares of Series A Preferred Stock which shares are convertible into a like number of shares of common stock. Does not include 110,263 shares issuable upon exercise of options to purchase 110,263 shares of Series A Preferred Stock which are subject to vesting. (5) Consists of shares issuable upon exercise of options to purchase 14,612 shares of Series A Preferred Stock which shares are convertible into a like number of shares of common stock. Does not include 26,644 shares issuable upon exercise of options to purchase 26,644 shares of Series A Preferred Stock which are subject to vesting. (6) Includes 477,500 shares owned of record by Synergy Group International, Inc. of which Mr. Marold is the sole shareholder. (7) Includes 750,000 shares owned of record by Meris Capital Partners, L.P. which Mr. Meris is deemed to beneficially own. Material Escrow Arrangements 1,000,000 of our outstanding shares of common stock have been deposited into escrow and remain subject to cancellation upon the terms set forth in a certain escrow agreement entered into in connection with our merger with CNF, Inc. These shares will be released upon us realizing an additional $2,000,000 of debt or equity financing by no later than May 15, 2000. Material Voting Arrangements Until May 19, 2001, certain of our historic shareholders, including Vincent J. Marold, and Synergy Group International, Inc., who hold an aggregate of 2,100,000 shares of common stock, and Paul Charles who holds 3,157,000 shares of Series A Preferred Stock, have agreed to vote their shares to elect a designee of Imperium Capital Corporation to serve on our Board of Directors, to elect Paul Charles to serve on our board if it consists of less than five directors and to elect Mr. Charles and an additional designee of Mr. Charles in the event that our board consists of five or more directors. 36 DESCRIPTION OF SECURITIES Common Stock We are authorized to issue 50,000,000 shares of common stock, $.0001 par value per share, of which 11,975,063 are outstanding as of the date of this prospectus. Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights. Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable. Preferred Stock Within the limits and restrictions provided in the Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 15,000,000 shares of preferred stock, $.0001 par value per share (the "Preferred Stock"), in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications. Series A Convertible Preferred Stock. Our Board of Directors has authorized the designation of 6,000,000 shares of Preferred Stock as "Series A Convertible Preferred Stock" of which 3,675,537 are outstanding. The Company has also issued options to purchase an additional 780,091 shares of Series A Preferred Stock. The following describes the material features of the series A preferred stock which are more fully set forth in the company's Certificate of Designation on file with the Delaware Secretary of State. The Series A Preferred Stock is essentially a common stock equivalent. The Series A Preferred Stock does not have a liquidation preference, does not provide for a preferred dividend other than those declared by our board of directors out of funds legally available therefor and votes on an as converted into common stock basis. Commencing on the date of issuance, each share of Series A Preferred Stock is convertible into one (1) share of common stock. Thereafter, the conversion ratio is subject to upward adjustment based on the company achieving certain financial performance targets as reflected in the company's audited results of operation for the fiscal year ending March 31, 2000 as follows: 37
Shares of common stock to be issued upon conversion of each Financial Performance Target Share of Series A Preferred Stock ---------------------------- --------------------------------- Gross Revenues of $22.5 million and Net Income of $900,000 1.5 Gross Revenues of $38.25 million and Net Income of $1.53 million 1.75 Gross Revenues of $51 million and Net Income of $2.04 million 2.00 Gross Revenues of $64 million and Net Income of $2.56 million 2.25
The Financial Performance Targets with respect to gross revenues and net income shall be considered to have been achieved if actual gross revenues or net income, as applicable, as reported in the audited financial statements are within 10% of the targeted amount. All shares of Series A Preferred Stock which have not been converted shall automatically convert into common stock upon the earlier of (i) the completion of the audited financial statements; and (ii) June 30, 2000. Based upon the Company's financial performance during the first three quarters of fiscal 2000, it is unlikely that any of the financial targets will be achieved. Dividend Policy We have never paid cash dividends on our common stock. Our board of directors does not anticipate paying cash dividends in the foreseeable future as it intends to retain future earnings, if any, to finance the growth of the business. The payment of future cash dividends will depend on such factors as earnings levels, anticipated capital requirements, the operating and financial condition of the company and other factors deemed relevant by our board of directors. Delaware Anti-Takeover Law and Provisions of Company's Certificate of Incorporation Anti Takeover Law. As our shares become more widely held, listed on NASDAQ or on a national exchange, to which there can be no assurance, we will be governed by Section 203 of the General Corporation Law of the State of Delaware, an anti-takeover law. In general, the law prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. "Business combinations" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with its affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock. The provisions regarding certain business combinations under the General Corporation Law of the State of Delaware could have the effect of delaying, deferring or preventing a change in control of our company or the removal of our existing management. A 38 takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. Blank Check Preferred Stock. As described above, our board of directors is authorized without further stockholder action, to designate any number of series of preferred stock with such rights, preferences and designations as determined by the board. Shares of preferred stock issued by our board of directors could be utilized, under certain circumstances, to make an attempt to gain control of our company more difficult or time consuming. For example, shares of preferred stock could be issued with certain rights that might have the effect of diluting the percentage of common stock owned by a significant stockholder or issued to purchasers who might side with management in opposing a takeover bid that our board of directors determines is not in the best interest of the company and its stockholders. The existence of the preferred stock may, therefore, be viewed as having possible anti-takeover effects. A takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. Transfer Agent The transfer agent for the company's securities is StockTrans, Inc., 7 East Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300. SELLING SECURITY HOLDERS The selling security holders identified in the following table are offering for sale 3,106,623 shares of common stock. These shares include: o 2,456,623 shares of common stock o 650,000 shares of common stock which may be issued upon the conversion of series A preferred stock We previously issued these shares of common stock and series A preferred stock in private placement transactions. 850,000 of these shares are being offered by directors, officers or principal stockholders of the company. Of the 3,106,623 share of common stock being offered by the selling security holders, 1,453,413 shares are subject to lock-up agreements which prohibit the offer or sale of these shares until nine (9) months after the date of this prospectus. The selling security holders may offer their shares of common stock for sale from time to time at market prices prevailing at the time of sale or at negotiated prices, and without payment of any underwriting discounts or commissions except for usual and customary selling commissions paid to brokers or dealers. 39 The following table sets forth as of February 22, 2000 the number of shares being held of record or beneficially by the selling security holders and provides by footnote reference any material relationship between the company and the selling security holder, all of which is based upon information currently available to the company.
Beneficial Ownership of Selling security Holder Beneficial Ownership of Prior to Offering (1) Shares After Offering (2) ---------------------------- ------------------------------ Number of Shares Name of Selling Security Holder Number Percent Offered Hereby (2) Number Percent - ------------------------------- ------ ------- ------------------ ------ ------- Blair Portigal 71,822 * 71,822 - - Paul Charles(3) 3,157,000(4) 20.9% 150,000 3,007,000 19.2% Chenango, Inc. 350,000(5) 2.8% 350,000 - - Discretionary Investment Trust(6) 350,000 2.9% 350,000 - - Deremie Enterprises Limited(7) 500,000 4.2% 500,000 - - Enrico E. DiVito, DDS 35,918 * 35,918 - - Euroswiss Securities, Ltd. 150,000(8) 1.2% 150,000 - - Michael G. Glynn 97,500 * 87,500 10,000 - Keith and Carol Henrichsen 11,507 * 5,753 5,754 * Imperium Capital Corporation(9) 250,000 2.1% 250,000 - - Lawrence Kaplan 347,574 2.9% 173,787 173,787 1.4% Allen and Jane Kelsey 35,890 * 35,890 - - Lindzon Capital Partners(10) 186,562 1.6% 126,562 60,000 * Meris Capital Partners, L.P(11) 750,000 6.3% 700,000 50,000 * Harold Rubenstein 113,151 * 83,151 30,000 * Rochelle and Shelden Terman 36,240 * 36,240 - - --------- 3,106,623 =========
* Represents less than 1% of the outstanding shares of common stock (1) Applicable percentage of ownership is based on 11,975,063 shares of common stock outstanding as of February 22, 2000, plus any securities held by such holder exercisable for or convertible into common stock within sixty (60) days after the date of this prospectus. (2) Assumes that all shares are sold pursuant to this offering and that no other shares of common stock are acquired or disposed of by the selling security holders prior to the termination of this offering. Because the selling security holders may sell all, some or none of their shares or may acquire or dispose of other shares of common stock, we cannot estimate the aggregate number of shares which will be sold in this offering or the number or percentage of shares of common stock that each selling security holder will own upon completion of this offering. Applicable percentage of ownership is based on 12,625,063 shares of common stock outstanding after the offering (11,975,063 shares outstanding as of February 22, 2000, plus 650,000 shares issuable upon the conversion of 650,000 shares of Series A Preferred Stock), together with any securities held by such holder exercisable for or convertible into common stock within 60 day after the date of this prospectus. (3) Mr. Charles is the Chairman of the Board of Directors and a principal stockholder of the Company. (4) Includes 3,157,000 shares of common stock issuable upon the conversion of Series A Preferred Stock. (5) Consists of 350,000 shares of common stock issuable upon the conversion of Series A Preferred Stock. (6) Pursuant to a February 2, 2000 securities purchase agreement, Discretionary Investment Trust has the right to consent to the Company's issuance of any common stock or securities convertible into common stock. (7) Pursuant to a February 2, 2000 securities purchase agreement, Deremie Enterprises Limited has the right to consent to the Company's issuance of any common stock or securities convertible into common stock. (8) Consists of 150,000 shares of common stock issuable upon the conversion of Series A Preferred Stock. (9) Imperium Capital Corporation has the right to designate one person to serve on the Company's Board of Directors. 40 (10) Lindzon Capital Partners is an investment fund managed by Howard Lindzon who beneficially owns an additional 332,500 shares of common stock and 6,188 shares of Series A Preferred Stock. (11) Under applicable SEC Rules, these shares are deemed to be beneficially owned by William J. Meris, a principal stockholder of the Company. Under agreements with the selling security holders, we will pay all offering expenses except the fees and expenses of any counsel and other advisors that the selling security holders may employ to represent them in connection with the offering and all brokerage or underwriting discounts or commissions paid to broker-dealers in connection with the sale of the shares. PLAN OF DISTRIBUTION The selling security holders have not advised us of any specific plan for distribution of the shares offered hereby, but it is anticipated that the shares will be sold from time to time by the selling security holders or by pledgees, donees, transferees or other successors in interest on a best efforts basis without an underwriter. Such sales may be made on the National Quotation Bureau's Pink Sheets, the OTC Bulletin Board, any exchange upon which our shares may trade in the future, over-the-counter, or otherwise, at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The shares may be sold by one or more of the following: o a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker or dealer for its account pursuant to this prospectus; o ordinary brokerage transactions and transactions in which the broker solicits purchases; o through options, swaps or derivatives; o in privately negotiated transactions; o in transactions to cover short sales; o through a combination of any such methods of sale; or o in accordance with Rule 144 under the Securities Act, rather than pursuant to this prospectus. The selling security holders may sell their shares directly to purchasers or may use brokers, dealers, underwriters or agents to sell their shares. Brokers or dealers engaged by the selling security holders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions, discounts or concessions from the selling security holders, or, if any such broker-dealer acts as agent for the purchaser of shares, from the purchaser in amounts to be negotiated immediately prior to the sale. The compensation received by brokers or dealers may, 41 but is not expected to, exceed that which is customary for the types of transactions involved. Broker-dealers may agree with a selling security holder to sell a specified number of shares at a stipulated price per share, and, to the extent the broker-dealer is unable to do so acting as agent for a selling security holder, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer commitment to the selling security holder. Broker-dealers who acquire shares as principal may thereafter resell the shares from time to time in transactions, which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above, in the over-the counter market or otherwise at prices and on terms then prevailing at the time of sale, at prices then related to the then-current market price or in negotiated transactions. In connection with resales of the shares, broker-dealers may pay to or receive from the purchasers of shares commissions as described above. The selling security holders and any broker-dealers or agents that participate with the selling security holders in the sale of the shares may be deemed to be "underwriters" within the meaning of the securities act. In that event, any commissions received by broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the securities act. From time to time the selling security holders may engage in short sales, short sales against the box, puts and calls and other hedging transactions in our securities, and may sell and deliver the shares in connection with such transactions or in settlement of securities loans. These transactions may be entered into with broker-dealers or other financial institutions. In addition, from time to time, a selling security holder may pledge its shares pursuant to the margin provisions of its customer agreements with its broker-dealer. Upon delivery of the shares or a default by a selling security holder, the broker-dealer or financial institution may offer and sell the pledged shares from time to time. Of the 3,106,623 shares of common stock being offered by the selling security holders, 1,453,413 shares are subject to lock-up agreements with the company. The lock-up agreements prohibit the offer or sale of these shares until nine (9) months after the date of this prospectus. We will not receive any proceeds from the sale of the shares. We will pay the expenses of preparing this prospectus and the related registration statement. The selling security holders have been advised that they are subject to the applicable provisions of the Exchange Act, including without limitation, Rules 10b-5 and Regulation M there under. LEGAL MATTERS Certain legal matters, including the validity of the shares being issued, will be passed upon for the company by Buchanan Ingersoll Professional Corporation, Eleven Penn Center, 1835 Market Street, 14th Floor, Philadelphia, PA 19103. EXPERTS The financial statements as of March 31, 1999 and 1998 and for each of the two years in the period ended March 31, 1999 included in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report 42 expresses an unqualified opinion and includes an explanatory paragraph regarding the Company's ability to continue as a going concern), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN GET MORE INFORMATION We have filed a registration statement on Form SB-2 with the SEC. This prospectus, which forms a part of that registration statement, does not contain all of the information included in the registration statement and the exhibits and schedules thereto as permitted by the rules and regulations of the SEC. For further information with respect to the company and the shares of common stock offered hereby, reference is made to the registration statement, including the exhibits and schedules thereto. Statements contained in this prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and, where such contract or other document is an exhibit to the registration statement, each such statement is qualified in all respects by the provisions of such exhibit, to which reference is hereby made. You may review a copy of the registration statement at the SEC's public reference room in Washington, D.C., and at the SEC's regional offices in Chicago, Illinois and New York, New York. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The registration statement can also be reviewed by accessing the SEC's Internet site at http://www.sec.gov. As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. 43 CNF TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS OF THE COMPANY CNF TECHNOLOGIES, INC. Independent Auditor's Report ................................................F-2 Financial Statements Balance Sheets...........................................................F-3 Statements of Operations.................................................F-4 Statements of Shareholder's (Capital Deficiency) Equity .................F-5 Statements of Cash Flows ................................................F-6 Notes to Financial Statements ...........................................F-7 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors CNF Technologies, Inc. Scottsdale, Arizona We have audited the accompanying balance sheets of CNF Technologies, Inc. (formerly CNF, Inc.) (the "Company") as of March 31, 1999 and 1998, and the related statements of operations, shareholder's (capital deficiency) equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at March 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company's recurring losses from operations, negative working capital, and shareholders' capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are described in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Phoenix, Arizona May 925, 1999 (June 11, 1999 as to paragraph 1 of Note 1, paragraph 2 of Note 4, and paragraphs 4, 5 and 7 of Note 13) F-2 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) BALANCE SHEETS DECEMBER 31, 1999 AND MARCH 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------ March 31, December 31, ------------------ ASSETS 1999 1999 1998 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,500 $ 184,663 $ 229,419 Accounts receivable - trade (net of allowance of $340,000, $390,000 and $330,000 at December 31, 1999, March 31, 1999 and 1998, respectively) 1,428,938 834,383 1,084,527 Accounts receivable - employees and other 129 31,736 118,128 Inventories (Note 2) 1,595,550 1,656,001 1,505,140 Prepaid expenses and other current assets 138,701 112,782 314,729 Income tax receivable 95,717 95,717 30,732 ------- ------- ------ Total current assets 3,260,535 2,915,282 3,282,675 PROPERTY AND EQUIPMENT - Net (Note 3) 628,346 582,233 338,261 NOTE RECEIVABLE FROM RELATED PARTY (Note 9) 9,906 95,000 OTHER ASSETS 30,670 31,266 14,054 ------- ------- ------ TOTAL $ 3,919,551 $ 3,538,687 $ 3,729,990 =========== =========== ========== LIABILITIES AND SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 3,546,351 $ 3,642,535 $ 2,101,691 Accounts payable - related party 345 10,000 Lines of credit (Note 4) 682,120 672,135 Short-term obligations (Note 5) 503,259 Short-term obligations - related parties (Note 5) 750,000 397,551 Accrued compensation 224,695 225,716 144,626 Accrued expenses 389,450 437,050 139,113 Current portion of capital leases (Note 7) 30,510 17,826 Current portion of notes payable (Note 5) 55,645 71,623 62,279 ------- ------- ------ Total current liabilities 4,996,651 5,978,025 3,129,844 CAPITAL LEASES (Note 7) 77,402 67,136 NOTES PAYABLE (Note 5) 153,106 220,163 259,758 -------- -------- ------- Total liabilities 5,227,159 6,265,324 3,389,602 ---------- ---------- --------- COMMITMENTS AND CONTINGENCIES (Notes 1, 7, 10, 12 and 13) SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY (Note 6): Preferred stock, par value of $.0001: 15,000,000 shares authorized; 4,163,933 shares issued and outstanding at December 31, 1999 416 Common stock, par value of $.0001: 50,000,000 shares authorized; 11,445,563 shares issued and outstanding at December 31, 1999 1,145 Common stock, no par value: 25,000,000 shares authorized; 2,503,000 and 2,500,000 shares issued and outstanding as of March 31, 1999 and 1998, respectively 1,000 1,000 Additional paid-in capital 7,250,658 7,500 (Deficit) retained earnings (8,559,827) (2,735,137) 339,388 --------- --------- ------- Total shareholder's (capital deficiency) equity (1,307,608) (2,726,637) 340,388 --------- --------- -------- TOTAL $ 3,919,551 $ 3,538,687 $ 3,729,990 =========== =========== ===========
See notes to financial statements. F-3 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------- Nine-Month Periods Ended December 31, Years Ended March 31, ------------------------ --------------------- 1999 1998 1999 1998 (Unaudited) REVENUES (Note 11) $ 8,510,873 $ 7,578,878 $ 9,425,947 $ 7,726,484 COST OF REVENUES 6,048,172 5,066,561 6,088,549 4,460,944 ---------- ---------- ----------- --------- Gross profit 2,462,701 2,512,317 3,337,398 3,265,540 ---------- ---------- ----------- --------- OPERATING EXPENSES: General and administrative 4,170,091 2,951,046 3,960,673 1,916,877 Research and development 849,123 800,894 1,200,939 890,944 Sales and marketing 806,325 672,912 1,086,265 480,170 ---------- ---------- ----------- --------- Total operating expenses 5,825,539 4,424,852 6,247,877 3,287,991 ---------- ---------- ----------- --------- LOSS FROM OPERATIONS (3,362,838) (1,912,535) (2,910,479) (22,451) ---------- ---------- ----------- -------- OTHER INCOME (EXPENSE): Interest income 3,215 345 20,528 1,070 Interest expense (Notes 5 and 13) (2,473,297) (92,666) (248,342) (68,552) Other income 8,230 116,973 18,568 31,766 ---------- ---------- --------- -------- Other (expense) income - net (2,461,852) 24,652 (209,246) (35,716) ---------- ---------- ------- ------- LOSS BEFORE INCOME TAX (BENEFIT) PROVISION (5,824,690) (1,887,883) (3,119,725) (58,167) --------- --------- (BENEFIT) PROVISION FOR INCOME TAXES (Note 8) (45,200) 21,100 ------ ------ NET LOSS $ (5,824,690) $ (1,887,883) $ (3,074,525) $ (79,267) ============ ============ ============ ========= BASIC AND DILUTED LOSS PER SHARE - Applicable to common shareholders $ (0.69) $ (0.76) $ (1.23) $ (0.03) ============ ============ ============ ========= BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING - Basic and diluted 8,490,496 2,500,000 2,500,250 2,500,000 ============ ============ ============ =========
See notes to financial statements. F-4 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) STATEMENTS OF SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY
- --------------------------------------------------------------------------------------------------------------------------- Total Preferred Stock Common Stock Additional Retained Shareholder's ------------------ ---------------- Paid-in Earnings Equity (Capital Shares Amount Shares Amount Capital Deficit) Deficiency) BALANCE, APRIL 1, 1997 2,500,000 $1,000 $ 418,655 $ 419,655 Net loss (79,267) (79,267) --------- -------- BALANCE, MARCH 31, 1998 2,500,000 1,000 339,388 340,388 Common stock issued (Note 5) 3,000 $ 7,500 7,500 Net loss (3,074,525) (3,074,525) ---------- ---------- BALANCE, MARCH 31, 1999 2,503,000 1,000 7,500 (2,735,137) (2,726,637) Retirement of CNF, Inc. stock (unaudited) (Note 13) (2,503,000) (1,000) (1,000) Issuance of new stock (Notes 6 and 13): Preferred stock (unaudited) 5,163,933 $ 516 516 Common stock (unaudited) 11,445,563 1,145 7,243,158 7,244,303 Preferred stock surrendered (unaudited) (1,000,000) (100) (100) Net loss (unaudited) (5,824,690) (5,824,690) ---------- ---------- BALANCE, DECEMBER 31, 1999 (unaudited) 4,163,933 $ 416 11,445,563 $1,145 $7,250,658 $(8,559,827) $(1,307,608) ========= ===== ========== ====== ========== =========== ===========
See notes to financial statements. F-5 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------- Nine-Month Periods Ended December 31, Years Ended March 31, ------------------- --------------------- 1999 1998 1999 1998 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(5,824,690) $(1,887,883) $(3,074,525) $ (79,267) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 129,669 100,543 140,323 60,797 Amortization of discount on note payable subject to 50% conversion (Note 5) 503,259 Loss (gain) on sales of assets 3,122 (1,409) 8,233 Deferred income taxes - net (12,557) Expenses associated with Private Placement Memorandum (359,846) Expenses satisfied with issuance of common stock 1,762,489 7,500 Expenses associated with merger (50,250) Changes in assets and liabilities: Accounts receivable - trade (594,555) 497,178 250,144 (802,276) Accounts receivable - other 31,607 51,337 86,392 (102,926) Inventories 60,451 598,449 (150,861) (931,665) Prepaid expenses and other assets (25,919) (128,582) 184,735 (248,997) Accounts payable - trade (104,494) 641,948 1,540,844 1,654,744 Accounts payable - related party (345) (9,510) (9,655) Income tax receivable (64,985) (24,806) Accrued compensation (1,021) 37,104 81,090 25,310 Accrued expenses (4,065) 40,096 297,937 17,431 ----------- ----------- ---------- --------- Net cash used in operating activities (4,474,588) (60,729) (702,828) (444,212) ----------- ----------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (133,521) (290,454) (296,138) (273,929) Loan to officer (9,906) Collection of note receivable 9,906 95,000 95,000 ----------- ----------- ---------- Net cash used in investing activities (123,615) (195,454) (211,044) (273,929) ----------- ----------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (payments) on lines of credit, net (682,120) 9,985 9,985 672,135 Loan and note payable 36,892 540,151 Notes payable - related party 2,302,449 39,000 397,551 Issuance of preferred stock 179 Equity transaction (Note 13) 3,000,000 Principal payments on capital leases (22,434) (7,643) (11,429) Principal payments on notes payable (83,034) (49,971) (67,142) (51,940) Principal payments on notes payable - related party (100,000) ----------- Net cash provided by financing activities 4,415,040 28,263 869,116 620,195 ----------- ----------- ---------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (183,163) (227,920) (44,756) (97,946) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 184,663 229,419 229,419 327,365 ----------- ----------- ---------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,500 $ 1,499 $ 184,663 $ 229,419 =========== =========== ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 150,624 $ 92,666 $ 146,289 $ 68,552 =========== =========== ========= ========= Cash paid for income taxes $ - $ 19,000 $ 20,635 $ 59,429 =========== =========== ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock in connection with the conversion of notes payable (Note 13) $ 2,353,259 $ - $ - $ - =========== =========== ========= ========= Capital expenditures financed through obligations under capital leases $ 45,384 $ 82,891 $ 96,391 $ - =========== =========== ========= ========= See notes to financial statements.
F-6 CNF TECHNOLOGIES, iNC. (Formerly CNF, Inc.) NOTES TO FINANCIAL STATEMENTS NINE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998 (Unaudited) AND YEARS ENDED MARCH 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. BUSINESS AND BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - CNF Technologies, Inc. (formerly CNF, Inc.) (the "Company") was incorporated in California in June 1988. In July 1998, the Company relocated its corporate headquarters to Scottsdale, Arizona. The Company designs, manufactures and markets portable peripherals to notebook PC vendors, wholesale distributors, computer resellers, computer retail stores and corporate end users. As described in Note 13, on June 8, 1999, the Company completed a merger with JLL Ventures (Delaware) Corp., a Delaware Corporation, (JLL) and JLL ACQUISITIONS CORP., a Delaware corporation and wholly-owned subsidiary of JLL (JLL ACQUISITIONS). JLL subsequently changed its name to CNF Technologies, Inc. and JLL ACQUISITIONS changed its name to CNF Mobile Solutions, Inc. Interim Period Presentation - The unaudited financial statements for the nine-month periods ended December 31, 1999 and 1998 have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows. The results of operations for the nine-month periods ended December 31, 1999 are not necessarily indicative of results that may be expected for the year ending March 31, 2000 or any future period. Basis of Presentation - The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the nine-month periods ended December 31, 1999 and the years ended March 31, 1999 and 1998, the Company incurred net losses of $5,824,690 (unaudited), $3,074,525 and $79,267, respectively, and, as of December 31, 1999 and March 31, 1999, the Company's current liabilities exceeded its current assets by $1,736,116 (unaudited) and $3,062,743, respectively, and its total liabilities exceeded its total assets by $1,307,608 (unaudited) and $2,726,637, respectively. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations from sources that are described in Note 13 to the financial statements. F-7 Summary of Significant Accounting Policies a. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b. Cash and cash equivalents consist of cash held in bank demand deposits and highly liquid investments purchased with initial maturities of three months or less. c. Inventories are stated at the lower of cost (first-in, first-out method) or market. d. Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets of five to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives or the underlying lease term. The Company evaluates the recoverability of long-lived assets on an on-going basis. e. Income Taxes - The Company accounts for income taxes using the asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards measured by applying current enacted tax laws. f. Revenue Recognition - Revenues, less reserves for returns, are recognized upon shipment to the customer. Title to the product transfers upon shipment to the customer. Revenues from sales to distributors and authorized resellers are subject to terms allowing certain rights of return and price protection rights. Accordingly, allowances for estimated future returns are provided for upon recognition of revenue. Such amounts are estimated based on historical rates of return, distributor inventory levels and other factors. At December 31, 1999, reserves of $330,000 and $10,000 (unaudited) were recorded by the Company for estimated future returns and bad debts, respectively. At March 31, 1999 and 1998, reserves of $350,000 and $40,000 and $300,000 and $30,000, respectively, were recorded by the Company for estimated future returns and bad debts. g. Certain Significant Risks and Uncertainties - The Company participates in a dynamic high technology industry and believes that changes in any of the following areas, among others, could have a material adverse effect on the Company's future financial position or results of operations: advances and trends in new technologies and industry standards; competitive pressures in the form of new products; changes in certain strategic partnerships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; risk associated with changes in domestic and international economic and/or political conditions or regulations; availability of necessary components; risks associated with year 2000 compliance; and the Company's ability to attract and retain employees necessary to support its growth. h. Recently Issued Accounting Standards - In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise report, by major components and as a single total, the change in its net assets from non-owner sources during the period. There were no differences between net loss and comprehensive net loss for the years presented. F-8 In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued, which establishes accounting and reporting standards for derivative instruments and hedging activities which are required for fiscal quarters beginning after June 15, 1999. On May 20, 1999, the FASB issued an Exposure Draft, which would have the effect of deferring the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. On July 7, 1999, the FASB adopted the Exposure Draft as SFAS No. 137. This statement requires balance sheet recognition of derivatives as assets or liabilities measured at fair value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. The Company has not yet determined the effect the adoption of SFAS No. 133 will have on its financial statements. 2. INVENTORIES Inventories consist of the following:
March 31, December 31, ------------------- 1999 1999 1998 (Unaudited) Raw materials $ 806,924 $1,011,970 $ 575,675 Work in process 16,800 47,169 Finished goods 771,826 596,862 929,465 ------- -------- ------- Inventories $1,595,550 $1,656,001 $1,505,140 ========== ========== ==========
3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
March 31, December 31, ------------------- 1999 1999 1998 (Unaudited) Equipment $ 892,827 $ 737,195 $ 414,872 Furniture and fixtures 50,904 30,754 23,818 Leasehold improvements 7,806 Vehicles 38,025 38,025 1,624 ------- ------- ----- Total 981,756 805,974 448,120 Accumulated depreciation and amortization (353,410) (223,741) (109,859) --------- --------- --------- Property and equipment - net $ 628,346 $ 582,233 $ 338,261 ========= ========= =========
Assets recorded under capital leases consist of the following:
December 31, March 31, 1999 1999 (Unaudited) Equipment $141,774 $ 96,391 Accumulated amortization (31,245) (12,932) -------- -------- Total $110,529 $ 83,459 ======== ========
F-9 Depreciation and amortization expense was $129,669 and $100,943 for the nine-month periods ended December 31, 1999 and 1998 (unaudited), respectively. Depreciation and amortization expense was $140,323 and $60,797 for the years ended March 31, 1999 and 1998, respectively. 4. LINES OF CREDIT In August 1997, the Company borrowed $100,000 and $600,000 under two bank lines of credit, which bear interest at prime (7.75% at March 31, 1999 and 8.5% at March 31, 1998) plus 2 percent and 3.5 percent per annum, respectively. The Company had outstanding borrowings of $682,120 and $672,135 under the lines of credit as of March 31, 1999 and 1998, respectively. As described in Note 13, subsequent to March 31, 1999, the Company's lines of credit maturity dates were extended under a loan modification agreement. Per the loan modification agreement, on June 7, 1999 and on June 30, 1999, a $100,000 principal-only installment shall be due and payable. In addition, a $100,000 principal-only payment shall be due and payable upon execution of the loan modification agreement. Interest-only installments will be due and payable on the tenth day of each month. The remaining balance on the lines of credit was due and payable on July 31, 1999. In accordance with the loan modification agreement, the Company made a $100,000 principal-only payment, as well as a $100,000 payment for execution of the loan modification agreement, on June 4, 1999. The Company made an additional principal only payment in August 1999 in the amount of approximately $152,000 and negotiated a second loan modification agreement extending the maturity date to December 31, 1999 (unaudited). On October 6, 1999, the Company paid the final installment on its lines of credit (unaudited). F-10 5. DEBT Short-term obligations at December 31, 1999 and March 31, 1999 consist of the following:
December 31, March 31, 1999 1999 (Unaudited) Note payable to a shareholder, unsecured, with interest at 10%, payable upon the earlier of the completion of a $3,000,000 financing transaction by the Company or March 19, 2000. 3,000 shares of common stock were issued to the investor as additional consideration. $ 100,000 Notes payable to related-parties, unsecured, with interest at 10%, payable upon the earlier of the completion of a $4,000,000 financing transaction by the Company or February 22, 2000 ($250,000) and March 9, 2000 ($25,000). Holder of the note has the right to convert the note to shares of the Company's stock at a price equal to a 25% discount from the offering price in a subsequent offering of the Company's stock, should one occur. On July 15, 1999, one party exercised its option to convert its $25,000 note, plus accrued interest of $892, to 11,507 shares of the Company's common stock. $ 250,000 275,000 Note payable to the president of the Company, unsecured, with interest at 10%. 22,551 Notes payable to four shareholders, unsecured, with interest at 10%, payable upon the earlier of the completion of a $3,000,000 financing transaction by the Company or one year from the date of the note (maturities range from April 7, 2000 to May 6, 2000). 97,500 shares of common stock were issued to the four shareholders as additional consideration. Holders of the notes have the right to convert the notes to shares of the Company's stock at a price equal to a 25% discount from the offering price in a subsequent offering of the Company's stock, should one occur. 50,000 Notes payable to four shareholders, unsecured, with interest at 10%, payable upon the earlier of the completion of a $4,000,000 financing transaction by the Company or one year from the date of the note (maturities range from May 26, 2000 to June 4, 2000). 70,000 shares of common stock were issued to the investors as additional consideration. Holders of the notes have the right to convert the notes to shares of the Company's stock at a price equal to a 25% discount from the offering price in a subsequent offering of the Company's stock, should one occur. 150,000 Notes payable to eight shareholders, unsecured, with interest at 10%, payable upon the earlier of the completion of a $5,000,000 financing transaction by the Company or one year from the date of the note (maturities range from July 8, 2000 to August 18, 2000). 65,000 shares of common stock were issued to the investors as additional consideration. 300,000 ------- Total related-party short-term obligations 750,000 397,551 Note payable, unsecured, with interest at 10%, payable upon the earlier of the completion of a $4,000,000 financing transaction by the Company or January 8, 2000. Holder of the note had the right to convert the note to shares of the Company's stock at a price equal to a 50% discount from the offering price in a subsequent offering of the Company's stock, should one occur. On July 15, 1999, the holder of the note exercised the option to convert the $503,259 note, plus accrued interest of $18,102, to 347,574 shares of the Company's common stock. 503,259 -------- Total short-term obligations $ 750,000 $ 900,810 ========= =========
F-11 During October, November and December 1999 (unaudited), the Company converted $1,859,630 of notes payable to 1,112,315 shares of common stock. As the result of the transaction, the Company recorded interest expense of $1,477,315 to reflect the financial statement impact of the beneficial conversion feature of the convertible debt and additional equity incentives (Note 13). The maturity dates of all remaining outstanding short-term obligations have been extended through January 30, 2001 (unaudited). Long-term debt obligations consist of the following:
March 31, December 31, ------------------- 1999 1999 1998 (Unaudited) Note payable to bank, unsecured, with interest at prime plus 2% (9.75% at March 31, 1999) payable in monthly installments of $1,068 through May 2001 $ 45,000 $ 65,000 Note payable to bank, unsecured, with interest at prime plus 2.25% (10% at March 31, 1999) payable in variable monthly installments through September 2003 $ 190,760 220,871 257,037 Other notes payable 17,991 25,915 ------- ------ Total long-term obligations 208,751 291,786 322,037 Less current portion (55,645) (71,623) (62,279) --------- -------- ------- Total long-term obligations $ 153,106 $220,163 $259,758 ========= ======== ======== Future annual maturities of the Company's long-term notes payable for the years subsequent to March 31, 1999 are as follows: 2000 $ 71,623 2001 77,177 2002 58,134 2003 55,149 2004 29,703 ------ Total $291,786 ========
6. SHAREHOLDER'S EQUITY Common Stock In November 1997, the Board of Directors approved a 250-for-1 split of the outstanding shares of common stock. All share amounts in these financial statements have been adjusted to give retroactive effect to the stock split. Stock Option Plan In November 1997, the Board of Directors adopted the 1997 Equity Incentive Plan (the "Plan"). Under the Plan, the Company may grant options to purchase up to 602,026 shares of the Company's common stock to employees, officers, directors, and consultants at prices not less than the fair market value (as determined by the Board of Directors) at the date of grant for incentive stock options and not less than 90 percent of the fair market value at the date of grant for nonqualified stock options. F-12 During fiscal 1999, the Company granted options of 405,658 shares of common stock to certain employees of the Company. These options expire ten years from the date of grant and vest over a four-year period, 25 percent after the first year and ratably each subsequent month for the balance of the four years. Vested options must be exercised within 45 days of termination of employment.
Options Outstanding --------------------- Options Exercise Available Price for Grant Shares Per Share Balance, April 1, 1997 - Authorized 602,026 ------- Balance, March 31, 1998 602,026 Granted (405,658) 405,658 $0.50 to $2.50 ------- ------- -------------- Balance, March 31, 1999 196,368 405,658 $0.50 to $2.50 ======= ======= ==============
In June 1999 (unaudited), the Company issued (i) 5,163,188 shares of Series A Preferred Stock to the holders of all outstanding shares of common stock of CNF; and (ii) options to purchase 836,790 shares of Series A Preferred Stock to the holders of all outstanding options to purchase shares of common stock of CNF in connection with the merger with JLL and JLL ACQUISITIONS. The options to purchase shares of preferred stock have a variable conversion rate to shares of CNF Technologies, Inc. common stock based on financial performance for the year ending March 31, 2000 (Note 13). Additionally, in December 1999, employees of the Company purchased 745 shares of the Company's preferred stock (unaudited). Subsequent to March 31, 1999, the Company issued 11,445,563 shares of common stock (unaudited). These shares were sold to accredited investors in private placement transactions. The following summarizes certain weighted average information on options outstanding at March 31, 1999:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price $0.50 376,658 9.07 $0.50 0 $0.50 $2.50 29,000 9.83 $2.50 0 $2.50
The Company applies APB Opinion No. 25 and related interpretations in accounting for its Plan. There was no compensation cost charged against income for its Plan for 1999. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No. 123, the Company's net loss and net loss per share for the year ended March 31, 1999 would have been adjusted to the pro forma amounts indicated below: F-13
Net loss - as reported $ (3,074,525) ============ Net loss - pro forma $ (3,093,583) ============ Basic and diluted loss per share - as reported $ (1.23) ============ Basic and diluted loss per share - pro forma $ (1.24) ============
The following summarizes certain weighted average information on options outstanding at December 31, 1999 (unaudited):
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price $0.24 771,812 8.32 $0.24 313,345 $0.24 $1.21 20,628 9.17 $1.21 0 $1.21
Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No. 123, the Company's net loss and net loss per share for the nine-month periods ended December 31, 1999 would have been adjusted to the pro forma amounts indicated below:
Net loss - as reported $ (5,824,690) ============ Net loss - pro forma $ (5,843,108) ============ Basic and diluted loss per share - as reported $ (0.69) ============ Basic and diluted loss per share - pro forma $ (0.69) ============
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants: no dividend yield; expected volatility of 35 percent; risk-free interest rate of 5 percent; and an expected life of seven years. Concurrent with the merger discussed in Note 13, the Plan was frozen subsequent to March 31, 1999 and no additional options will be issued. On July 14, 1999 (unaudited), the Company issued a Private Placement Memorandum (the "Private Placement") offering 1,000,000 shares of the Company's common stock at a price of $3.00 per share, subject to an increase of up to an additional 1,000,000 shares to cover over-allotments. The offering period expires on September 14, 1999. However, this date was extended through February 15, 2000 at the election of the Company (Note 13). F-14 7. LEASES The Company's operations utilize leased equipment and facilities. Future minimum lease payments under noncancellable operating leases and capital lease payments as of March 31, 1999 consist of the following:
Capital Operating Leases Leases 2000 $23,366 $319,020 2001 23,689 319,020 2002 20,971 2003 17,807 2004 13,162 Thereafter 323 ------- -------- Total 99,318 $638,040 ======== Less - interest (14,356) ------- Present value of minimum capital lease obligation 84,962 Less current portion of capital lease obligation (17,826) ------- Long-term portion of capital lease obligation $67,136 =======
Rent expense was $293,663 and $304,764 for the nine-month periods ended December 31, 1999 and 1998 (unaudited), respectively. Rent expense was $412,567 and $54,371 for the years ended March 31, 1999 and 1998, respectively. 8. INCOME TAXES The (benefit) provision for income taxes for the years ended March 31 consists of the following:
1999 1998 Current: Federal $(45,200) $ 32,122 State 1,535 -------- -------- Total current (45,200) 33,657 Deferred: Federal (9,769) State (2,788) -------- -------- Total deferred (12,557) -------- -------- Total (benefit) provision from income taxes $(45,200) $ 21,100 ======== ========
F-15 A reconciliation of the (benefit) provision for income taxes and the amounts that would be computed using federal statutory tax rates are as follows:
March 31, December 31, --------------------- 1999 1999 1998 (Unaudited) Computed expected tax benefit $(1,980,395) $(1,060,707) $(19,777) State income taxes - net of federal benefit (827) Nondeductible expenses and other credits 37,982 (94,618) Change in valuation allowance 1,980,395 977,525 136,322 ----------- ----------- -------- Total $ - $ (45,200) $ 21,100 =========== =========== ========
The following summarizes the effect of deferred income tax items and the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
March 31, December 31, ---------------------- 1999 1999 1998 (unaudited) Net operating loss $2,994,176 $ 1,013,781 Credit carryforwards 127,746 127,746 $ 106,873 Temporary differences: Sales returns 65,000 65,000 42,000 Depreciation (92,680) (92,680) (12,551) ---------- ----------- --------- Total 3,094,242 1,113,847 136,322 Valuation allowance (3,094,242) (1,113,847) (136,322) ---------- ----------- --------- Total $ - $ - $ - ========== =========== =========
The valuation allowance is maintained against deferred tax assets as a result of uncertainties concerning the Company's future ability to realize the benefits of such deferred tax assets. 9. RELATED PARTY TRANSACTIONS In February 1997, the Company's President borrowed $195,000 from the Company under a note payable due in full with interest on February 14, 2002. This notes interest rate was 8 percent per annum. At March 31, 1999, the balance was paid in full. The Company's President loaned the Company $39,000 at an interest rate of 10 percent on August 19, 1998. The balance of this note was $22,551 as of March 31, 1999. At December 31, 1999, the balance was paid in full (unaudited). The Company's Chief Financial Officer borrowed funds during the fiscal year ended March 31, 1999 totaling $9,700. The note bears interest at an interest rate of 8.5 percent per annum. Payments are due monthly with the balance to be paid in full as of November 5, 2000. The balance of the note as of March 31, 1999, including interest, was $9,906. At December 31, 1999, the balance was paid in full (unaudited). The Company leased its California facility from its President. For the years ended March 31, 1999 and 1998, rent expense for such lease was $34,000 and $42,800, respectively. F-16 10. EMPLOYEE BENEFIT PLAN In January 1999, the Company adopted a defined contribution plan under Section 401(k) of the Internal Revenue Service Code covering all eligible employees (the "401(k) Plan"). Eligible participants may contribute up to 15 percent of their total compensation. Participants will be immediately vested in their personal contributions and over a six-year period for amounts contributed by the Company. The Company did not make any matching contributions to the 401(k) Plan for the fiscal year ended March 31, 1999 or the nine-month period ended December 31, 1999 (unaudited). 11. BUSINESS SEGMENTS The Company's only business activity is the manufacture and sale of peripheral devices for laptop computers. Therefore, the Company currently operates within one business segment. Two customers accounted for 73 percent of revenues for the nine-month periods ended December 31, 1999 (Customer E accounted for 46 percent and Customer C for 27 percent). Three customers accounted for 65 percent of revenues for the nine-month periods ended December 31, 1998 (Customer A accounted for 28 percent, Customer B for 20 percent and Customer D for 17 percent). Three customers accounted for 89 percent of accounts receivable (Customer E accounted for 28 percent, Customer C for 40 percent and Customer I for 21 percent) at December 31, 1999 (unaudited). Four customers accounted for 65 percent of revenues for the year ended March 31, 1999 (Customer A accounted for 22 percent, Customer B for 16 percent, Customer C for 14 percent, and Customer D for 13 percent of revenue). One customer accounted for 13 percent of revenues for the year ended March 31, 1998. Export sales accounted for 10 percent and 17 percent of revenues for the years ended March 31, 1999 and 1998, respectively. Two customers accounted for 81 percent (Customer C accounted for 48 percent and Customer E for 33 percent) and three customers accounted for 45 percent of accounts receivable (Customer F accounted for 27 percent, Customer G for 18 percent, and Customer H for 13 percent) at March 31, 1999 and 1998, respectively. 12. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal matters that management considers to be in the normal course of business. In management's opinion, all matters will be settled without material effect on the Company's financial position or results of operations. 13. SUBSEQUENT EVENTS On April 16, 1999, the Company entered into a definitive agreement to merge with JLL Ventures (Delaware) Corp., a Delaware corporation, ("JLL") and JLL ACQUISITIONS CORP., a Delaware corporation and wholly-owned subsidiary of JLL ("JLL ACQUISITIONS") (the "Merger"). JLL was an inactive public company. In connection with the Merger, all shares of the Company are to be exchanged for shares of JLL. JLL held $1,000,000 in cash at the time of the Merger. The Company will assume no additional liabilities as a result of its merger with JLL. Furthermore, JLL is required by the merger agreement to assist the Company in obtaining additional financing in the form of bridge loans from unrelated parties within 30 days after the Merger closing date. As a result of the Merger, the shareholders of the Company will maintain a controlling interest in the Company and the Merger will be accounted for as a "reverse acquisition." Accordingly, for financial statement presentation purposes, the Company is viewed as the continuing entity and the related business combination is viewed as a recapitalization of the Company, rather than an acquisition by JLL. F-17 Each of the Company's shareholders will exchange each share of Company's common stock for 2.06 shares of JLL's preferred stock. The preferred stock has voting rights and has a variable conversion rate to common stock of CNF Technologies, Inc. based on financial performance for the year ending March 31, 2000:
Financial Performance Targets with Preferred Stock Conversion Rates -------------------------------------------------------------------------------- Conversion Target Rate Gross revenues of $20.25 million and net income of $810,000 1.50 Gross revenues of $34.43 million and net income of $1.38 million 1.75 Gross revenues of $45.9 million and net income of $1.84 million 2.00 Gross revenues of $57.6 million and net income of $2.30 million 2.25
The Financial Performance Targets are to be derived from the results of operations reflected within the Company's audited financial statements for the fiscal year ending March 31, 2000. Prior to that time, preferred stock can be converted by the holder to common stock on a one-to-one basis. Should the Company not meet the financial performance targets, the preferred stock will automatically convert to common stock on a one-to-one basis. In any event, all shares of preferred stock shall be converted to shares of common stock no later than June 30, 2000. Subsequent to March 31, 1999 and prior to the closing of the Merger, in accordance with the merger agreement, the Company received $975,000 in bridge loans from four unrelated parties, unsecured, with interest at 10 percent, payable upon the earlier of (i) completion of an unsecured $3,000,000 financing transaction by the Company or (ii) one year from the date of the note (maturities range from April 7, 2000 to May 12, 2000). Also, prior to the closing of the Merger, in accordance with the merger agreement, the Company received $700,000 in bridge loans from four unrelated parties, unsecured, with interest at 10 percent, payable upon the earlier of (i) completion of an unsecured $4,000,000 financing transaction by the Company or (ii) one year from the date of the note (maturities range from May 26, 2000 to June 4, 2000). Holders of the notes have the right to convert the notes to shares of the Company's stock at a price equal to a 25 percent discount from the offering price in a subsequent offering of the Company's stock, should one occur. On June 8, 1999, the Merger was completed and JLL ACQUISITIONS changed its name to CNF Mobile Solutions Inc. On June 11, 1999, JLL changed its name to CNF Technologies, Inc. In connection with the anticipated completion of the Merger, the lines of credit maturity dates were extended under a loan modification agreement. Per the loan modification agreement, on June 7, 1999 and on June 30, 1999, a $100,000 principal-only installment shall be due and payable. In addition, a $100,000 principal-only payment shall be due and payable upon execution of the loan modification agreement. Interest-only installments will be due and payable on the tenth day of each month. The remaining balance on the lines of credit will be due and payable on July 31, 1999. On June 4, 1999, in accordance with the loan modification agreement, the Company made the required $100,000 principal-only payment, as well as the $100,000 principal payment due on execution of the loan modification agreement. Unaudited The Company made an additional principal only payment on its lines of credit in August 1999 in the amount of approximately $152,000, and negotiated a second loan modification agreement extending the maturity date to December 31, 1999. On October 6, 1999, the Company paid the final installment on its lines of credit. F-18 Two million shares of the Company's outstanding common stock have been deposited into escrow and remain subject to cancellation upon the terms set forth in a certain escrow agreement entered into in connection with the Merger. Specifically, certain historic shareholders of the Company have deposited these shares into escrow to secure an obligation under the merger agreement to complete a private placement which provides the Company with proceeds of between $2,000,000 and $6,000,000 (inclusive of the conversion of certain indebtedness) by no later than on or about February 15, 2000. These shares will be released based on the gross proceeds realized by the Company's completion of the private placement and conversion of indebtedness and the conversion of certain indebtedness. Two million of the shares of Series A Preferred Stock issued to Mr. Paul Charles, a principal shareholder of the Company, under the merger agreement were subject to cancellation upon the terms set forth in a separate escrow agreement by and between the Company and Mr. Charles. These shares were deposited into escrow to secure Mr. Charles' indemnification obligations under the merger agreement with respect to certain representations, warranties and covenants thereunder. Provided that there were no claims for indemnification under the merger agreement pending against Mr. Charles, 1,000,000 of these shares were subject to release on or about December 8, 1999 and the remainder were subject to release on or about December 8, 2000. As the result of cash flow considerations, the Company agreed to provide the holders of certain bridge loans additional equity incentives to exercise their rights to convert the bridge loans to shares of the Company's common stock. During October, November, and December 1999, the Company converted $1,859,630 of bridge loans ($1,825,000 principal amount and $34,630 of interest) for 1,112,315 shares of common stock. The resulting shares consisted of 912,500 for the principal amount of the bridge loans, 17,315 shares for the related accrued interest and 182,500 shares provided to the holders as equity incentives. As the result of the transaction, the Company recorded interest expense of $1,477,315 to reflect the impact of the beneficial conversion feature of the convertible debt and equity incentives. On November 1, 1999, the Company issued 75,000 shares of common stock to Deremie Enterprises Limited for consideration for a bridge note of $500,000. As a result of the transaction, the Company recorded interest expense of $225,000 to record the impact of the consideration given for the bridge note. The note was repaid on November 26, 1999. On November 26, 1999, the Company conducted an initial closing of the Private Placement pursuant to which the Company obtained gross proceeds of $2,000,000 from the sale of 666,667 shares of common stock. In connection with the Private Placement, the Company issued warrants to purchase 200,000 shares of common stock, all of which are currently exercisable. In addition, the Company agreed to issue warrants to the Company's placement agent to purchase up to an additional 200,000 shares of common stock, which will be immediately exercisable. On November 26, 1999, the Company issued 66,667 of these warrants. All warrants have an exercise price of $3.00 and expire in November 2004. On November 15, 1999 and February 8, 2000, the Company entered into agreements with Paul Charles and Synergy Group International, Inc. ("Synergy Group"), a principal shareholder of the Company, and others which amended certain provisions of the Merger. Specifically, Mr. Charles agreed to resign his position as the Chief Executive Officer and President of the Company and to surrender 1,500,000 of the shares of Series A Preferred Stock issued to him in the Merger and to transfer an additional 500,000 shares to a financial consultant. The agreement also amended the provisions of the Merger relating to the private financing obligations. These amendments consisted of reducing the minimum required proceeds from $3,000,000 to $2,000,000, including the conversion of indebtedness as proceeds and amending the escrow provisions relating to the 4,000,000 shares of common stock owned by the Synergy Group and others to secure the funding obligations. Additionally, the Private Placement Memorandum was terminated and the remaining shares will be released upon certain performance F-19 criteria from various parties. As amended, 2,000,000 of these shares were released upon the Company realizing gross proceeds of $2,000,000, an additional 1,000,000 shares were released upon the Company realizing $4,000,000 of gross proceeds, and the remaining 1,000,000 shares will be released upon the Company realizing $6,000,000 of gross proceeds. On February 8, 2000, the Company issued 250,000 shares of common stock raising gross proceeds of $500,000. The Company also issued 250,000 shares of common stock for financial consulting services. In February 2000, employees of the Company purchased 11,604 shares of the Company's preferred stock. * * * * * F-20 Until ____________ (ninety (90) days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 3,106,623 Shares [LOGO] CNF TECHNOLOGIES, INC. Common Stock ------------------- P R O S P E C T U S ------------------- March 2, 2000 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Certificate of Incorporation and Bylaws reflect the adoption of the provisions of Section 102(b)(7) of the Delaware General Corporation Law (the "GCL"), which eliminate or limit the personal liability of a director to the Company or its stockholders for monetary damages for breach of fiduciary duty under certain circumstances. If the GCL is amended to authorize corporate action further eliminating or limiting personal liability of directors, the Certificate of Incorporation provides that the liability of the director of the Company shall be eliminated or limited to the fullest extent permitted by the GCL. The Company's Certificate of Incorporation and Bylaws also provide that the Company shall indemnify any person, who was or is a party to a proceeding by reason of the fact that he is or was a director, officer, employer or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees) actually and reasonably incurred by him in connection with such proceeding if he acted in good faith and in a manner he reasonably believed to be or not opposed to the best interests of the Company, in accordance with, and to the full extent permitted by, the GCL. The determination of whether indemnification is proper under the circumstances, unless made by the Court, shall be determined by the Board of Directors. Reference is made to Item 28 for the undertakings of the Registrant with respect to indemnification of liabilities arising under the Securities Act of 1933, as amended (the "Act"). ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is a list of the estimated expenses to be incurred by the Registrant in connection with the preparation and filing of this Registration Statement. SEC Registration Fee...................................... $ 4,946 Printing and Engraving.................................... $20,000 Accountants' Fees and Expenses............................ $15,000 Legal Fees and Expenses................................... $30,000 Other Offering Expenses................................... $ 5,000 ------- Total..................................................... $74,946 ======= ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Recent Sales of Unregistered Securities 1. On or about February 2, 2000 the Company issued 250,000 shares of common stock at $2.50 per share raising gross proceeds of $500,000. These securities were sold to two (2) accredited investors in a private placement transaction exempt from the registration II-1 requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person as follows: Name Number of Shares ---- ---------------- Discretionary Investment Trust 100,000 Deremie Enterprises Limited. 150,000 ------- 250,000 2. On or about February 2, 2000, the Company issued 250,000 shares of common stock to one (1) accredited investor in consideration of financial consulting services. The securities were issued in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof directly by Company without payment of underwriting discounts or commissions to any person and without engaging in any advertising or general solicitation of any kind as follows: Name Number of Shares ---- ---------------- Discretionary Investment Trust 250,000 3. During January and February 2000, the Company issued 29,500 shares of common stock together with promissory notes in the aggregate principal amount of $295,000. These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation and without payment of underwriting discounts or commissions to one (1) accredited investor, who was known either to the Company's officers or principal shareholders prior to the offering of such securities, as follows: Principal Amount Name of Note Number of Shares ---- ----------------- ---------------- Larry Kaplan $145,000 14,500 Larry Kaplan 150,000 15,000 -------- ------ TOTAL $295,000 29,500 4. On November 26, 1999, the Company issued 666,667 shares of common stock at $3.00 per share raising gross proceeds of $2,000,000. The Company paid brokerage commissions and non accountable expense equal to $260,000 together with warrants to purchase 266,667 shares of common stock at an exercise price of $3.00 per share to a registered broker-dealer. These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder solely to a limited number accredited investors without engaging in any advertising or general solicitation of any kind as follows: II-3 Number Number Name of Shares of Warrants ---- --------- ----------- Donald Parvin & Philip Parvin JTROS 8,333 Pueblo Properties L.L.C. 8,333 Daljit S. Buttar 108,333 Michael K. Havrilesko 83,333 Matrose Capital Management, Ltd. 266,667 Myron H. Reinhart 83,333 Steve Katz & Becky Katz JTROS 16,667 David Henry Sutton 8,333 Neil Druks 16,667 Allen Jacobson 16,667 Jacob Roth & Yentil Roth JTROS 16,667 Amro International S.A. 100,000 Balmore Funds 83,334 Austost Anstalt Schaan 83,334 Frederick G. Heumann 33,333 ------- TOTAL 666,667 5. During November and December 1999, the Company issued 512,316 shares of common stock in consideration of the cancellation of $825,000 of outstanding indebtedness, $34,630 of accrued interest and additional equity incentives. These securities were sold to accredited investors in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation and without payment of underwriting discounts or commissions solely to accredited investors who had provided unsecured debt financing to the Company during July and August 1999. These investors were known either to the officers or principal shareholders of the Company prior to the offering of the notes. Name Number of Shares ---- ---------------- Daljit S. Buttar 92,733 Enrico E. DiVito, DDS 30,918 Michael G. Glynn 75,000 Allen and Jane Kelsey 30,890 Lindzon Capital Partners 126,562 Blair Portigal 61,822 Harold Rubenstein 63,151 Rochelle and Shelden Terman 31,240 ------- TOTAL 512,316 6. On October 29, 1999, the Company issued 600,000 shares of common stock in consideration of the cancellation of $1,000,000 of outstanding indebtedness incurred during June 1999, and on November 2, 1999 issued 5,000 shares of common stock in consideration of the advance of a bridge loan in the principal amount of $500,000. These securities were sold to two (2) accredited investors who had either previously provided unsecured debt financing to the Company or as an incentive to provide financing in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the II-3 Company without payment of underwriting discounts or commissions. Both investors were either known to the officers or principal shareholders of the Company prior to the offering of the note. Name Number of Shares ---- ---------------- Meris Capital Partners, L.P. 600,000 Imperium Capital Corporation 75,000 TOTAL 675,000 7. During July 1999, the Company issued 359,081 shares of common stock in consideration of the cancellation of $547,253 of outstanding indebtedness. incurred during June 1999 These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the without payment of underwriting discounts or commissions to two (2) accredited investors were known either by the officers or principal shareholders of the Company prior to the offering of the notes: Name Number of Shares ---- ---------------- Larry Kaplan 347,574 Keith and Carol Henrichsen 11,507 8. During July and August 1999, the Company issued 65,000 shares of common stock together with promissory notes in the aggregate principal amount of $650,000. These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation and without payment of underwriting discounts or commissions to a limited number of accredited investors who were known either to the Company's officers or principal shareholders prior to the offering of such securities as follows: Principal Amount Number Name of Notes of Shares ---- ---------------- --------- Daljit S. Battar $150,000 15,000 Creative Business (Asia Online Publications) 100,000 10,000 Enrico E. Divito DDS 50,000 5,000 Allen and Jane Kelsey 50,000 5,000 Kerzner Revocable Trust 50,000 5,000 Larfer Family Trust 100,000 10,000 Blair Portigal 100,000 10,000 Myron Reinhart 50,000 5,000 -------- ----- TOTAL $650,000 65,000 9. During February and March 1999, the Company issued promissory notes in the aggregate principal amount of $778,259. These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation and without payment of underwriting discounts or commissions to a limited number of II-4 accredited investors who were known either to the Company's officers or principal shareholders prior to the offering of such securities as follows: Principal Amount Name of Notes ---- ---------------- Sid and Lila Parrish $250,000 Larry Kaplan 503,259 Keith and Carol Henrichsen 25,000 -------- TOTAL $778,259 10. After the completion of the Merger, during June 1999, the Company issued 167,500 shares of common stock in connection with the issuance of the promissory notes by CNF, Inc. in the aggregate principal amount of $1,675,000 prior to the merger during April 1999. These shares were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation and without payment of underwriting discounts or commissions. These shares were issued to a limited number accredited investors who were known either to the officers of principal shareholders of the Company prior to the offering of the notes in consideration of the substantial additional risk undertaken by such investors by advancing unsecured funds to CNF, Inc. prior to completion of the Merger. Principal Amount Number Name of Notes of Shares ---- ---------------- --------- Jim Caljeen $ 100,000 10,000 Michael G. Glynn 125,000 12,500 Helen and Jerry Holden 50,000 5,000 Lanny Lahr 100,000 10,000 Meris Capital Partners, LP 1,000,000 100,000 Harold Rubenstein 250,000 25,000 Rochelle and Sheldon Terman 50,000 5,000 ---------- ------- TOTAL $1,675,000 167,500 11. On June 8, 1999, the Company acquired CNF, Inc. by merger in consideration of the issuance of (i) 5,163,188 shares of Series A Preferred Stock to the holders of all outstanding shares of common stock of CNF, Inc.; and (ii) options to purchase 836,790 shares of Series A preferred Stock to the holders of all outstanding options to purchase shares of CNF, Inc. common stock. These securities were issued in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without payment of underwriting discounts or commissions to the following accredited investors: Number of Series A Name Preferred Shares Paul Charles 5,157,000 Howard Lindzon 6,188 --------- TOTAL 5,163,188 II-5
Number of Shares Number of of CNF Common Preferred Shares Stock Issuable Current Issuable Upon Adjusted Holder of CNF Options Upon Exercise Exercise Price($) Exercise Exercise Price($) --------------------- ---------------- ----------------- ---------------- ----------------- David Thompson 164,474 0.5 339,277 0.24 Daniel Rudich 98,684 0.5 203,565 0.24 Luis Manriquez 25,000 0.5 51,570 0.24 Jeff Piper 15,000 0.5 30,942 0.24 Al Ingallinera 10,000 0.5 20,628 0.24 Justin Hendrickson 5,000 0.5 10,314 0.24 Jaime Melendez 5,000 0.5 10,314 0.24 Sal Ramirez 500 0.5 1,031 0.24 Jesus Arrazola 500 0.5 1,031 0.24 Nicole Farley 500 0.5 1,031 0.24 Luke Sanfilippo 2,500 0.5 5,157 0.24 Ryan Taylor 2,500 0.5 5,147 0.24 Nick Nebelsky 5,000 0.5 10,314 0.24 Regina Kretschmann 10,000 0.5 20,628 0.24 Pam Long 1,000 0.5 2,063 0.24 Quin Rodriquez 1,000 0.5 2,063 0.24 Frank Layland 20,000 0.5 41,256 0.24 Sami Aljanabe 10,000 0.5 20,628 0.24 Quin Rodriquez 19,000 2.50 39,193 1.21 David Marsh 10,000 2.50 20,628 1.21 ------- ------- TOTAL 405,658 836,790
12. During May and June 1999, the Company issued and sold an aggregate of 8,000,000 shares of common stock raising gross proceeds of $1,120,000. These shares were issued to accredited investors in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder. This offering was undertaken by the Company to a limited number accredited investors without engaging in any advertising or general solicitation and without payment of underwriting discounts or commissions prior to the closing of the merger. At that time the Company was inactive with no assets or liabilities. Investors in such offering were, therefore, subject to a number of risks and uncertainties, including the material contingencies associated with completion of the merger. Name Number of Shares ---- ---------------- ACA Trading Intermediates 370,000 All Pro Security 65,000 Avalon Financial Services LLC 130,000 Beaumont Investment Holding Ltd. 340,000 Jeff Berman 70,000 Blake Group Inc. 395,000 Boyett Investment Ltd. 318,000 Brookabby Investments Ltd. 5,000 Edmund J. Burgassi 5,000 II-6 Name Number of Shares ---- ---------------- Capital Growth Trust 175,000 Kenny Cook 100,000 Dwyer Investments LP 5,000 EBR Investments 50,000 FAC Enterprises Inc. 292,000 Clifford Feldstein 25,000 Fincord Holding Corp. 425,000 Michele R. Ganz 20,000 Geneco Investment Corp. 578,000 Marvin Gersten 125,000 Michael Glynn 10,000 Godwin Finance Ltd. 400,000 Michael Goldstein 10,000 Carolyn Gordon 5,000 Cathy Graham 45,000 Gunhill Capital Inc. 50,000 Huber Family Trust 12,000 Imperium Capital 175,000 Allan E. Jacobson 15,000 Ron Jaffe 10,000 Jay Josephs 15,000 KAB Investments Inc. 225,000 Robert S. Kant 20,000 Alan and Jan Kelsey 25,000 Kenneth Kirshcenbaum 50,000 Steven Kram 25,000 Jack Leadbeater 100,000 Howard Lindzon 332,500 Lindzon Capital Partners 60,000 Sara L. Marold Bypass Trust 150,000 Vincent J. Marold Exempt Trust 1,000,000 MCZ Corp 48,000 William Meris 15,000 Meris Capital Partners LP 50,000 Anna Maria Mintz 20,000 Carolyn J. Orena 25,000 Robert Perlitz 5,000 Tom Peterson 25,000 RMLH Holding, LLC 120,000 Harold and Beverly Rubenstein 25,000 Lynda Rufo 20,000 Mark Scatterday 45,000 Arthur Van Beuren Seavey 5,000 Seavey Funds Inc. 108,000 Rob Segal 90,000 Michael S. Siegal 35,000 SPH Investments 257,000 Synergy Group 177,500 Patricia Trish Trust 30,000 II-7 Name Number of Shares ---- ---------------- Troy Funding Corp. 212,000 Richard Tully 20,000 Wabering Investment Group Ltd. 400,000 Wexler & Burkhart 30,000 Gordon Douglas Young 10,000 --------- TOTAL 8,000,000 ITEM 27. EXHIBITS THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REGISTRATION STATEMENT:
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 2.1 Agreement and Plan of Merger (the "Merger Agreement") dated (1) April 16, 1999 by and among JLL Ventures (Delaware) Corp., JLL Ventures Acquisition Corp., CNF, Inc. and Paul Charles 2.2 Amendment No. 1 to Merger Agreement dated May 24, 1999 (1) 2.3 Agreement dated November 1, 1999 (resulting in a second (1) amendment to Merger Agreement) 2.4 Amendment No. 1 to Agreement dated November 1, 1999 Filed herewith (resulting in a third amendment to Merger Agreement) 3.1 Certificate of Incorporation (1) 3.2 Certificate of Amendment to Certificate of Incorporation (1) 3.3 Certificate of Designation of Series A Convertible Preferred (1) Stock 3.4 By-Laws, as amended to date (1) 5.1 Opinion of Buchanan Ingersoll Professional Corporation To be filed by Amendment 10.1 Employment Agreement dated May 19, 1999 by and between the (1) Company and Paul Charles
II-8
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.2 Addendum to Employment Agreement dated November 2, 1999 by (1) and between the Company and Paul Charles 10.3 Employment Agreement dated May 19, 1999 by and between the (1) Company and David Thompson 10.4 Employment Agreement dated May 19, 1999 by and between the (1) Company and R. Daniel Rudich 10.5 Addendum to Employment Agreement dated November 2, 1999 by (1) and between the Company and R. Daniel Rudich 10.6 Employment Agreement dated May 19, 1999 by and between the (1) Company and Frank Layland 10.7 Escrow Agreement dated June 8, 1999 by and among, inter alia, (1) the Company, Synergy Group International, Inc. and certain shareholders of the Company (as amended by Exhibits 2.3 and 2.4) 10.8 Escrow Agreement dated June 8, 1999 by and among, inter alia, (1) the Company and Paul Charles (as substantially amended by Exhibits 2.3 and 2.4) 10.9 Lease Agreement dated April 1, 1998 by and between the Filed herewith Company and Filed herewith City Park LLC 10.10 Distribution Agreement dated February 19, 1998 by and between Filed herewith the Filed herewith Company and Ingram Micro Inc., as amended 10.11 Distributor Agreement dated January 7, 1999 by and between Filed herewith the Company and Merisel Americas, Inc. 10.12 Promissory Note evidencing certain outstanding unsecured Filed herewith indebtedness 10.13 Form of Amendment to Promissory Note evidencing all Filed herewith outstanding unsecured indebtedness 10.14 Form of Promissory Note evidencing certain additional Filed herewith outstanding indebtedness
II-9
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 21.1 Subsidiaries of the Registrant Filed herewith 23.1 Consent of Buchanan Ingersoll Professional Corporation Filed under Exhibit 5.1 23.2 Consent of Deloitte and Touche LLP Filed herewith 27.1 Financial Data Schedule Filed herewith 99.1 Notice of Allowance dated August 16, 1999 issued by the Filed herewith United States Patent and Trademark Office for the Company's Digitari Universal Docking and Port Replication Technologies 99.2 October 28, 1999 Patent issued by the Australian Patent Filed herewith Office for the Company's Digitari Universal Docking and Port Replication Technologies 99.3 Notice of Patent issuance dated August 1999 from the United To be Filed By Amendment States Patent and Trademark Office for the Company's Device Dock Technologies.
- ------------------ (1) Filed as an Exhibit to Registrant's Registration Statement on Form SB-2 on December 3, 1999. ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: 1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended; (ii) reflect in the prospectus any facts or events arising after the effective date of the registration statement which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. 2. For the purpose of determining liability under the Securities Act of 1933, as amended, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. To file a post-effective amendment to remove from registration any of the securities being registered which remain unsold at the termination of the offering. II-10 4. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in a successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized in the City of Scottsdale, Arizona on March 2, 2000. CNF TECHNOLOGIES, INC. By: /s/ David G. Thompson ----------------------------------- Interim Chief Executive Officer and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints DAVID G. THOMPSON his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any or all amendments (including, without limitation, post-effective amendments) to this Registration Statement and any related Registration Statements filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated. Signature Title Date - --------- ----- ---- /s/ Paul D. Charles Chairman March 2, 2000 - ------------------------- Paul D. Charles /s/ Carmine F. Adimando Director March 2, 2000 - ------------------------- Carmine F. Adimando EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 2.4 Amendment No. 1 to Agreement dated November 1, 1999 (resulting in a third amendment to Merger Agreement) 10.9 Lease Agreement dated April 1, 1998 by and between the Company and City Park LLC 10.10 Distribution Agreement dated February 19, 1998 by and between the Company and Ingram Micro Inc., as amended 10.11 Distributor Agreement dated January 7, 1999 by and between the Company and Merisel Americas, Inc. 10.12 Promissory Note evidencing certain outstanding unsecured indebtedness 10.13 Form of Amendment to Promissory Note evidencing all outstanding unsecured indebtedness 10.14 Form of Promissory Note evidencing certain additional outstanding indebtedness 21.1 Subsidiaries of the Registrant 23.2 Consent of Deloitte and Touche LLP 27.1 Financial Data Schedule 99.1 Notice of Allowance dated August 16, 1999 issued by the United States Patent and Trademark Office for the Company's Digitari Universal Docking and Port Replication Technologies 99.2 October 28, 1999 Patent issued by the Australian Patent Office for the Company's Digitari Universal Docking and Port Replication Technologies EX-2.4 2 AMENDMENT NO. 1 TO NOVEMBER 1, 1999 AGREEMENT AMENDMENT NO. 1 TO NOVEMBER 1, 1999 AGREEMENT AGREEMENT made as of the 28th day of January, 2000, by and among CNF TECHNOLOGIES, INC., a Delaware corporation (the "Company"), SYNERGY GROUP INTERNATIONAL, INC., a Nevada corporation ("Synergy"), VINCENT MAROLD, an individual residing at 4725 East Sunrise Drive, #228, Tucson, Arizona 85718 ("Marold"), and PAUL CHARLES, an individual residing at 10931 East Laurel Lane, Scottsdale, Arizona 85260 ("Charles"). W I T N E S S E T H: WHEREAS, on April 16, 1999, an Agreement and Plan of Merger was entered into among JLL Ventures (Delaware) Corp., ("JLL"), JLL Ventures Acquisition Corp. ("JLL Acquisition"), CNF, INC., a California corporation ("CNF") and Paul Charles as the principal shareholder of CNF (the "Original Merger Agreement"), the purpose of which was to effectuate the merger of CNF with and into JLL Acquisition (the "Merger"); WHEREAS, on May 24, 1999, the parties to the Original Merger Agreement entered into Amendment No. 1 to the Agreement and Plan of Merger dated April 16, 1999 ("Amendment No. 1 to the Merger Agreement"); WHEREAS, in connection with the Original Merger Agreement and Amendment No. 1 to the Merger Agreement (referred to in the aggregate as the "Merger Agreement"), Charles entered into an escrow agreement pursuant to which certain of his shares of JLL were to be placed in escrow for indemnification claims, among others (the "Shareholder Escrow Agreement"), and certain historic stockholders of JLL entered into an escrow agreement pursuant to which certain of their shares of JLL were placed in escrow to assure certain post-closing placement activities (the "Acquiror Escrow Agreement"); WHEREAS, effective as of June 19, 1999, the Merger was completed (the "Closing") pursuant to which CNF merged into JLL Acquisition, JLL Acquisition changed its corporate name to "CNF Mobile Solutions, Inc." and JLL changed its corporate name to "CNF Technologies, Inc."; WHEREAS, on July 14, 1999, the Company commenced a private placement of shares of its common stock in a manner contemplated in the Merger Agreement (the "Private Placement"); WHEREAS, in order to induce the interest of certain investors to invest in the Private Placement, the Company and the parties hereto entered into an agreement on November 1, 1999 (the "November 1, 1999 Agreement") to modify certain components of the Private Placement, which, in turn, required an amendment to certain of the agreements entered into in connection with the Merger, and resulted in an amendment to the Private Placement, as evidenced by a Private Placement Memorandum dated November 3, 1999; WHEREAS, in order to induce a subsequent equity financing of $500,000 into the Company by Deremie Enterprises ("Deremie"), the parties hereto have agreed to enter into this Agreement (the "Agreement") which is intended, where applicable, to constitute a formal amendment to the Original Merger Agreement, Amendment No. 1 to the Merger Agreement, the Shareholder Escrow Agreement, the Acquiror Escrow Agreement, and the November 1, 1999 Agreement. NOW THEREFORE, in consideration of the premises and agreements contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: -2- 1. Matters of Corporate Governance. Until May 19, 2001, Synergy, Charles, plus those other shareholders who execute the signature page hereof, will agree to vote their shares of common stock of the Company at any regular or special meeting of its stockholders, or by written consent, solicitation or otherwise, called or required for the purpose of electing the Company's Board of Directors, for the nomination of a designee of Imperium Capital, Inc. to the Company's Board of Directors. 2. Surrender of Preferred Shares. (a) Upon the execution hereof, Charles agrees to: (i) surrender to the Company for cancellation 500,000 shares of Series A Convertible Preferred Stock (the "Preferred Shares"), in addition to the 1,000,000 Preferred Shares surrendered pursuant to the November 1, 1999 Agreement; and (ii) transfer 500,000 additional shares to Euroswiss Securities or designee thereof for aggregate consideration of $1.00. (b) The Company agrees to accord to Charles' remaining Preferred Shares the same terms and conditions as may be provided to any other holders of the Preferred Shares, should the Company elect to modify, extend, alter or waive any of the terms and conditions of the Preferred Shares. 3. Removal of Certain Charles Shares Held in Escrow. (a) Section 9 of Amendment No. 1 to the Merger Agreement shall be modified such that the 500,000 Preferred Shares surrendered and 500,000 Preferred Shares transferred according to Section 2 of this Agreement shall be removed from the Preferred Shares previously held in escrow, and such escrow arrangements shall hereafter be of no further force or effect. Accordingly, the Shareholder Escrow Agreement is deemed terminated. -3- 4. Modification to Acquiror Escrow. Sections 6(b) and 6(c) of the November 1, 1999 Agreement shall be deleted in their entirety and shall be replaced by the following: "(b) (i) The Company acknowledges that the Historic Acquiror Shareholders have, by virtue of the Private Placement that closed on or about November 24, 1999, earned the release of 2,000,000 Historic Acquiror Shares from escrow; (ii) If an aggregate of $4,000,000 of Gross Proceeds are "realized" by the Company on or before February 7, 2000 (the "First Surrender Date"), the Historic Acquiror Shareholders shall be entitled to have an additional 1,000,000 shares released from escrow; and (iii) If $4,000,000 of Gross Proceeds are "realized" by the First Surrender Date, and an additional $2,000,000 of Gross Proceeds are "realized" by May 15, 2000 (the "Second Surrender Date"), the Historic Acquiror Shareholders shall on the Second Surrender Date be entitled to the release of the remaining 1,000,000 shares from escrow. (iv) For the purposes of subparagraph (ii) and (iii) above, Gross Proceeds will be deemed "realized" by the Company through either the Private Placement, debt or equity financing provided or directed to the Company by any of the Historic Acquiror Shareholders (excluding for this purpose any of the financing now being provided by Deremie) or through the conversion of Bridge Notes or other unsecured indebtedness secured by the Company. (c) The Acquiror Escrow Agreement shall be deemed amended so as to reflect terms and conditions consistent with those set forth in Section 5.13(b) of the Original Merger Agreement, as amended by the November 1, 1999 Agreement and the foregoing Sections 4(a), 4(b) and 4(c) of this Agreement." 5. Private Sale of Securities. Section 7 of the November 1, 1999 Agreement shall be deleted in its entirety and replaced with the following: "Synergy will use best efforts to arrange for the purchase of 200,000 of the Preferred Shares owned by Charles, at a price of $1.25 per share, within no more than 150 days of effectiveness of the Registration Statement on Form SB-2 currently on file with the Securities and Exchange Commission. The Preferred Shares shall be paid for at least 25% upon the date of purchase, with the balance paid in three ratable monthly installments thereafter." -4- 6. Capitalized Terms. All capitalized terms utilized herein and not otherwise defined herein, shall have the meaning ascribed thereto in the Merger Agreement, or in the November 1, 1999 Agreement, as applicable. 7. Full Force and Effect. All other provisions in the Merger Agreement, or in the November 1, 1999 Agreement, as applicable, shall remain in full force and effect except those identified in this Agreement. 8. Counterpart and Facsimile. This Agreement may be executed in two or more counterparts and delivered via facsimile, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the date and year first written above. CNF TECHNOLOGIES, INC. By: /s/ Paul Charles ---------------------------------------------- Name: Paul Charles Title: Chief Executive Officer SYNERGY GROUP INTERNATIONAL, INC. By: /s/ Vincent Marold ---------------------------------------------- Name: Vincent Marold Title: President /s/ Vincent Marold ---------------------------------------------- Vincent Marold, as designee of Acquiror's Board of Directors pursuant to Section 5.19(a) of the Original Merger Agreement /s/ Paul Charles ---------------------------------------------- Paul Charles For the sole purpose of acknowledging their agreement to vote their shares in the manner provided at Section 1 of this Agreement: BY: BY: ------------------------------ ----------------------------------- Name: Genco Investment Corp. Name: Imperium Capital Corporation Number of Shares: Number of Shares: ---------------- --------------------- BY: BY: ------------------------------ ----------------------------------- Name: Fincord Holdings Corp. Name: KAB Investments, Inc. Number of Shares: Number of Shares: ----------------- ---------------------- -6- BY: BY: ------------------------------ ----------------------------------- Name: SPH Investments, Inc. Name: FAC Enterprises, Inc. Number of Shares: Number of Shares: ----------------- ---------------------- BY: BY: /s/ Howard Lindzon ------------------------------ ----------------------------------- Name: Capital Growth Trust Name: Lindzon Capital Partners, LLC Number of Shares: Number of Shares: ----------------- ---------------------- BY: BY: /s/ Vincent Marold ------------------------------ ----------------------------------- Name: Howard Lindzon Name: Vincent Marold Number of Shares: Number of Shares: ----------------- ---------------------- BY: BY: ------------------------------ ----------------------------------- Name: Paul Charles Name: Synergy Group International, Inc. Number of Shares: Number of Shares: ----------------- ---------------------- EX-10.9 3 LEASE STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE MODIFIED NET 1.Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, April 1, 1998 is made by and between CITY PARK LLC ("Lessor") and CNF, INC. ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 7722 EAST GRAY ROAD, Suite(s) B, SCOTTSDALE, located in the County of MARICOPA, State of ARIZONA with a zip code of 85260 and generally described as (describe briefly the nature of the property) AN APPROXIMATE 21,976 OFFICE/WAREHOUSE SPACE (SEE LEASE ADDENDUM) In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Promises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2 Parking: 0 unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and 45 reserved vehicle parking spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6). 1.3 Term: THREE (3) YEARS ("Original Term") commencing May 1, 1998 ("Commencement Date") and ending April 30, 2001 ("Expiration Date"). (See Paragraph 3 for further provisions.) 1.4 Early Possession: 4/15/98 ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 Base Rent: $14,284.40 per month ("Base Rent"), + rental tax equal to 1.90% payable on the FIRST day of each month commencing May 1, 1998 (See Paragraph 4 for further provisions.) [ ] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted per Addendum 1 attached hereto. 1.6(a) Rent Paid Upon Execution: $14,555.80 as Base Rent + rental tax for the period May 1998. 1.6(b) Lessee's Share of Common Area Operating Expenses: 54.940% ("Lessee's Share") as determined by [X] pro rata square footage of the Premises as compared to the total square footage of the Building or [ ] other criteria as described in ___. 1.7 Security Deposit: $14.600.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: DISTRIBUTION, WAREHOUSING AND OFFICES FOR MANUFACTURING OF PORTABLE COMPUTER PERIPHERAL ACCESSORIES AND EQUIPMENT (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): CUTLER COMMERCIAL represents [X} Lessor exclusively ("Lessor's Broker"); [ ] both Lessor and Lessee, and CORE JACKSON (MILIC) represents [X} Lessee exclusively ("Lessee's Broker"); [ ] both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.10(b) Payment to Brokers. Upon the execution of this Lease by both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Broker(s) (or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $BY SEPARATE AGREEMENT for brokerage services rendered by said Broker(s) in connection with this transaction. 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by DAVID THOMPSON, ITS CFO PAUL CHARLES, ITS PRESIDENT ("Guarantor(s)"). (See Paragraph 37 for further provisions.) 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1-4 and Exhibit(s) A all of which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3 (a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessors expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessors agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Promises. In Such event, Lessee shall, at Lessee's sole cost and expense, correct any noncompliance of the Premises with said warranties. Initials ------ ------ MUTLI-TENANT MODIFIED NET PAGE 1/NET-MULTI 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee of Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor of such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, In addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be Immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law. 2.7 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and Invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, In the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Dale but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. It for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, If one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at Its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or all such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services and the costs of any environmental Inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Real Property Taxes (as defined in Paragraph 10.2) to be paid by Lessor for the Building and the Common Areas under Paragraph 10 hereof. (vi) The cost of the premiums for the insurance policies maintained by Lessor under Paragraph 8 hereof. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (viii) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the industrial Center. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor [from time to time of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12-month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as Indicated on said statement, Lessee shall be credited the amount of such over- Initials ------ ------ MULTI-TENANT-MODIFIED NET (C) American Industrial Real Estate Association 1993 -2- payment against Lessee's Share of Common Area Operating Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d) during said preceding were less than Lessee's Share as Indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth In Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. It Lessor uses or applies all or any portion of said Security Deposit, lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent Increases during the term of this Lease. Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth In Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held In trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that Is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee. Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, Is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall Include an explanation of Lessor's reasonable objections to the change In use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used In this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor: If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence. spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released In, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorney' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessees sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors. windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (it located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke Initials ------ ------ MULTI-TENANT-MODIFIED NET (C) American Industrial Real Estate Association 1993 -3- detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender, and Restoration. (a) Ownership. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment of Premiums: The cost of the premiums for the insurance policies maintained by Lessor under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an Additional Insured-Managers or Lessors of Premises" endorsement and contain the 'Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or abut the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue or "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in Initials: ------ ------ MULTI-TENANT-MODIFIED NET (C) American Industrial Real Estate Association 1993 -4- this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessees part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessors negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in. full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (f) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessees election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used In this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject Initials ------ ------ MULTI-TENANT-MODIFIED NET (C) American Industrial Real Estate Association 1993 -5- to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) (if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 Real Property Tax Definition. As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Properly Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Properly Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, it disputed by Lessee. Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next Installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lesser hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessors considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. Initials: MULTI-TENANT--MODIFIED NET (C) American Industrial Real Estate Association 1993 -6- (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit Increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment schedule of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists In the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the subleasee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1 (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee it Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1 (e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the lime of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn. Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor In the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment approximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of retailing, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such case, the applicable grace period under the unlawful detainer statue shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) offer Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations an assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Initials: MULTI-TENANT--MODIFIED NET (C) American Industrial Real Estate Association 1993 -7- (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event of Breech. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the lime of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, If any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation. Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Brokers' Fees. 15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the procuring cause of this Lease. 15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) granted under this Lease or any Option subsequently granted, or (b) it Lessee acquires any rights to the Premises or other premises in which Lessor has an interest, or (c) if Lessee remains in possession of the Premises with the consent of Lessor after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect at the time of the execution of this Lease. 15.3 Assumption of Obligations. Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be an intended third party beneficiary of the provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.4 Representations and Warranties. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnity, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, bill not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery dale is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United Slates Express Mail or overnight courier that guarantees next day Initials: MULTI-TENANT--MODIFIED NET (C) American Industrial Real Estate Association 1993 -8- delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. It any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorneys' Fees. It any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of this Paragraph 31. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof, which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. 35. Termination; Merger: Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. Initials: MULTI-TENANT--MODIFIED NET (C) American Industrial Real Estate Association 1993 -9- 39. Options. 39.1 Definition. As used in this Lease, the word "Option" has the following meaning: (a) the right to extend the form of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option notwithstanding any provision in the grant of Option to the contrary: (1) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a) (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, it, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable nonmonetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. Initials: MULTI-TENANT--MODIFIED NET (C) American Industrial Real Estate Association 1993 -10- LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. This lease has been prepared for submission to your attorney who will review the document and assist you to determine whether your legal rights are adequately protected. Cutler Commercial is not authorized to give legal or tax advice; no representation or recommendation is made by Cutler Commercial or its agents or employees as to the legal sufficiency, legal effect or tax consequences of this document or any transaction relating thereto. These are questions for your attorney with whom you should consult before signing this document. The parties hereto have executed this Lease at the place on the dates specified immediately adjacent to their respective signatures. BY LESSOR: CITY PARK LLC (For Rental Payments) C/O 2150 EAST HIGHLAND STE 207 PHOENIX ARIZONA 85016-4721 - ------------------------------------------------------ Date: CLIFFORD J. CUTLER, ITS MANAGING MEMBER NAME PRINTED: CLIFFORD J. CUTLER, ITS MANAGING MEMBER BY LESSEE: CNF, INC. (For Notices) 7722 EAST GRAY ROAD SCOTTSDALE AZ 85260 BY: /s/ Illegible 4/7/98 - ------------------------------------------------------ NAME PRINTED: DAVID THOMPSON, ITS CFO BY: /s/ David Thompson 4/7/98 - ------------------------------------------------------ NAME PRINTED: PAUL CHARLES, ITS PRESIDENT BY: /s/ Paul Charles 4/7/98 - ------------------------------------------------------ MULTI-TENANT MODIFIED NET PAGE 11/NET-MULTI LEASE ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE MODIFIED NET THIS LEASE ADDENDUM, pertaining to that certain Lease dated for reference purposes only, April 01, 1998 , made by and between CITY PARK LLC ("Lessor") and CNF, INC. ("Lessee"), (collectively the "Parties," or individually a "Party") for that certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 7722 EAST GRAY ROAD, SUITE B, SCOTTSDALE, located in the county of MARICOPA, State of ARIZONA with zip code 85260, Lessor and Lessee agree to the following additional provisions: 1.) THE PREMISES ARE THOSE SHOWN ON EXHIBIT A (FLOOR PLAN) ATTACHED HERETO AND MADE A PART HEREOF. THE PREMISES SHALL CONSIST OF AN AREA OF APPROXIMATELY 21,976 SQUARE FEET OF GROSS RENTABLE AREA ON THE GROUND AND FIRST FLOORS OF THE BUILDING. THE EXACT AREA OF THE PREMISES SHALL BE CALCULATED ACCORDING TO B.O.M.A. STANDARD BY THE LESSOR'S ARCHITECT. 2.) LESSOR'S IMPROVEMENTS, LESSOR, AT LESSOR'S EXPENSE, SHALL PERFORM THE FOLLOWING WORK TO BE COMPLETED AS SOON AS REASONABLY POSSIBLE: A.) WAREHOUSE - FIRST FLOOR 1.) ALL AIR CONDITIONING AND HEATING UNITS, SHIPPING DOORS, MECHANICAL IN GOOD WORKING CONDITION. 2.) DELIVER ENTIRE WAREHOUSE FLOOR IN "BROOM-CLEAN" CONDITION. 3.) ERECT A DIVISION WALL (ACCORDING TO CITY AND STATE CODE) ALONG COLUMN LINE AS SHOWN ON PLAN ATTACHED. B.) OFFICES - SECOND FLOOR 1.) TOUCH UP PAINT ON OFFICE WALLS WHERE NECESSARY. 2.) DELIVER ALL CARPET IN SHAMPOOED AND VACUUM-CLEANED CONDITION. 3.) FIRST RIGHT OF REFUSAL TO LEASE ADJACENT SPACE. PROVIDED LESSEE IS NOT IN DEFAULT OF ANY TERM, CONDITION, RULE OR REGULATION OF THIS LEASE, LESSEE SHALL HAVE THE RIGHT OF FIRST REFUSAL TO LEASE ANY ADJACENT SPACE THAT MAY BE OR BECOME AVAILABLE DURING THE TERM OF THE LEASE. SHOULD LESSOR RECEIVE A BONA FIDE OFFER TO LEASE THAT IS ACCEPTABLE TO LESSOR REGARDING ADJACENT SPACE WITHIN THE BUILDING, LESSOR MUST NOTIFY LESSEE IN WRITING OF HIS RECEIPT OF SUCH OFFER INCLUDING ITS TERMS AND CONDITIONS WITHIN TWENTY-FOUR (24) HOURS. LESSEE SHALL THEN HAVE THREE (3) BUSINESS DAYS TO RESPOND TO LESSOR. SHOULD LESSEE ADVISE LESSOR OF HIS ACCEPTANCE, AND LESSEE SHALL EXERCISE ITS FIRST RIGHT OF REFUSAL, THE LEASE TERM SHALL COMMENCE ON THE FIRST OF THE MONTH NEAREST THIRTY DAYS AFTER LESSEE EXERCISES ITS FIRST RIGHT OF REFUSAL AND EXPIRE ON THE SAME DATE AS THIS LEASE AGREEMENT. 4.) OPTION TO PURCHASE: PROVIDED LESSEE IS NOT IN DEFAULT OF ANY TERM, CONDITION, RULE OR REGULATION OF THIS LEASE AGREEMENT, LESSEE SHALL HAVE THE OPTION TO PURCHASE THE BUILDING, TOGETHER WITH THE 1.62 ACRES OF LAND UPON WHICH IT IS SITUATED IDENTIFIED BY TAX PARCEL NO. 162-35-620 (HEREINAFTER COLLECTIVELY REFERRED TO AS THE "PROPERTY" FOR A PURCHASE PRICE OF TWO MILLION FOUR HUNDRED THOUSAND DOLLARS AND N0/100 ($2,400,000.00). THIS OPTION TO PURCHASE THE PROPERTY SHALL BE EXERCISABLE AT ANY TIME DURING THE FIRST TWELVE (12) MONTHS OF THE LEASE TERM BY NOTIFYING LESSOR OF LESSEE'S INTENT TO DO SO IN WRITING. FOLLOWING LESSOR'S RECEIPT OF WRITTEN NOTICE OF LESSEE'S EXERCISING ITS OPTION, THERE SHALL BE A THIRTY (30) DAY PERIOD WITHIN WHICH LESSEE AND LESSOR SHALL HAVE TO EXECUTE A PURCHASE AND SALE AGREEMENT CONTAINING USUAL REPRESENTATIONS, WARRANTIES, CONDITIONS AND ESCROW INSTRUCTIONS NORMALLY FOUND IN SUCH AN AGREEMENT. CLOSE OF ESCROW SHALL TAKE PLACE WITHIN SIXTY (60) DAYS THEREAFTER. ESCROW INSTRUCTIONS SHALL CONTAIN A COMMISSION OF FOUR PERCENT (4%) PAYABLE TO THE BROKERS (50% TO CUTLER COMMERCIAL AND 50% TO CORE/JACKSON) UPON RECORDING OF THE SALE BY ESCROW AGENTS LESS THE UNEARNED INCREMENT FROM THE LEASING COMMISSION. FURTHERMORE, SHOULD LESSOR RECEIVE A BONA FIDE OFFER TO PURCHASE THAT IS ACCEPTABLE FOR THE SALE OF THE PROPERTY, LESSOR MUST NOTIFY IN WRITING THE LESSEE OF RECEIPT OF SUCH OFFER, INCLUDING ITS TERMS AND CONDITIONS WITHIN TWENTY-FOUR (24) HOURS. THE LESSEE SHALL THEN HAVE THREE (3) CALENDAR DAYS TO CONTEMPLATE SAID OFFER AND EXERCISE HIS FIRST RIGHT OF REFUSAL BY NOTIFYING THE LESSOR IN WRITING OF HIS ACCEPTANCE OF SAID OFFER. SHOULD THE LESSEE ADVISE LESSOR OF HIS ACCEPTANCE OF SAME, THEN THE SAME PROCEDURE AS STATED ABOVE FOR THE EXERCISING OF THE OPTION TO PURCHASE SHALL APPLY, AND THE TWO PARTIES SHALL PROCEED TO CLOSE OF ESCROW. MULTI-TENANT MODIFIED NET PAGE 11/NET-NETADD-CNF.040198 The parties hereto have executed this Lease at the place on the dates specified immediately adjacent to their respective signatures. BY LESSOR: CITY PARK LLC - ------------------------------------------------------- Date: CLIFFORD J. CUTLER, ITS MANAGING MEMBER NAME PRINTED: CLIFFORD J. CUTLER, ITS MANAGING MEMBER BY LESSEE: CNF, INC. BY: 4/7/98 - ------------------------------------------------------- Date NAME PRINTED: DAVID THOMPSON, ITS CFO BY: 4/7/98 - ------------------------------------------------------- Date NAME PRINTED: PAUL CHARLES, ITS PRESIDENT BY: 4/7/98 - ------------------------------------------------------- Date MULTI-TENANT MODIFIED NET PAGE 11/NET-NETADD-CNF.040198 EXHIBIT A GUARANTEE For value received, the undersigned absolutely guarantees all payments under that certain Lease Agreement dated for reference purposes only, April 01, 1998 by and between CITY PARK LLC (as Lessor) and CNF, INC. (as Lessee) for the premises known as 7722 EAST GRAY ROAD,, SUITE B, SCOTTSDALE AZ 85260, executed by DAVID THOMPSON, ITS CFO and PAUL CHARLES, ITS PRESIDENT. If obligor breaches any terms of the Lease Agreement, the undersigned will be liable thereon demand. The undersigned waive notice of acceptance, notice of nonpayment, protest and notice of protest with respect to the obligation covered hereunder. This guarantee shall continue in force and apply to all transactions notwithstanding any change in the makeup of the debtor's corporate board and officers or board member. Liability under this Agreement shall commence on the date of the Lease, and shall continue the obligation guaranteed hereunder is completely discharged. This guarantee shall continue in effect notwithstanding any legal disability of the debtor to incur the indebtedness or obligation in full or in part. The creditor may proceed against any or all of the guarantors for any amount guaranteed hereunder whether action is brought against the debtor or whether the debtor is joined in any such action or actions or not. Creditor may without notice sell, assign or transfer all the indebtedness or obligation covered hereunder. In that event, each and every immediate and successive assignee, transferee, or holder of all or any part of the indebtedness or obligation shall have the right to enforce this guarantee by legal action or otherwise for the benefit of such assignee, transferee, or holder as fully as if such assignee, transferee, or holder were herein named specifically given such right and power. Should suit be brought to recover on this guarantee, the guarantor(s) promise to pay as attorney's fees, a reasonable amount additional to the amount found due hereunder. GUARANTOR: /s/ David Thompson ----------------------------------- DAVID THOMPSON, ITS CFO SOCIAL SECURITY NO: ###-##-#### GUARANTOR: /s/ Paul Charles ----------------------------------- PAUL CHARLES, ITS PRESIDENT HOME ADDRESS: 15645 CALLE ENRIQUE, MORGAN HILL, CA 95037 NEW ADDRESS: 7722 EAST GRAY ROAD, SUITE B SCOTTSDALE, AZ 85260 MUTLI-TENANT MODIFIED NET PAGE 1/NET-MULTI DISCLOSURE REGARDING REAL ESTATE AGENCY RELATIONSHIPS (As required by the Civil Code) When you enter into a discussion with a real estate agent regarding a real estate transaction, you should from the outset understand what type of agency relationship or representation you wish to have with the agent in the transaction. LESSOR or SELLER'S AGENT A Lessor or Seller's agent under a listing agreement with Lessor or Seller acts as the agent for the Lessor or Seller only. A Lessor or Seller's agent or a subagent of that agent has the following affirmative obligations: To the Lessor or Seller: (a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor or Seller. To the Lessee/Buyer and Lessor/Seller: (a) Diligent exercise of reasonable skill and care in performance of agent's duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of property that are not known to, or within the diligent attention and observation of the parties. An agent is not obligated to reveal to either party any confidential information obtained from the other party which does not involve the affirmative duties set forth above. LESSEE OR BUYER'S AGENT: A leasing/selling agent can with a Buyer's consent, agree to act as agent for the Buyer only. In these situations, the agent is not the Lessor or Seller's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Seller. An agent acting only for a Buyer has the following affirmative obligations: To the Lessee or Buyer; (a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee or Buyer. To the Lessee/Buyer and Lessor/Seller: (a) Diligent exercise of reasonable skill and care in performance of agent's duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of property that are not known to, or within the diligent attention and observation of the parties. An agent is not obligated to reveal to either party any confidential information obtained from the other party which does not involve the affirmative duties set forth above. AGENT REPRESENTING BOTH LESSOR/SELLER AND LESSEE/BUYER: A real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the Lessor/Seller and the Lessee/Buyer in a transaction, but only with the knowledge and consent of both the Lessor/Seller and the Lessee/Buyer. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor/Seller and the Lessee/Buyer: (a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee or Buyer. (b) Other duties to the Lessor/Seller and the Lessee/Buyer as stated above in their respective sections. In representing both Lessor/Seller and Lessee/Buyer, the agent may not, without the express permission of the respective party, disclose to the other party that the Lessor/Seller will accept a price than the listing price or the Lessee/Buyer will pay a price greater than the price offered. Throughout your real property transaction you may receive more than one disclosure form, depending upon the number of agents assisting in the transaction. The law requires each agent with whom you have more than a casual relationship to present you with this disclosure form. You should read its contents each time it is presented to you, considering the relationship between you and the real estate agent in your specific transaction. CONFIRMATION REAL ESTATE AGENCY RELATIONSHIPS Subject Property Address: 7722 EAST GRAY ROAD B SCOTTSDALE AZ 85260 The following agency relationship(s) is/are confirmed for this transaction:
CUTLER COMMERCIAL CORE JACKSON (MILIC): - --------------------------------------------- ------------------------------------------------ is the agent of (check one) is the agent of (check one) / / the Lessor/Seller exclusively; or / / the Lessee/Buyer exclusively; or / / both the Lessor/Seller and Lessee/Buyer / / the Lessor/Seller exclusively; or / / both the Lessee/Buyer and Lessor/Seller I/WE ACKNOWLEDGE RECEIPT OF A COPY OF THIS CONFIRMATION. CITY PARK LLC Lessor/Seller: Lessor/Seller: ---------------------------------- ---------------------------------- Date: Date: ------------------------------------------- ------------------------------------------- CNF, INC. Lessee/Buyer: /s/ Paul Charles Lessee/Buyer: /s/ David Thompson ----------------------------------- ----------------------------------- Date: 4/7/98 Date: 4/6/98 ------------------------------------------- ------------------------------------------- CUTLER COMMERCIAL: BY: DATE: ---------------------------------------------------------------- ------------------------ CORE JACKSON (MILIC): BY: DATE: ---------------------------------------------------------------- ------------------------
A real estate broker is qualified to advise on real estate. If you desire Legal Advice, please consult your attorney. BROKERS FILE NO: BROKER INITIALS: - ---------------------------- ------------------- EX-10.10 4 DISTRIBUTION AGREEMENT [LOGO] DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT ("Agreement"), is entered into this 19th day of February, 1998, by and between INGRAM MICRO INC. ("Ingram"), a Delaware corporation, having its principal place of business at 1600 E. St. Andrew Place, Santa Ana, California 92705, and CNF, Inc. ("Vendor"), a California corporation, having its principal place of business at 15345 Calle Enrique, Morgan Hill, California 95037. The parties desire to and hereby do enter into a distributor/supplier relationship, the governing terms and mutual promises of which are set out in this Agreement. 1. DISTRIBUTION RIGHTS 1.1 Territory Vendor grants to Ingram, including its affiliates for resale, and Ingram accepts, the nonexclusive right to distribute worldwide all computer products produced and/or offered by Vendor ("Product") during the term of this Agreement. Ingram shall have the right to purchase, sell and ship to any reseller within the territory or to Ingram's affiliate, or at Vendor's option Ingram's affiliate may purchase direct from Vendor. 1.2 Product Vendor agrees to make available and to sell to Ingram such Product as Ingram shall order from Vendor at the prices and subject to the terms set forth in this Agreement. Ingram shall not be required to purchase any minimum amount or quantity of the Product. 2. TERM AND TERMINATION 2.1 Term The initial term of this Agreement shall be for a period of twelve (12) months, beginning on the date first above written. Vendor shall achieve and maintain an average sell thru rate of fifty thousand dollars ($50,000) per month during the initial term, otherwise Ingram will review for possible contract termination. In the event such sell thru rate is attained Ingram will extend the term an additional twelve (12) months. Thereafter, this Agreement shall be renewed for successive one (1) year terms without further notice, unless terminated sooner as provided under the provisions of this Agreement. 2.2 Termination (a) Either party may terminate this Agreement, with or without cause, by giving thirty (30) days written notice to the other party. (b) Either party may immediately terminate this Agreement with written notice if the other party: (i) materially breaches any term of this Agreement and such breach continues for thirty (30) business days after written notification thereof; or - -------------------------------------------------------------------------------- CNF, Inc. 1 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- (ii) ceases to conduct business in the normal course, becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits the appointment of a receiver for its business or assets, or avails itself of or becomes subject to any proceeding under any Bankruptcy Act or any other federal or state statute relating to insolvency or the protection of rights of creditors; or (iii) attempts to assign or otherwise transfer its rights hereunder unless both have agreed in writing to such assignment or transfer. 3. INGRAM OBLIGATIONS 3.1 Product Availability Ingram will list Product in its catalog(s) as appropriate and endeavor to make such Product available to customers. 3.2 Advertising Ingram will advertise and/or promote Product in a commercially reasonable manner and will transmit as reasonably necessary Product information and promotional materials to its customers. 3.3 Support Ingram will make its facilities reasonably available for Vendor and will assist in Product training and support. Ingram will provide reasonable, general Product technical assistance to its customers, and will direct all other technical issues directly to Vendor. 3.4 Administration (a) Upon request, Ingram will furnish Vendor with a valid tax exemption certificate. (b) Ingram will provide Vendor standard sales-out and inventory reports via its electronic Bulletin Board System. (c) Ingram may handle its customers' Product returns by batching them for return to Vendor at regular intervals. 4. VENDOR OBLIGATIONS 4.1 Shipping/Export (a) Vendor shall ship Product pursuant to Ingram purchase order(s) ("P.O."). Product shall be shipped F.O.B. Ingram's designated warehouse with risk of loss or damage to pass to Ingram upon delivery to the warehouse specified in Ingrain's P.O. (b) Ingram requires concurrent with the execution of this Agreement Export Administration Regulations product classification and supporting documentation: Certificate of Origin (General Use and/or NAFTA), Export Commodity Control Number's; (ECCN's), General License and/or Individual Validated License information and Schedule "B"/Harmonized - -------------------------------------------------------------------------------- CNF, Inc. 2 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- Numbers. This applies when distribution rights granted under Section 1.1 are outside the United States for the initial Product/s and when additions or changes to these Products occurs. 4.2 Invoicing For each Product shipment to Ingram, Vendor shall issue to Ingram an invoice showing Ingram's order number, the Product part number, description, price and any discount. At least monthly, Vendor shall provide Ingram with a current statement of account, listing all invoices outstanding and any payments made and credits given since the date of the previous statement. 4.3 Product Availability Vendor agrees to maintain sufficient Product inventory to fill Ingram's orders. If a shortage of any Product exists, Vendor agrees to allocate its available inventory of such Product to Ingram in proportion to Ingram's percentage of all of Vendor's customer orders for such Product during the previous sixty (60) days. 4.4 Product Marking Vendor will clearly mark each unit of Product with the Product name and computer compatibility. Such packaging will also bear a machine-readable bar code identifier scannable in standard Uniform Product Code (UPC) format. The bar code must identify the Product as specified by the Uniform Code Council (UCC). If the Vendor or Ingram customers' require serial number tracking the serial number must be clearly marked and bar coded on the outside of the individual selling unit. The bar code shall fully comply with all conditions regarding standard product labeling set forth in Exhibit B in the then-current Ingram Guide to Bar Code: The Product Label. Vendor may be assessed a reasonable per unit charge for all Product not in conformance herewith. 4.5 TechNotes Vendor will within thirty (30) days of execution of this Agreement sign the CIS/ Manufacture Product Information Library - TechNotes and Content Distribution Agreements as shown in Exhibit C and provide the required product information in the designated template format. 4.6 Support At no charge to Ingram, Vendor shall support Product and any reasonable Ingram efforts to sell Product. Vendor shall also provide to Ingram, its employees, and its customers reasonable amounts of sales literature, advertising materials, and training and support in Product sales. 4.7 New Product Vendor shall endeavor to notify Ingram at least thirty (30) days before the date any new Product is introduced. Vendor shall make such Product available for distribution by Ingram no later than the date it is first offered for sale in the marketplace. 4.8 Insurance Vendor shall carry insurance coverage for product liability/completed operations with minimum limits of two million dollars ($2,000,000). Within ten (10) days of full execution of this Agreement, Vendor shall provide Ingram with a Certificate of Insurance. This Certificate of Insurance must include: (i) a broad form endorsement naming Ingram as an additional insured, and (ii) a mandatory thirty (30) day notice to Ingram of insurance cancellation. - -------------------------------------------------------------------------------- CNF, Inc. 3 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- 4.9 Warranties/Certification (a) General Warranty Vendor represents and warrants that (i) it has good transferable title to the Products, (ii) the Product will perform in conformity with specifications and documentation supplied by Vendor, (iii) the Product or its use does not infringe any patents, copyrights, trademarks, trade secrets, or any other intellectual property rights, (iv) that there are no suits or proceedings pending or threatened which allege any infringement of such proprietary rights, and (v) the Product sales to Ingram do not in any way constitute violations of any law, ordinance, rule or regulation in the distribution territory. (b) Warranty Vendor hereby represents and warrants that any Product offered for distribution does not contain any obscene, defamatory or libelous matter or violate any right of publicity or privacy. (c) End-User Warranty Vendor shall provide a warranty statement with Product for end user benefit. This warranty shall commence upon Product delivery to end-user. (d) Millennium Compliance Warranty Vendor warrants and represents that the Product will properly (a) record, store, process, calculate or present calendar dates falling on and after (and if applicable, spans of time including) January 1, 2000 as a result of the occurrence, or use of data consisting of, such dates and (b) calculate any information dependent on or relating to dates on or after January 1, 2000 in the same manner, and with the same functionality, data integrity and performance, as such Product records, stores, processes, calculates and presents calendar dates on or before December 31, 1999, or information dependent on or relating to such dates. (e) Class B Warranty Vendor hereby represents and warrants that the Product has been or will be at the time of shipment certified as a Class B computing device as required by the rules of the U.S.A. Federal Communications Commission ("FCC Rules"). (f) EU Warranty Vendor further warrants and represents for Products distributed to the European Union ("EU") that the Products will be accepted under all EU directives, regulations and the EU country's legislation. (g) Made in America Certification Vendor by the execution of this Agreement certifies that it will not label any of its products as being "Made in America," "Made in U.S.A.," or with similar wording, unless all components or elements of such Product is in fact made in the United States of America. Vendor further agrees to defend, indemnify and hold harmless from and against any and all claims, demands, liabilities, penalties, damages, judgments or expenses (including attorney's fees and court costs) arising out of or resulting in any way from Product that does not conform to the Certification. 4.10 Sell Through Vendor shall achieve and maintain an average sell through of one hundred thousand dollars ($100,000) per month combined for all Products. Vendor shall - -------------------------------------------------------------------------------- CNF, Inc. 4 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- pre-pay all marketing expenditures by Ingram during the first ninety (90) days ("initial period") and thereafter in the event the sell through rate either (i) fails to achieve this amount after the initial period, or (ii) at any time thereafter when such rate is not maintained. 4.11 Rebate Vendor will pay Ingram a three percent (3%) quarterly rebate based on gross sales. The rebate will be paid by check within thirty (30) days after the quarter end. If no check is received within that period Ingram shall deduct that amount from the Vendor's next payment. 5. PRICING 5.1 Ingram Pricing The suggested retail price and any Ingram discount for Product is set out in Exhibit D. Vendor may modify Exhibit D with a minimum of thirty (30) days advance written notice to Ingram. All Ingram orders for Product will be billed at the price in effect when the order is placed. Ingram shall have sole discretion as to selling price of Product to its customers. 5.2 Vendor Pricing Vendor agrees that the prices and terms it offers to Ingram are now and will continue to be at least as low as those it offers to any of its customers excluding Original Equipment Manufacturer ("OEM") accounts. If Vendor offers price discounts, promotional discounts or other special prices to its other customers excluding OEM accounts, Ingram shall also be entitled to participate in and receive notice of the same no later than Vendor's other non OEM customers. 5.3 International Pricing If Vendor offers a better price outside the U.S. and Ingram has distribution rights in that territory then the same price shall be offered to Ingram for Product sales into that territory. 5.4 Price Adjustments If Vendor reduces any Product price, or offers increased discounts to any customers excluding OEM accounts, Vendor will promptly credit Ingram for the difference between the original Product price and the reduced Product price for Ingram's and its customers' Product inventory, including: (i) any Customer Product in-transit from/to Ingrain, (ii) any unshipped orders, and (iii) orders in-transit to Ingram on the price reduction or increased discount offer date. In the event that Vendor shall raise the list price of a Product, all orders for such Product placed prior to the effective date of the price increase shall be invoiced at the lower price. Vendor shall provide Ingram with thirty (30) days advance notice of any price increases. 5.5 Payment Terms Vendor will issue invoices concurrently with Product shipments to Ingram. Ingram will pay Vendor one time per month for any invoices not held in reserve for: (i) Product on hand at Ingram, (ii) Product on hand at resellers who have purchased Vendor's product from Ingram, (iii) Product in transit to Ingram from resellers, (iv) marketing programs which will occur in the near future, and (v) for any outstanding debit or invoice to Vendor. - -------------------------------------------------------------------------------- CNF, Inc. 5 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- 5.6 Right to Withhold Notwithstanding any other provision in this Agreement to the contrary, Ingram shall not be deemed in default if it withholds any specific amount to Vendor because of a legitimate dispute between the parties as to that specific amount pending the timely resolution of the disputed amount. 6. MARKETING 6.1 Trademarks Ingram may advertise and promote the Product and/or Vendor, and may thereby use Vendor's trademarks, service marks and trade names. Neither party shall acquire any rights in the trademarks, service marks or trade names of the other. 6.2 Advertising (a) Vendor agrees to cooperate with Ingram in advertising and promoting the Product and/or Vendor and hereby grants Ingram a cooperative advertising allowance of two percent (2%) of invoice amounts for Product purchased by Ingram from Vendor to the extent that Ingram or customer/dealers use the allowance for any advertising and promoting which features Product and/or Vendor. Upon receipt of reasonable evidence of advertising expenditures, Vendor agrees to credit the amount of any such expenditures against future purchases by Ingram. (b) Vendor agrees to provide Marketing Development Funds ("MDF") of one percent (1%) of invoice amounts for Product purchased by Ingram from Vendor. 6.3 Programs (a) Ingram may offer marketing programs to Vendor including but not limited to launch programs and reseller pass through opportunities. If Vendor elects to participate, Vendor agrees to pay such funds as may be required for this purpose. (b) Vendor shall provide in addition to amounts under 6.2 (a) & (b), thirty thousand dollars ($30,000) to be used during the first three (3) months for Product launch. A check for this amount shall be issued to Ingram concurrent with the execution of this Agreement. Thereafter, Vendor shall pre-pay all marketing and promotional activities until a sales rate of one hundred thousand dollars ($100,000) per month is achieved. Ingram shall prepare, implement and review with Vendor marketing plans funded by these expenditures. 6.4 Support Product Vendor shall consign a reasonable amount of demonstration Product to aid Ingram in its support and promotion of Product. All such consigned Product will be returned to Vendor upon request. 7. RETURNS 7.1 Stock Balancing Notwithstanding anything herein to the contrary, Ingram may return throughout the term any Products which are in their original packaging to Vendor for full credit - -------------------------------------------------------------------------------- CNF, Inc. 6 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- of the Products' purchase price. In the event that a Return Material Authorization (RMA) for the return of Product is not issued within five (5) days of the request, Ingram shall have the right to return any Product(s) to Vendor without an RMA, and Vendor shall be obligated to accept such return for credit. Ingram will pay all freight charges for returned Products. 7.2 Post-Term/Termination For one hundred eighty (180) days after the expiration or earlier termination of this Agreement, Ingram may return to Vendor any Product for credit against outstanding invoices, or if there are no outstanding invoices for a cash refund. Any credit or refund due Ingram for returned Product shall be equal to the Product purchase price. Ingram will pay all freight charges for returned Products. 7.3 Product Discontinuation Vendor shall give Ingram thirty (30) days' advance written notice of Product discontinuation. Ingram may return all such Product to Vendor for full credit of Product purchase price plus all freight charges incurred by Ingram in returning the Product. 7.4 Defective Product (a) Ingram may return any Product to Vendor that Ingram or its customer finds defective. Vendor shall immediately credit Ingram for the Product purchase price, plus all freight charges incurred by Ingram in returning the defective Product. (b) If any Product is recalled by Vendor because of defects, revisions or upgrades, Ingram will, at Vendor's request, provide reasonable assistance with the recall. Vendor will pay Ingrain's expenses in connection with such recall. 8. INDEMNIFICATION 8.1 Product Indemnity Vendor shall defend, indemnify, and hold harmless Ingram from and against any claims, demands, liabilities, or expenses (including attorney's fees and costs) for any injury or damage, including, but not limited to, any personal or bodily injury or property damage, arising out of or resulting in any way from any defect in Products. This duty to indemnify Ingram shall be in addition to the warranty obligations of Vendor. 8.2 General Indemnity Each party shall indemnify, defend and hold the other harmless from and against any and all claims, actions, damages, demands, liabilities, costs and expenses, including reasonable attorney's fees and expenses, resulting from any act or omission of the acting party or its employees under this Agreement, that causes or results in property damage, personal injury or death. 8.3 Intellectual Property Rights Indemnity Vendor shall defend, indemnify and hold Ingram, its resellers and their customers, harmless from and against all damages and costs incurred by any of them arising from the infringement of any patent, copyright, trademark, trade secret or other proprietary right by reason of the manufacture, sale, marketing, or use of Product. - -------------------------------------------------------------------------------- CNF, Inc. 7 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- 8.4 Product Infringement Upon infringement, Vendor may, at its expense and option (i) procure the right to continue using any part of Product, (ii) replace the infringing Product with a non-infringing Product of similar performance, or (iii) modify Product to make it non-infringing, or provide Ingram with written assurances that the claim is unsupportable. In either case, Vendor shall defend, indemnify and hold Ingram, its resellers and their customers, harmless from and against all damages and costs incurred by any of them arising from a claim of infringement. If Vendor does not so act within ninety (90) days after such claim, Ingram may return Product to Vendor for a full credit against future purchases or for a cash refund, at Ingram's option. 8.5 Multi-Media Indemnity Vendor shall defend, indemnify and hold Ingram, its resellers and their customers, harmless from and against all damages and costs incurred by any of them to the extent it is based upon a claim that the Product either (i) violates a third party's right of publicity and/or right of privacy, or (ii) contains any obscene, defamatory or libelous matter. 8.6 European Indemnity For Products distributed to a country of the EU, the Vendor accepts full responsibility for, and will indemnify Ingram for, all costs and damages arising from any non-compliance with any manufacturer-directed EU decree, regulation or directive. 8.7 Millennium Compliance Indemnity Vendor agrees to indemnify and hold Ingram and its shareholders, officers, directors, employees, agents, successors, and assigns harmless from and against any and all claims, suits, actions, liabilities, losses, costs, reasonable attorney's fees, expenses, judgments or damages, whether ordinary, special or consequential, resulting from any third party claim made or suit brought against Ingram or such persons, to the extent such results from Vendor's breach of the warranty specified in Section 4.9(d). 8.8 Limitation of Liability NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR LOST PROFITS OF BUSINESS, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES, WHETHER BASED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE, STRICT LIABILITY OR OTHERWISE), AND WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS LIMITATION IS IN NO WAY MEANT TO LIMIT VENDOR'S LIABILITY FOR PERSONAL INJURY OR DEATH AS A RESULT OF A DEFECT IN ANY PRODUCT IN THOSE JURISDICTIONS WHERE THE LAW DOES NOT ALLOW THIS LIMITATION. 9. COMPLIANCE WITH FEDERAL LAWS AND REGULATIONS 9.1 Executive Order 11246 Vendor agrees to include the Equal Employment Opportunity Clause by reference in every contract, agreement and purchase order entered into with subcontractors or suppliers as required by 41 CFR 60-1.4. 9.2 Employer Information Report EEO-1/ Written Affirmative Action Program Vendor agrees that if the value of any contract or purchase order is fifty thousand dollars ($50,000) or - -------------------------------------------------------------------------------- CNF, Inc. 8 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- more and the Vendor has fifty (50) or more employees, Vendor will (i) file an EEO-1 report (Standard Form 100) and comply with and file such other compliance reports as may be required under Executive Order 11246, as amended, and Rules and Regulations adopted thereunder and (ii) will develop a written affirmative action compliance program for each of its establishments as required by Title 41 CFR 60-1.40. 9.3 Veterans Employment Clause Vendor agrees to abide by and comply with the provisions of the Affirmative Action Clause, 41 CFR 60-250.4. 9.4 Employment of Handicapped Persons Vendor agrees that it will abide by and comply with the provisions of the Affirmative Action Clause, 41 CFR 60-741.4. 9.5 Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals Where a government contract is expected to exceed five hundred thousand dollars ($500,000), Vendor agrees to comply with all requirements of P.L. 95-507 and regulations promulgated thereunder. Vendor shall comply with instructions contained in Exhibit E. 9.6 Women-Owned Business Concerns Vendor shall comply with instructions contained in Exhibit E. Where a government contract is expected to exceed five hundred thousand dollars ($500,000), Vendor agrees to comply with all requirements of Executive Order 12138 and all regulations promulgated thereunder. 10. GOVERNMENT PROGRAM 10.1 Partnership America Vendor may, at its sole option, participate in Ingram's government reseller program in which case the provisions of Exhibit F, Partnership America, shall apply. A draft copy is provided solely for your information and review. 11. GENERAL PROVISIONS 11.1 Notices Any notice which either party may desire to give the other party must be in writing and may be given by (i) personal delivery to an officer of the party, (ii) by mailing the same by registered or certified mail, return receipt requested, to the party to whom the party is directed at the address of such party as set forth at the beginning of this Agreement, or such other address as the parties may hereinafter designate, and (iii) by facsimile or telex communication subsequently to be confirmed in writing pursuant to item (ii) herein. 11.2 Governing Law This Agreement shall be construed and enforced in accordance with the laws of the State of California, except that body of law concerning conflicts of law. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. - -------------------------------------------------------------------------------- CNF, Inc. 9 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- 11.3 Cooperation Each party agrees to execute and deliver such further documents and to cooperate as may be necessary to implement and give effect to the provisions contained herein. 11.4 Force Majeure Neither party shall be liable to the other for any delay or failure to perform which results from causes outside its reasonable control. 11.5 Attorneys Fees In the event there is any dispute concerning the terms of this Agreement or the performance of any party hereto pursuant to the terms of this Agreement, and any party hereto retains counsel for the purpose of enforcing any of the provisions of this Agreement or asserting the terms of this Agreement in defense of any suit filed against said party, each party shall be solely responsible for its own costs and attorney's fees incurred in connection with the dispute irrespective of whether or not a lawsuit is actually commenced or prosecuted to conclusion. 11.6 Export Regulations Ingram agrees by the purchase of Products to conform to, and abide by, the export laws and regulations of the United States, including but not limited to, the Export Administration Act of 1979 as amended and its implementing regulations. Ingram shall include a statement in it's standard sales terms and conditions that any shipment of Product outside the United States will require a valid export license. Ingram further agrees to distribute Product in accordance with the territory as defined in Section 1.1. Whenever a EU country is specified as Territory under Section 1.1, Territory shall include all EU countries. 12. AGREEMENT 12.1 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.2 Section Headings Section headings in this Agreement are for convenience only, and shall not be used in construing the Agreement. 12.3 Incorporation of all Exhibits Each and every exhibit referred to hereinabove and attached hereto is hereby incorporated herein by reference as if set forth herein in full. 12.4 Severability A judicial determination that any provision of this Agreement is invalid in whole or in part shall not affect the enforceability of those provisions found to be valid. 12.5 No Implied Waivers If either party fails to require performance of any duty hereunder by the other party, such failure shall not affect its right to require performance of that or any other duty thereafter. The waiver by either party of a breach of any provision of this Agreement shall not be a waiver of the provision itself or a waiver of any breach thereafter, or a waiver of any other provision herein. - -------------------------------------------------------------------------------- CNF, Inc. 10 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- 12.6 Binding Effect/Assignment This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, and their respective representatives, successors and permitted assigns. This Agreement shall not be assignable by Vendor, without the express written consent of Ingram, which consent shall not be unreasonably withheld, including to a Person in which it has merged or which has otherwise succeeded to all or substantially all of such party's business and assets to which this Agreement pertains and which has assumed in writing or by operation of law its obligations under this Agreement. Any attempted assignment in violation of this provision will be void. 12.7 Survival Sections 5.5 (Payment Terms), 5.6 (Right to Withhold), 7.2 (Post-Term Termination) and 8. (Indemnification) shall survive the expiration or earlier termination of this Agreement. 12.8 Entire This Agreement constitutes the entire agreement between the parties regarding its subject matter. This Agreement supersedes any and all previous proposals, representations or statements, oral or written. Any previous agreements between the parties pertaining to the subject matter of this Agreement are expressly terminated. The terms and conditions of each party's purchase orders, invoices, acknowledgments/confirmations or similar documents shall not apply to any order under this Agreement, and any such terms and conditions on any such document are objected to without need of further notice or objection. Any modifications to this Agreement must be in writing and signed by authorized representatives of both parties. 12.9 Authorized Representatives Either party's authorized representative for execution of this Agreement or any amendment hereto shall be president, a partner, or a duly authorized vice president of their respective party. The parties executing this Agreement warrant that they have the requisite authority to do so. IN WITNESS WHEREOF, the parties hereunto have executed this Agreement. "Ingram" "Vendor" Ingram Micro Inc. CNF, Inc. 1600 E. St. Andrew Place 15345 Calle Enrique Santa Ana, California 92705 Morgan ill, California 9503 By: /s/ Michael Terrell By: /s/ David G. Thompson ------------------------------ -------------------------------- Name: Michael Terrell Name: David G. Thompson ---------------------------- ------------------------------ Title: Vice President Purchasing Title: CFO --------------------------- ----------------------------- Date: May 28, 1998 Date: 4/9/98 ---------------------------- ------------------------------ - -------------------------------------------------------------------------------- CNF, Inc. 11 Confidential (Doc Rev 12/95) 4/6/98 Ingram Micro Inc. Distribution Agreement - -------------------------------------------------------------------------------- *AGREEMENT MUST BE SIGNED BY PRESIDENT OR BY A DULY AUTHORIZED VICE PRESIDENT OR PARTNER. EXHIBITS: - --------- A - Vendor Routing Guide (if applicable) B - Guide to Bar Code: The Product Label C - TechNotes D - Product Price List E - Small And Disadvantaged Business Certification F - Partnership America - -------------------------------------------------------------------------------- CNF, Inc. 12 Confidential (Doc Rev 12/95) 4/6/98 [LOGO] AMENDMENT #1 to the DISTRIBUTION AGREEMENT THIS AMENDMENT (the "Amendment") is entered into this 2nd day of June, 1999, by and between INGRAM MICRO INC. ("Ingram") and CNF Mobile Solutions, Inc., a wholly owned subsidiary of CNF Technologies, Inc. ("Vendor"). The parties have agreed to amend their Distribution Agreement ("Agreement") dated February 19, 1998. 1. Due to the merge of CNF, Inc. ("CNF") and JLL Ventures, Inc. ("JLL"), replace the name with CNF Mobile Solutions, Inc., a wholly owned subsidiary of CNF Technologies, Inc. with principal place of business at 7722 E. Gray Rd., Scottsdale, Az. 85260 2. Section 2.1, Term - Delete the 2nd & 3rd sentences. 3. Section 4.10, Sell Through - Delete the 2nd sentence. 4. Section 4.11, Rebate - Delete the entire section. 5. Section 5.5, Payment Terms - Replace the words in the 2nd sentence "Ingram will pay Vendor one time per month ........" with "Ingram will pay Vendor net thirty (30) days from the invoice date ........". 6. Section 6.3(b), Programs - Delete the entire section. 7. This Amendment shall remain in effect for the current term and any renewal term of the Agreement. INGRAM MICRO INC. CNF Mobile Solutions, Inc. 1600 East St. Andrew Place 7722 E. Gray Road Santa Ana, CA 92705 Scottsdale, Arizona 85260 By: /s/ Tim Jeffries By: /s/ David G. Thompson ------------------------------ -------------------------------- Name: Tim Jeffries Name: David G. Thompson ---------------------------- ------------------------------ Title: GM, Storage & Components Title: CFO --------------------------- ----------------------------- - -------------------------------------------------------------------------------- JLL Ventures, Inc. 1 Confidential (Doc Rev 2/97) 6/2/99 EX-10.11 5 DISTRIBUTOR AGREEMENT DISTRIBUTOR AGREEMENT This Distributor Agreement (the "Agreement") is made by and between CNF, Inc., a California corporation ("Supplier") and Merisel Americas, Inc., a Delaware corporation ("Distributor"). Supplier and Distributor hereby agree as follows: 1. Distribution Rights. Supplier grants to Distributor the non-exclusive worldwide right and license to distribute Supplier's Products to Distributor's customers; provided, that Distributor may at any time during the term of this Agreement assign its rights and obligations under this Agreement to one or more of Distributor's direct or indirect subsidiaries or affiliates (individually, a "Subsidiary") with respect to specific territories around the world, and each Subsidiary shall thereafter have the rights and obligations of Distributor hereunder with respect to the territory assigned to it as if such Subsidiary had entered into this Agreement directly with Supplier. "Products" shall include all of Supplier's products set forth on Exhibit A hereto and any other products manufactured or marketed by Supplier during the term of this Agreement and intended for sale by resellers. Supplier has provided Distributor a list of all other distributors purchasing Products from Supplier as of the date hereof, and Supplier shall give Distributor at least thirty (30) days' prior written notice of the appointment of any other distributor in the United States or Canada of any of its Products during the term of this Agreement, and shall make reasonable efforts to notify Distributor of any distributors appointed outside the United States and Canada, prior to such appointment. 2. Price and Payment Terms. 2.1 Retail Price and Discount. The purchase price payable for any Product ordered by Distributor shall be equal to Supplier's published suggested retail price for the Product less a discount off such suggested retail price. Suggested retail prices, Distributor and Reseller discount amounts and purchase prices for the Products are set forth on Exhibit A. In the event Supplier wishes to change the suggested retail price of any Product, Supplier shall give Distributor at least thirty (30) days' prior written notice of the change, specifying the new suggested retail price, discount amount (determined using the above discount percentage) and purchase price payable by Distributor. In the event any new Product is manufactured or marketed by Supplier during the term of the Agreement, Supplier shall notify Distributor in writing of the suggested retail price, discount amount (determined using the above discount percentage) and purchase price payable by Distributor. 2.2 Price Protection. (a) If the purchase price of any Product is increased, Supplier shall honor any Distributor purchase orders placed prior to the effective date of the increase at the price in effect immediately prior to the time the increased is announced. (b) If the purchase price of any Product is decreased, Supplier shall grant Distributor a credit in the amount of the price decrease for each unit of the Product that is or has been (i) on order or in transit to Distributor on the effective date of the price decrease, and (ii) in Distributor's inventory on the effective date of the decrease. In addition, Distributor and Supplier shall mutually agree upon which Resellers shall be entitled to price protection from Supplier and Supplier shall grant Distributor a price protection credit for each price protection request submitted by such Resellers provided the price protection request is placed with Distributor within the thirty (30) days following the effective date of the price decrease. In order to receive any credits hereunder, Distributor shall provide Supplier with a report or reports specifying the number of units for which credits are requested, and Supplier shall grant such credits within thirty (30) days after receipt of any such report. In the event Supplier has not granted such credit(s) to Distributor within such thirty (30) day period, Distributor shall have the right to deduct such credit(s) from any amounts due Supplier under this Agreement at such time. In the event no amounts are due to Supplier at such time, Distributor shall have the right to request cash payment of such credit amount by Supplier, in accordance with Section 2.6 of this Agreement. Should Supplier have reasonable, valid cause to question or contest any credit requested under this 1 Section 2.2, Supplier shall contest such amount or pose such question within thirty (30) days following Supplier's receipt of Distributor's report(s) as described hereinabove or Supplier shall waive its rights to contest or question such credits and shall remit such credit amounts to Distributor as described in this Section 2.2. (c) Section 2.2(b) shall apply to all Subsidiaries that have the rights of Distributor hereunder (and also for Merisel Americas, Inc. to the extent Product is held in inventory outside of the United States or ordered from a location outside of the United States). 2.3 Payment Terms. All payments made to either party under this Agreement shall be due and payable in United States Dollars. Payments to Supplier with respect to all Products received by Distributor Supplier shall be due and payable within thirty (30) days after the shipment date of the Products ordered. All payments shall be subject to (i) a two percent (2%) discount if payment is made within net fifteen (15) days of the date of receipt of Products and (ii) a three percent (3%) discount if payment is made prior to the receipt of the Products ordered. 2.4 Rebates. Supplier and Distributor agree to enter into rebate discussions within one (1) year following the date of execution of this Agreement. In the event Distributor achieves the Quarterly Sales Goal in any quarter which occurs after such rebates have been established, (as they may be adjusted from time to time pursuant to Exhibit A), Supplier shall pay Distributor a rebate in the amount determined pursuant to Exhibit A within thirty (30) days after receipt of a sales report from Distributor setting forth its sales results. 2.5 Most Favored Customer. Supplier agrees that the discounts, purchase prices, payment terms and other terms and conditions of sale for any Product shall not at any time be less favorable to Distributor than the discounts, purchase prices, payment terms and other terms and conditions of sale for the Products offered by Supplier to any other distributor or aggregator. 2.6 Recoupment (a) Distributor shall have the right of recoupment with respect to all amounts owed to it by Supplier under this Agreement. Any amounts payable to Distributor under this Agreement for any reason (including, without limitation, for price protection, product returns, marketing funds or Frequent Buyer Program funds) shall first be applied as a credit by Distributor and shall reduce any uncontested amounts owed by Distributor to Supplier. In the event that Distributor maintains a credit balance with Supplier after application of credits, Supplier shall pay Distributor the amount of the remaining credit balance within thirty (30) days via an instrument acceptable to Distributor (which may include, but shall not be limited to, in Distributor's sole option, by cash, company check, cashier's check, or wire transfer). (b) Distributor shall have the right of recoupment with respect to any amounts owed by it to Supplier. Any amounts owed to Supplier by Distributor under this Agreement for any reason (including, without limitation, for the purchase of products) shall first be reduced by any amounts owed to Distributor by Supplier. In the event that Distributor maintains a debit balance with Supplier after such reduction (including the application of credits), Distributor shall have the right, in its sole option, to either: (i) return Products in Distributor's inventory to Supplier for credit in the amount of the purchase price paid for such Products, less any credits previously issued to Distributor under Section 2.2 hereof, which credit shall be applied to the amounts owed by Distributor to Supplier; or (ii) pay Supplier the amount owed by Distributor to Supplier. Irrespective of which option Distributor selects, Distributor shall retain all future rights to return Product as set forth in this Agreement. 2 3. Orders and Shipping. 3.1 Order Placement. Distributor shall place orders for Products with Supplier in writing. Supplier shall use reasonable efforts to deliver Products to Distributor within ten (10) days of the date of Distributor's order. Distributor shall have no obligation to order any minimum quantity of Products. 3.2 Allocation. In the event of any shortage of Products, upon order by Distributor Supplier shall ship to Distributor at least as many units of Product as Supplier ships to any other customer. In the event any Product is subject to limited availability at any time and Distributor has placed orders for such Product, either prior to the date such Product becomes subject to limited availability, or during such time as such Product is subject to limited availability, Supplier agrees to contact Distributor prior to shipping any order for such Product, and Distributor shall have the right, in its sole option and without liability, to cancel any existing order for such Product(s). 3.3 Title and Risk of Loss. Products shall be shipped F.O.B. to the Distributor warehouse specified in the order. Any freight costs for Products shipped to Distributor's United States locations shall be paid by Supplier and Supplier shall have access to Distributor's negotiated freight rates with Distributor's designated carrier. Distributor agrees to utilize such designated carrier for all shipments unless both parties mutually agree on an alternate shipping method. 3.4 Incorrect or Erroneous Shipment. In the event the Product(s) shipped to Distributor does not conform to the Product description for such Product set forth on the applicable purchase order for such Product(s), Distributor shall contact Supplier, and Supplier shall use reasonable efforts to ship the correct Product(s) to the United States location specified by Distributor within ten (10) business days of Distributor's notification of such misshipment to Supplier at no additional cost to Distributor. Distributor shall obtain a Return Material Authorization number, as is set forth in Section 5.4 of this Agreement, for any such Product and shall return any misshipped Product to Supplier, via freight collect, for credit in the amount paid by Distributor for such Product. 3.5 Disclaimer of Standard Terms. All terms, conditions, or provisions which may appear as pre-printed language or otherwise be inserted within any order confirmation or invoice for any Products shall be of no force and effect notwithstanding the execution or delivery of such other document subsequent to the date of this Agreement. 3.6 Bar Coding. Supplier shall mark each Product sold to Distributor with the appropriate UPC bar code: The preferred bar codes are Version A barcode, or Code 39 with FACT Data Identifiers barcode. In the event Supplier utilizes any other UPC standard bar code, Supplier shall submit a sample of such bar code to Distributor, prior to the execution of this Agreement, to verify compatibility with Distributor's bar code recognition systems. Distributor reserves the right, in its sole discretion and without penalty or liability to Distributor, to (i) refuse any shipment of Product(s) which are not so marked; and (ii) elect not to set up any Product in its systems which is not marked with a UPC standard bar code compatible with Distributor's bar code recognition systems. 4. Defective Products. Supplier shall accept the return of any Product alleged by Distributor or its customers to be defective and shall grant to Distributor a credit for any Products to be returned in the amount of the purchase price charged to Distributor therefor, less any applicable credits pursuant to Section 2.2 hereof which have been previously paid to Distributor. Distributor shall first instruct its customer to contact Supplier's technical support group to verify such defect, but Distributor's customer's failure to so contact Supplier shall not affect Distributor's right to return Products under this Section 4. Distributor shall obtain a Return Material Authorization ("RMA"), as set forth in Section 5.4 of this Agreement, for all returns under this Section 4. 3 Supplier also shall pay all freight charges for shipments of such Products from Distributor's United States location to Supplier by Distributor. 5. Inventory Maintenance. 5.1 Stock Balancing Rights. At any time or from time to time during the term of the Agreement, Distributor may return for credit an amount of Products with an original purchase price not in excess of twenty-five percent (25%) of the aggregate purchase price of all of Distributor's purchases during the preceding two (2) calendar quarters. 5.2 Acceptable Level Return Rights. In addition to the Stock Balancing Rights set forth hereinabove, in the event Distributor determines that the sales of any Product have not reached, or do not remain at, an acceptable level at any time during the term of this Agreement, Distributor may return any or all units of such Product to Supplier for credit. For the purposes of this Section 5.2, "acceptable level" shall mean sales of any Product in an amount equal to or greater than fifteen thousand dollars ($15,000.00) per month. 5.3 Discontinued Products. (a) In the event Supplier shall discontinue any Product, or declare any Product to be obsolete, Supplier shall notify Distributor thirty (30) days in advance of such discontinuation or declaration of obsolescence. Distributor shall have the right to return all units of such Product then in Distributor's Inventory to Supplier, for credit for a period of one hundred eighty (180) days following the effective date of discontinuation. (b) In the event Supplier offers to Distributor, or any other similar purchaser, new Products which are of equivalent and/or superior fit, form and function to a similar Product, and such new Product negatively affects Distributor's ability to sell such similar Product(s) then in Distributor's inventory, to the extent that Distributor's sales of the prior version of such Product decrease by fifty percent (50%) or more based upon Distributor's sales out of such Product(s) in the sixty (60) days preceding the date such new Product(s) is made available, Distributor shall have the right to declare its inventory of such similar Product(s) functionally discontinued, shall so notify Supplier, and shall return the affected inventory of such functionally discontinued Product(s) for credit for a period of sixty (60) days for all mass storage subsystem Products, and one hundred eighty (180) days for all other Products, following the date of functional discontinuation. (c) The return rights set forth in this Section 5.3 are in addition to any return rights described under Sections 5.1 and 5.2 of this Agreement. 5.4 Return Procedures. Supplier shall issue a Return Material Authorization ("RMA") number for any Products Distributor requests to return within five (5) business days following the date Distributor requests such RMA; (provided, however, that in the event such RMA is not issued within such five (5) day period, Distributor shall have the right to return any units of the Product(s) to Supplier without an RMA, and Supplier shall be obligated to accept such return). All Products returned pursuant to this Section 5 shall be unopened and in their original packaging. The amount of the credit for any returned Products shall be equal to the original purchase price charged to Distributor less any credits pursuant to Section 2.2 hereof which have been previously paid to Distributor. Supplier shall bear all freight costs associated with returns of Product to Supplier by Distributor under this Section 5. 6. Product Information Obligations and Set-Up Fees. 6.1 Product Set Up, Descriptions and Technical Support Requirements. Supplier shall provide Distributor's Product Information Center with the materials set forth on Exhibit B hereto. Distributor may, from time to time, change the requirements set forth in Exhibit B. Supplier shall be solely responsible for 4 the factual accuracy and completeness of any information or materials provided to Distributor. Distributor reserves the right to delay set up in Distributor's systems of any Product for which this information is not provided. 6.2 Product Physical Information. Supplier agrees to provide Distributor with the per-unit weight of each Product (such weight to include packaging) to be distributed by Distributor, and the cube dimension of each unit of Product, each Master Carton (if any) for each Product, and each pallet. Distributor reserves the right to delay set up in Distributor's systems of any Product for which this information is not provided. 6.3 New Products. Supplier agrees to provide Distributor with the material described in Section 6.1 and Exhibit B hereof for all updates and revisions of each Product and for each new Product which is manufactured or marketed by Supplier and which Distributor will distribute during the term of this Agreement, and shall make reasonable efforts provide Distributor with thirty (30) days prior notice of any such update, revision or new Product. 6.4 Product Changes. Supplier shall make reasonable commercial efforts to give Distributor thirty (30) days notice, or at least as much notice as is given to any other similar purchaser for any changes in Product packaging, documentation or major version changes. 6.5 Information. Products and Services. (a) Distributor, from time to time, may design, develop and operate a variety of materials, product catalogues, product set up forms, sales support and marketing services in connection with its wholesale computer products distribution business, including, without limitation, maintaining an electronic library containing computer hardware, software, peripheral and accessory product descriptions, creating custom product descriptions upon the request of its customers, publishing a computer reseller price book, creating and publishing advertisements for computer products; operating direct mail promotions, publishing catalogues; operating sales events and promotions and training sessions; operating an on-line order entry and information service (collectively, the "Information Products"). Distributor's Information Products may also permit Supplier to communicate directly with resellers through on-line message boards and other technology. (b) From time to time Supplier may provide information to Distributor for inclusion in the Information Products. Distributor may, in its sole discretion, with prior written approval from Supplier, charge a fee to the Supplier as a condition precedent for the inclusion of Supplier's information in an Information Product. (c) Distributor, in its sole discretion, may publish the Information Products through any available medium, including, without, limitation, through on-line computer networks, print media, CD ROM, diskette, facsimile, cable or satellite transmission. The type, amount and usage of the Information Products shall be as determined by Distributor from time to time, in its sole discretion. Distributor, in its sole discretion, may elect to charge the recipient of the Information Products (the "Customer") for receipt of the Information Products and the pricing charged by Distributor may include a profit for Distributor. Distributor reserves the right to modify or terminate any Information Product at any time, without notice or liability to Supplier, unless Supplier has paid for inclusion in which case Distributor will notify Supplier and provide a refund for service paid for but not provided. (d) The information that is contained in the Information Products comes from the following sources: i) Distributor created or generated information, including materials created by Distributor, that may or may not embody product information provided by the Supplier; and 5 ii) Supplier provided "Spec Sheets", photographs and Supplier trademarks, trade names and logos (collectively, the "Supplier Information"). "Distributor Information" means all intellectual property and information that is contained in the Information Products, except the Supplier Information. (e) Distributor shall have the ownership rights for all Distributor Information. Any information provided to Distributor for use in an Information Product that is not Supplier Information shall become Distributor Information. Supplier grants Distributor a nonexclusive worldwide right and license to republish and distribute the Supplier Information and to include the Supplier Information in any Information Product that Distributor may produce from time to time. Supplier warrants to Distributor that it has all rights to grant such a license in the Supplier Information. (f) Supplier shall be solely responsible for the factual accuracy and completeness of any information provided to Distributor for use in any Information Product. 6.6 D.A.T.A. Bank Program. During the first year of this Agreement, Supplier agrees to participate in Distributor's D.A.T.A. Bank Program, in such countries where Distributor offers such a Program, a copy of which is attached to this Agreement as Exhibit C and which may subsequently be amended or discontinued by Distributor from time to time. Supplier's participation in the D.A.T.A. Bank Program during each subsequent year shall be automatically renewed unless Supplier gives written notice to Distributor, in accordance with the terms set forth in Exhibit C, at least thirty (30) days prior to the expiration of the first or any subsequent Program year during the term of this Agreement. Distributor shall render an invoice each calendar quarter to Supplier for the participation fees payable by Supplier in connection with the D.A.T.A. Bank Program during the preceding quarter. Invoices rendered hereunder shall be paid by Supplier within thirty (30) days after receipt or, at Distributor's option, Distributor may deduct such amounts from any amounts due Supplier hereunder. 7. Marketing 7.1 Programs and Development Funds. Supplier shall provide Distributor with marketing development funds on a case by case basis for such marketing program as Supplier and Distributor mutually agree upon. Such funds shall be used in connection with marketing programs to be mutually agreed upon by Supplier and Distributor. Supplier shall also provide Distributor with Product launch funds to be utilized by Distributor to conduct initial marketing activities in connection with the commencement of Distributor's relationship with Supplier, such funds to be expended in accordance with a launch plan to be mutually agreed upon by Supplier and Distributor. Distributor shall invoice Supplier for all marketing development and launch funds due Distributor hereunder, and such invoices shall be due and payable within thirty (30) days after receipt or, at Distributor's option, Distributor may deduct such amounts from amounts due Supplier. 7.2 News Releases. No news releases, including photographs, films or videos, public announcements, Product or company endorsements by Distributor or confirmation of all, or any part of, the subject matter of this Agreement shall be made public without the prior written consent of Distributor. 8. Product Agreements and Indemnification. 8.1 No Violations. Supplier represents and warrants that the purchase of Products by Distributor and subsequent sale to its customers, as contemplated by this Agreement throughout the United States, Canada and Mexico, and, to the best knowledge of Supplier, the sale of each Product in any other foreign 6 country, violates no foreign, federal state or local law or regulation or any agreement between Supplier and any other person or entity. 8.2 Title and Infringement. Supplier represents and warrants that (a) it owns all right, title and interest in and to the Products necessary to enter into and perform its obligations to Distributor hereunder, and (b) no Product sold to Distributor during the term of this Agreement, nor the use of any such Product, nor anything in or contemplated by this Agreement, infringes upon the Intellectual Rights (as herein defined) of any other person or entity, and no suit or proceeding is pending or threatened alleging that any Product or the use thereof infringes upon any Intellectual Rights. As used herein, the term "Intellectual Right" means any rights relating to any trademark, tradename, service mark, copyright, patent, trade secret or other proprietary right. 8.3 Indemnification. Supplier agrees to hold Distributor harmless and indemnify, reimburse, and defend it upon request at its own cost from any proceedings related to any claim asserted against Distributor or its customers with respect to the Products, any information or materials provided by Supplier pursuant to this Agreement, or which otherwise arises out of its relationship with Distributor, (including without limitation any claim that any Product infringes the Intellectual Rights of another) and shall pay them for all amounts owed by them to third persons and expenses incurred by them in connection with any such claim or suit. Distributor shall notify Supplier of any claim described in this Section 8.3 and shall allow Supplier the opportunity to assume the sole control of the defense and/or settlement of any such claim, provided that Distributor shall have the right to approve any settlement which imposes any obligation upon it. 8.4 Insurance. Supplier shall maintain, at its expense, a policy or policies of product liability insurance, with a broad form Vendor's Endorsement naming Distributor as an additional insured, providing coverage of not less than one million dollars ($1,000,000.00) combined single limit, and shall provide Distributor with a Certificate of Insurance (including broad form Vendor's Endorsement) reflecting such coverage. The Certificate shall provide for at least ten (10) days prior written notice of cancellation or substantial change. 8.5 Buy American Act. In order to ascertain whether or not the Products meet the requirements of the "Buy American Act" and to ensure that the Products may be exported to Canada and Mexico in accordance with the terms of the North American Free Trade Agreement, Supplier shall set forth, on Exhibit A hereto, which Products, if any, are less than fifty-one percent (51%) U.S. manufactured, and further shall complete the information set forth on Exhibit D hereto, the "Certificate of Origin" with respect to each Product made available to Distributor under this Agreement, such form to be completed on or prior to the date such Product is first made available for purchase hereunder. Further, a new copy of such form shall be provided to Distributor each year during the term of this Agreement, prior to the annual anniversary date of such Agreement. Supplier shall indemnify Distributor, hold it harmless and reimburse it for any and all expenses or costs incurred by Distributor in the event the information set forth by Supplier on the "Certificate of Origin" is incorrect or erroneous. 9. Term and Termination. 9.1 Unless earlier terminated as provided herein, this Agreement shall have an initial term of one year from the last date either party executed this Agreement, and shall automatically renew for successive one year periods unless either party notifies the other party in writing of its election to terminate the Agreement at least sixty (60) days prior to the expiration of the initial term or any renewal term, as applicable. 9.2 Either party may terminate this Agreement with or without cause, upon thirty (30) days prior written notice to the other party; provided that, in the event the terminating party notifies the other party that such other party has materially breached any provision of this Agreement, the party in breach shall 7 have thirty (30) days after written notification detailing the breach is delivered by the non-breaching party to cure such breach. 9.3 Upon expiration of this Agreement or termination by either party, Distributor may return to Supplier for credit any Products in its inventory or returned to it by its customers within the succeeding sixty (60) days for mass storage subsystem Products, and one hundred eighty (180) days for all other Products. Distributor shall be credited for any Products so returned in an amount equal to the original purchase price thereof, less any credits pursuant to Section 2.2 hereof which have been previously paid to Distributor and shall be first applied to any uncontested amounts due Supplier. Any remaining balance shall be promptly paid to Distributor. 10. General. 10.1 Entire Agreement. This Agreement contains all the agreements, understanding, representations, conditions, warranties and covenants, and constitutes the sole and entire agreement between the parties hereto pertaining to the subject matter hereof and supersedes all prior communications or agreements, written or oral. This Agreement may not be released or modified except by the mutual written consent of both Distributor and Supplier as attested to by an instrument signed by an officer of each of them. If any provision of this Agreement is declared invalid or unenforceable the remaining provisions of this Agreement shall remain in full force and effect. 10.2 Independent Relationship. Nothing contained herein shall be deemed or construed as creating a joint venture or partnership between Distributor and Supplier. Neither Distributor nor Supplier is by virtue of this Agreement authorized as an agent or other representative of the other. 10.3 Assignment. Except as expressly provided herein, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party; provided, that Distributor may assign its rights and obligations hereunder to one or more subsidiary or affiliate corporations without consent, but Distributor shall remain liable for all obligations hereunder. 10.4 Waiver or Delay. Any waiver of any provision of this Agreement, or a delay by either party in the enforcement of any right hereunder, shall neither be construed as a continuing waiver, or create an expectation of non-enforcement, of that or any other provision of this Agreement, either in the present or in the future. 10.5 Governing Law. The validity, interpretation, and performance of this Agreement shall be controlled by and construed under the laws of the State of California. 10.6 Force Majeure. Neither party hereto shall be liable for the failure to perform of any of its obligations under this Agreement if such failure is caused by the occurrence of any force majeure beyond the reasonable control of such party, including without limitation fire, flood, strikes and other industrial disturbances, failure of transport, accidents, wars, riots, insurrections or acts of God. 10.7 Confidentiality. Distributor and Supplier shall hold in trust and confidence and shall not disclose for a period of three (3) years from the date of disclosure any information deemed "Confidential Information" by the disclosing party and identified as such at the time of disclosure. Information shall not be deemed "Confidential Information" for the purposes of this Agreement that (i) is already known to the nondisclosing party at the time of disclosure; (ii) is or becomes publicly known through no wrongful act of the nondisclosing party, including by public announcement by the disclosing party; (iii) is received from a third party without similar restrictions and without breach of this Agreement; (iv) is independently developed by the non- 8 disclosing party; or (v) is lawfully required to be disclosed by any governmental agency or otherwise required to be disclosed by law. 10.8 Headings. The headings appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or extent of such section or in any way affect such paragraph. 10.9 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute a single instrument and agreement. 10.10 Notices. Any notices under this Agreement shall be in writing addressed to both the President and Contract Administrator of such party at the address set forth below (or such other address as a party may notify the other party in accordance with these provisions), and shall be delivered by certified mail, return receipt requested or by an overnight delivery service of national standing. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth below. MERISEL AMERICAS, INC. CNF, Inc. 200 Continental Blvd. 7722 East Gray Road P.O. Box 984 Scottsdale, AZ 85260 El Segundo, CA 90245-0984 By: /s/ Kris Rogers By: /s/ David G. Thompson -------------------------------- ----------------------------------- Name: KRIS ROGERS Name: David G. Thompson Title: SENIOR VICE PRESIDENT Title: CFO GENERAL MANAGER, -------------------------------- U.S. DISTRIBUTION Date: 1/7/99 Date: 12/28/98 ------------------------------- -------------------------------- 9 EXHIBIT A Products Suggested Distributor Reseller % U. S. Product List Price Discount Price Mfctd. - -------------------------------------------------------------------------------- Rebate Quarterly Sales Goal Rebate Percentage During all subsequent years of the Agreement, the Quarterly Sales Goals and Rebate Percentage for the year shall be as mutually agreed to by the parties hereto and shall be based upon Distributor's sales of the Products during the prior year. Any Quarterly Sales Goals shall, at Distributor's option, be amended following the end of any calendar quarter. 10 EXHIBIT B Product Information Center and Technical Support Requirements 1. A new Product Set Up Form must be fully completed for each Product, update, version change or new Product introduced by Supplier, which Supplier wishes Merisel to distribute. The Product Set Up Form shall be provided to Supplier by the Product Information Center. 2. Spec Sheets, Original Data Sheets and additional Supplier-provided reference materials must be completely legible. Materials which are not completely legible will be returned to Supplier and will not be used. 3. For each Product distributed by Distributor, Supplier is required to provide the following: 3.1 Spec and Data Sheets. 3.1.1 Three (3) original Spec or Data Sheets for the Product and any product information which is available on CD-ROM. 3.1.2 If Supplier is new to Distributor, Supplier must send fifteen (15) Product family, or company product offering, brochures to each of the persons listed below: Director Director Inside Sales, West Coast Inside Sales, East Coast Merisel, Inc. Merisel, Inc. 200 Continental Blvd. 293 Boston Post Road West El Segundo, CA 90245 Marlboro, MA 01752 3.1.3 Distributor part numbers must be affixed to three (3) of the Spec Sheets referenced in Section 3.1.1. Distributor part numbers must also be affixed to the back sides of Product photographs or any sleeves containing transparencies. 3.1.4 If a Spec Sheet refers to multiple Products, all relevant Distributor part numbers must be listed on such Spec or Data Sheet. 3.1.5 If a Distributor part number is not available for a Product, Supplier should refer to its own part number. 3.2 Logos and Photos. 3.2.1 Two Supplier logos scanned at 2400 dpi resolution into EPS or TIFF files. One of the EPS or TIFF files must contain a black- and-white logo and one of the EPS or TIFF files must contain a color logo. 3.2.2 One (1) approximately 2" x 3" digitized color image of each product in high resolution CMYK TIFF format ready for output up to 2400 dpi. (Other formats such as native PhotoShop, EPS, etc. are also acceptable.) OR 11 Digitized images are preferred, but if they are not available please send: One (1) color photograph of each product (in 35-mm slide, 2 1/4-inch or 4 X 5-inch transparency format). All photos must be marked with Merisel SKU number and/or Manufacturer's UPC code. Merisel SKU number and/or Manufacturer UPC code must also be affixed to the back side of product photos or any sleeves containing transparencies. 3.3 Empty Boxes. Two (2) empty boxes for each of Supplier's software and/or accessory Product(s) distributed by Distributor. 4. Software and Hardware Product for Evaluation Testing. 4.1 For all Products which Distributor has not previously distributed, including, but not limited to, new models or software updates which differ significantly from previous releases, Supplier shall provide fully-functional "NotFor-Resale" ("NFR") software or hardware units of the Product(s) for a ninety (90) day evaluation testing by Distributor's Technical Support department, as follows: 4.1.1 Evaluation/NFR units of Products shall be sent to Distributor's Technical Support operations as follows: National Manager, Tech Support Tech Support Operations Merisel, Inc. East Coast 200 Continental Blvd. Merisel, Inc. El Segundo, CA 90245 293 Boston Post Road West Marlboro, MA 01752 2 Fully-functional copies of Software 1 Fully-functional copy 1 unit of each Hardware Product of Software 4.2 Supplier must complete and FAX a "Product Tracking Form" to the Distributor Product Information Center when any unit of evaluation/NFR Product is shipped as set forth in Section 5.1 above. The Product Tracking Form is available from Distributor's on-line FAX-back service; Supplier may obtain the FAX number for such service from the Product Information Center. 12 EXHIBIT C D.A.T.A. Bank Core Program U.S. Program (U.S. dollars) Supplier agrees to participate in the D.A.T.A. Bank Program under the following terms and conditions: Participation Details 1. Initial program period: Annual: August 1st - July 31st of each year (the "Program Period"). Participation starting after August 1st of any year will be prorated. Merisel will invoice Supplier every three months for the previous three months through July 31st of each year. 2. If Supplier wishes to discontinue participation in the D.A.T.A. Bank Program, Supplier must provide a minimum of thirty (30) days written termination notification before the end of the initial, or any subsequent, Program Period, to the Director of Marketing for Distributor's "The Information Company" and Distributor's Contracts Administration Manager. If such notification is not received within such thirty (30) day period, Supplier's participation in the D.A.T.A. Bank Program will automatically renew for that year and each year thereafter unless Supplier provides such thirty (30) day minimum written notice of its intent to terminate its participation in the D.A.T.A. Bank Program prior to the end of any Program Period. Merisel has the right to cancel Supplier's program participation by providing a minimum of thirty (30) days written cancellation notification to Supplier. 3. Supplier must participate in the D.A.T.A. Bank Core Program in order to participate in unique, targeted Add-on Marketing Opportunities (a separate contract will be provided for such Add-on Marketing Opportunities). 4. To ensure the D.A.T.A. Bank database remains current, reports will be provided to participating Suppliers listing an inventory of library items per SKU at least every two months. 5. Proof of performance will consist of one copy of SELline (one time only, updates on-line), one copy of each CD-ROM and a listing of SKUs in the Literature Fax-back System. By signing this agreement, Supplier waives all rights to further proof of performance. 6. Suppliers are encouraged to promote their participation in D.A.T.A. Bank with the use of the SELline and D.A.T.A. Bank logos in their reseller communications. 7. Speed of upload of Supplier Information will depend on quality, volume and timeliness of information submitted to Merisel by Supplier. Participation Requirements Supplier must maintain current information in Merisel libraries at all times by providing the necessary coding and supporting materials through the ongoing product set-up process to take full advantage of D.A.T.A. Bank (e.g., Product Detail is driven by class codes submitted by Supplier during product set-up). Participation Fees Participation in D.A.T.A. Bank consolidates the distribution of your information through Merisel's electronic media: SELline, Salesnet, CD-ROM, and Literature Fax-back System. 13 Annual fees (which include setup and maintenance) will be billed quarterly and are based on current Merisel Price Book SKU count as of the date of billing ("baseline" SKU count) and up to 50MB of Library information storage space. If Supplier SKU count is significantly exceeded (defined as 15% above baseline SKU count), Supplier will be required to upgrade to the next participation level. Add-on Marketing Opportunities are offered at additional fees. Fees: Up to 9 SKU's $2,200.00 10 to 15 SKU's $5,500.00 16 to 75 SKU's $8,500.00 76-150 SKU's $11,500.00 151-1000 SKU's $16,000.00 Over 1000 SKU's $16,000.00 Plus $5.00/Per SKU [The D.A.T.A. Bank Program replaces the current On-Line Literature Library (OLLL). This agreement supersedes any prior agreement or terms for the OLLL program. By signing this agreement, Supplier authorizes Merisel to transfer funds remaining in the OLLL to D.A.T.A. Bank Program equivalents.] 14 EXHIBIT D Certificate of Origin (Document Original To Be Attached) 15 EX-10.12 6 NOTE NOTE Scottsdale, Arizona __________ March 8, 1999 FOR VALUE RECEIVED, CNF, Inc. a California corporation (the "Borrower"), hereby promises to pay to the order of, _____________, an individual residing at _______________________________ (the "Lender"), the principal sum of __________________ $_____________ payable in cash on the earlier of (i) the date Borrower, or any successor thereto, completes a financing transaction pursuant to which it obtains financing from the sale of equity securities in the amount of at least $4,000,000 (the "Financing Transaction"), and (ii) one (1) year from the date hereof with the earlier of such dates being the Maturity Date. The entire principal amount together with interest at the rate of ten (10%) percent per annum, shall be paid on the Maturity Date. All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 Noon, Pacific Standard Time, on the Maturity Date thereof to the Lender at the address set forth above, or such other place as Lender may from time to time designate in writing. If any payment or action to be made or taken hereunder shall be stated to be or become due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. Any failure to repay the principal or interest due hereunder upon the Maturity Date or any failure to adhere to the terms of this Note shall be considered an Event of Default. Upon the occurrence of an Event of Default the entire amount of the indebtedness evidenced by this Note hereby shall be immediately due and payable. Upon the acceleration of the obligations evidenced by this Note and failure by the Borrower to pay amounts then due hereunder, Lender may proceed to protect, exercise and enforce all of its rights and remedies under this Note. The remedies provided in this Note are cumulative and concurrent, may be pursued in any order, separately, successively or together, may be exercised as often as occasion therefor may arise, and shall be in addition to, and not in substitution for, the rights and remedies which would otherwise be vested in Lender for the recovery of damages, or otherwise, in the event of a breach of any of the undertakings of the Borrower hereunder. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by the Borrower and the Lender. The Lender may not sell, assign or transfer this Note or any portion hereof. This Note shall bind the Borrower and its successors and assigns, and the benefits hereof shall inure to the benefit of the Lender and its successors and assigns. All references herein to the "Borrower" and the "Lender" shall be deemed to apply to the Borrower and the Lender, respectively, and their respective successors and assigns. 4 Borrower may not prepay the loan evidenced by this Note, without the consent of the Lender. This Note and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the internal laws of the State of Arizona without giving effect to its conflicts of law principles. IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, has executed this Note as of the date first written above with the intention that this Note shall constitute a sealed instrument. CNF, INC. By: /s/ Paul Charles -------------------- Name: Paul Charles Title: President EX-10.13 7 PROMISSORY NOTE Exhibit 10.13 January 27, 2000 {name} {address] Re: Promissory Note dated as of [____________] for $[______] Dean [name]: The books and records of CNF Technologies, Inc. (the "Company") indicate that you have provided us with a loan in the principal amount of One Hundred Thousand Dollars (US $100,000), as evidenced by a note dated [________] (the "Note"). In order to induce an equity investment in the Company, this letter will constitute your formal agreement to extend the "Maturity Date" of the Note (as the term Maturity Date is defined with the Note) to January 30, 2001, and such date shall hereafter be referred to as the "Maturity Date" of the Note, as amended hereby. All other terms and conditions of the Note shall remain in full force and effect. Would you kindly indicate your intention to be legally bound by the terms set forth herein as a formal amendment to the Note, by placing your name and signature on the line provided below. Thank you for your consideration and cooperation in this matter. Very truly yours, CNF Technologies, Inc. By: ---------------------- David G. Thompson, CFO Acknowledged and Agreed to by: - ----------------------------------- Signature EX-10.14 8 PROMISSORY NOTE EXHIBIT "C" THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN BY THE REGISTERED OWNER FOR INVESTMENT, AND WITHOUT A VIEW TO RESALE OR DISTRIBUTION THEREOF, AND MAY NOT BE TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH TRANSFER OR DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AS AMENDED, OR THE RULES AND REGULATIONS THEREUNDER. FORM OF PROMISSORY NOTE $________ Scottsdale, Arizona ______________,1999 FOR VALUE RECEIVED, CNF Technologies, Inc., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of, ___________________, [a ______ corporation with a principal office at _____________________________ [an individual residing at __________________________________________________] (the "Lender"), the principal sum of __________________________(US $__________) payable in cash on the earlier of (i) the date the Company completes a private placement of its equity securities which yields net proceeds to the Company of at least $5,000,000; and (ii) June 30, 2001 with the earlier of such dates being the "Maturity Date." The entire principal amount together with interest at the rate of ten (10%) percent per annum, shall be paid on the Maturity Date. All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 Noon, Pacific Standard Time, on the Maturity Date thereof to the Lender at the address set forth above, or such other place as Lender may from time to time designate in writing. If any payment or action to be made or taken hereunder shall be stated to be or become due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. Any failure to repay the principal or interest due hereunder upon the Maturity Date or any failure to adhere to the terms of this Note shall be considered an Event of Default. Upon the occurrence of an Event of Default the entire amount of the indebtedness evidenced by this Note hereby shall be immediately due and payable. Upon the acceleration of the obligations evidenced by this Note and failure by the Borrower to pay amounts then due hereunder, Lender may proceed to protect, exercise and enforce all of its rights and remedies under this Note. The remedies provided in this Note are cumulative and concurrent, may be pursued in any order, separately, successively or together, may be exercised as often as occasion therefor may arise, and shall be in addition to, and not in substitution for, the rights and remedies which would otherwise be vested in Lender for the recovery of damages, or otherwise, in the event of a breach of any of the undertakings of the Borrower hereunder. This Note may not be modified, altered or amended, except by an agreement in writing signed by the Borrower and the Lender. The Lender may not sell, assign or transfer this Note or any portion hereof. This Note shall bind the Borrower and its successors and assigns, and the benefits hereof shall inure to the benefit of the Lender and its successors and assigns. All references herein to the "Borrower" and the "Lender" shall be deemed to apply to the Borrower and the Lender, respectively, and their respective successors and assigns. Borrower may not prepay the loan evidenced by this Note, without the consent of the Lender. This Note and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the internal laws of the State of Arizona without giving effect to its conflicts of law principles. IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, has executed this Note effective as of the date above indicated. CNF TECHNOLOGIES, INC. By: ----------------------------------------- Name: Title: EX-21.1 9 EXHIBIT 21.1 EXHIBIT 21.1 1. CNF Mobile Solutions, Inc. EX-23.2 10 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to the Registration Statement of CNF Technologies, Inc. on Form SB-2 of our report dated May 25, 1999 (June 11, 1999 as to paragraph 1 of Note 1, paragraph 2 of Note 4, and paragraphs 4, 5 and 7 of Note 13), (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the Company's ability to continue as a going concern) appearing in the prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such prospectus. DELOITTE & TOUCHE LLP Phoenix, Arizona February 29, 2000 EX-27 11 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CNF TECHNOLOGIES, INC'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1999 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENT. U.S. DOLLARS 12-MOS 9-MOS MAR-31-1999 MAR-31-2000 APR-01-1998 APR-01-1999 MAR-31-1999 DEC-31-1999 1 1 184,663 1,500 0 0 1,224,383 1,768,938 (390,000) (340,000) 1,656,001 1,595,550 2,915,282 3,260,535 805,974 981,756 (223,741) (353,410) 3,538,687 3,919,551 5,978,025 4,996,651 0 0 0 0 0 416 1,000 1,145 (2,727,637) (1,309,169) 3,538,687 3,919,551 9,425,947 8,510,873 9,425,947 8,510,873 6,088,549 6,048,172 6,088,549 6,048,172 6,208,781 5,814,094 0 0 248,342 2,473,297 (3,119,725) (5,824,690) (45,200) 0 0 0 0 0 0 0 0 0 (3,074,525) (5,824,690) (1.23) (.69) (1.23) (.69)
EX-99.1 12 NOTICE OF ALLOWANCE US PTO PART B -- ISSUE FEE TRANSMITTAL Complete and mail this form, together with applicable fees, to: Box ISSUE FEE Assistant Commissioner for Patents Washington, D.C. 20231 MAILING INSTRUCTIONS: This form should be used for transmitting the ISSUE FEE. Note: The certificate of mailing below can Blocks 1 through 4 should be completed where appropriate. All further only be used for domestic mailings of the correspondence including the Issue Fee Receipt, the Patent, advance orders and Issue Fee Transmittal. This certificate notification of maintenance fees will be mailed to the current correspondence cannot be used for any other accompanying address as indicated unless corrected below or directed otherwise in Block 1, papers. Each additional paper, such as an by (a) specifying a new correspondence address; and/or (b) indicating a separate assignment or formal drawing, must have its "FEE ADDRESS" for maintenance fee notifications. own certificate of mailing. Certificate of Mailing CURRENT CORRESPONDENCE ADDRESS (Note: Legibly mark-up with any corrections or use Block 1) I hereby certify that this Issue Fee Transmittal is being deposited with the 020451 LM61/0902 United States Postal Service with GRANT R CLAYTON sufficient postage for first class mail in CLAYTON HOWARTH & CANNON, PC an envelope addressed to the Box Issue Fee P O BOX 1909 address above on the date indicated below. SANDY UT 84091-1909 (Depositor's name) ------------------------------------------- (Signature) ------------------------------------------- (Date) -------------------------------------------
APPLICATION NO. FILING DATE TOTAL CLAIMS EXAMINER AND GROUP ART UNIT DATE MAILED 08/737,201 01/24/97 030 FREJD, R 2763 09/02/99 First Named Applicant CHARLES, 35 USC 154(b) term ext. = 0 DAYS. TITLE OF INVENTION SYSTEM AND METHOD FOR EXPANSION OF A COMPUTER
ATTY'S DOCKET NO. CLASS-SUBCLASS BATCH NO. APPLN. TYPE SMALL ENTITY FEE DUE DATE DUE 2 T-2844.US 395-500.460 B02 UTILITY YES $605.00 12/02/99
1. Change of correspondence address or indication of 2. For printing on the patent front page, list 1 COHEN & SMITH "Fee Address" (37 CFR 1.363). Use of PTO form(s) (1) the names of up to 3 registered patent and Customer Number are recommended, but not attorneys or agents OR, alternatively, (2) the 2 ______________ required. name of a single firm (having as a member a registered attorney or agent) and the names 3 ______________ |X| Change of correspondence address (or Change of of up to 2 registered patent attorneys or Correspondence Address form PTO/SB/122) agents. If no name is listed, no name will be attached. printed. |X| "Fee Address" indication (or "Fee Address" Indication form PTO/SB/47) attached.
3. ASSIGNEE NAME AND RESIDENCE DATA TO BE PRINTED ON THE PATENT (print or type) 4a. The following fees are enclosed (make PLEASE NOTE: Unless an assignee is identified below; no assignee data will check payable to Commissioner of Patents appear on the patent. Inclusion of assignee data is only appropriate when an and Trademarks): assignment has been previously submitted to the PTO or is being submitted under separate cover. Completion of this form is NOT a substitute for filing |X| Issue Fee an assignment. | | Advance Order - # of Copies ________ (A) NAME OF ASSIGNEE CNF Technologies, Inc. 4b. The following fees or deficiency in these (B) RESIDENCE: (CITY & STATE OR COUNTRY) fees should be charged to: Scottsdale, AZ DEPOSIT ACCOUNT NUMBER _________________ Please check the appropriate assignee category indicated below (will not be (ENCLOSE AN EXTRA COPY OF THIS FORM) printed on the patent) | | Issue Fee | | Individual |X| corporation or other private group entity | | government | | Advance Order - # of Copies ________
The COMMISSIONER OF PATENTS AND TRADEMARKS IS requested to apply the Issue Fee to the application identified above. (Authorized Signature) (Date) Burton Scheiner /s/ Burton Scheiner 12-2-99 NOTE: The Issue Fee will not be accepted from anyone other than the applicant; a registered attorney or agent; or the assignee or other party in interest as shown by the records of the Patent and Trademark Office. Burden Hour Statement: This form is estimated to take 0.2 hours to complete. Time will vary depending on the needs of the individual case. Any comments on the amount of time required to complete this form should be sent to the Chief Information Officer, Patent and Trademark Office, Washington, D.C. 20231. DO NOT SEND FEES OR COMPLETED FORMS TO THIS ADDRESS. SEND FEES AND THIS FORM TO: Box Issue Fee, Assistant Commissioner for Patents, Washington, D.C. 20231 Under the Paperwork Reduction Act of 1995, no persons are required to respond to a collection of information unless it displays a valid OMB control number. TRANSMIT THIS FORM WITH FEE PTOL-85B (REV. 10-96) Approved for use through 06/30/99. OMB 0651-0033 Patent and Trademark Office; U.S. DEPARTMENT OF COMMERCE UNITED STATES DEPARTMENT OF COMMERCE [LOGO] Patent and Trademark Office NOTICE OF ALLOWANCE AND ISSUE FEE DUE 020451 LM61/0902 GRANT R CLAYTON CLAYTON HOWARTH & CANNON, PC P O BOX 1909 SANDY UT 84091-1909
- --------------------------------------------------------------------------------------------- APPLICATION NO. FILING DATE TOTAL CLAIMS EXAMINER AND GROUP ART UNIT DATE MAILED - --------------------------------------------------------------------------------------------- 08/787,201 01/24/97 030 FREJD, R 2763 09/02/99 - --------------------------------------------------------------------------------------------- FIRST NAMED APPLICANT CHARLES 35 USC 154(b) term ext. = 0 Days. - --------------------------------------------------------------------------------------------- TITLE OF INVENTION SYSTEM AND METHOD FOR EXPANSION OF A COMPUTER
- --------------------------------------------------------------------------------------------- ATTY'S DOCKET NO. CLASS-SUBCLASS BATCH NO. APPLN. TYPE SMALL ENTITY FEE DUE DATE DUE - --------------------------------------------------------------------------------------------- 2 T-2844.US 395-500.460 B02 UTILITY YES $605.00 12/02/99 - ---------------------------------------------------------------------------------------------
THE APPLICATION IDENTIFIED ABOVE HAS BEEN EXAMINED AND IS ALLOWED FOR ISSUANCE AS A PATENT. PROSECUTION ON THE MERITS IS CLOSED. THE ISSUE FEE MUST BE PAID WITHIN THREE MONTHS FROM THE MAILING DATE OF THIS NOTICE OR THIS APPLICATION SHALL BE REGARDED AS ABANDONED. THIS STATUTORY PERIOD CANNOT BE EXTENDED. HOW TO RESPOND TO THIS NOTICE: I. Review the SMALL ENTITY status shown above. If the SMALL ENTITY is shown as YES, verify your If the SMALL ENTITY is shown as NO: current SMALL ENTITY status: A. If the status is changed, pay twice the amount of the FEE DUE shown above and notify the Patent and A. Pay FEE DUE shown above, or Trademark Office of the change in status, or B. If the status is the same, pay the FEE DUE shown above. B. File verified statement of Small Entity Status before, or with, payment of 1/2 the FEE DUE shown above. II. Part B-Issue Fee Transmittal should be completed and returned to the Patent and Trademark Office (PTO) with your ISSUE FEE. Even is the ISSUE FEE has already been paid by charge to deposit account, Part B Issue Fee Transmittal should be completed and returned. If you are charging the ISSUE FEE to your deposit account, section "4b" of Part B-Issue Fee Transmittal should be completed and an extra copy of the form should be submitted. All communications regarding this application must give application number and batch number. Please direct all communications prior to issuance to Box ISSUE FEE unless advised to the contrary. IMPORT REMINDER: Utility patents issuing on applications filed on or after Dec. 12, 1980 may require payment of maintenance fees. It is patentee's responsibility to ensure timely payment of maintenance fees when due.
YOUR COPY ??96) Approved for use through 06/30/99. (0651-0033) *U.S. GPO: 1998-437 639/80023
/ / Notice of References Cited, PTO-892 / / Information Disclosure Statement(s), PTO-1449, Paper No(s). ________________ /X/ Notice of Draftsperson's Patent Drawing Review, PTO-948 / / Notice of Informal Patent Application, PTO-152 EX-99.2 13 LETTERS PATENT ================================ [LOGO] Letters patent NO. Commonwealth Patents Act of 1990 707588 of Australia STANDARD PATENT I, Vivienne Joyce Thom, Commissioner of Patents, grant a Standard Patent with the following particulars: Name and Address of Patentee: CNF Technologies, Inc., 7722 East Gray Road, Scottsdale, Arizona 85260, United States Of America Names of Actual Inventors: Paul Charles and Walter C Peschke Title of Invention: System and method for expansion of a computer Application Number: 53059/96 Term of Letters Patent: Twenty years commencing on 7 March 1998 Priority Details: Number Date Filed With 08/399728 7 March 1995 UNITED STATES OF AMERICA Dated this 28 day of October 1999 /s/ V.J. Thom -------------------------------- V.J. THOM [LOGO] COMMISSIONER OF PATENTS Your Ref: T2844 - Australia Our Ref: 74660 PATENT REGISTRATION DETAILS --------------------------- COUNTRY: Australia TITLE: SYSTEM AND METHOD FOR EXPANSION OF A COMPUTER PATENT NO: 707588 PATENTEE: CNF Technologies, Inc. APPLICATION DATE: 7 March 1996 PRIORITY DETAILS: United States Of America (US) 08/399728 07 MAR 1995 PATENT ISSUE DATE: 28 October 1999 PATENT EXPIRY DATE: 7 March 2016 RENEWALS DUE FROM: 7 March 2001 This patent results from Application No 53059/96 which was filed with a Complete Specification on 7 March 1996. It claims a convention priority date of 7 March 1995. The term of this patent is 20 years from the date of application. Please note that the Publication Date on the attached Patent Abridgement may differ from the International Publication Date on the PCT Pamphlet. The Publication Date is the date the PCT Pamphlet was made open to public inspection by the Australian Patent Office. The Publication Journal Date is the date of advertisement in the Australian Official Journal of Patents that the PCT Pamphlet has been made open to public inspection. Australia has statutory provisions whereby third parties may apply for a compulsory licence if the reasonable requirements of the public in relation to the invention have not been met within three years from patent grant. Third parties may also seek revocation of the patent if the public's requirements are still not met within two years of the grant of a compulsory licence. In practice, however, these provisions are generally regarded as ineffectual as no compulsory licences have been granted and no patents revoked on these grounds. Should you require further information about this subject, please do not hesitate to contact us. In order to keep the patent in force it will be necessary to pay annual renewal fees from the date shown above. If this date has already passed. or is in the near future, you should have received a reminder from CPA. It is our practice to send details of all our cases to Computer Patent Annuities (CPA) who are thereafter entrusted with the task of paying renewal fees. CPA sends renewal reminder notices for all the cases on its database and attends to renewals upon their receipt of your instructions. Please do not hesitate to contact us should any matter arise with which we could assist you in your dealings with CPA. -----END PRIVACY-ENHANCED MESSAGE-----