-----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, VzLjw+JL1GNe05jimIwQ2CJjaTIsZJltxvnepavdhBC9PQQK/Ajcy1NT1Ba2mJ1Q WYFaU2MzChCrGRjiHvApWg== 0000936392-98-000080.txt : 19980130 0000936392-98-000080.hdr.sgml : 19980130 ACCESSION NUMBER: 0000936392-98-000080 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IPL SYSTEMS INC CENTRAL INDEX KEY: 0000351810 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042511897 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10370 FILM NUMBER: 98515781 BUSINESS ADDRESS: STREET 1: 124 ACTON ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 5084611000 MAIL ADDRESS: STREET 1: 124 ACTON STREET STREET 2: 124 ACTON STREET CITY: MAYNARD STATE: MA ZIP: 01754 10-K 1 FORM 10-K DATED 10-31-97 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. COMMISSION FILE NUMBER: 0-10370 IPL SYSTEMS, INC. (Exact name of Registrant as specified in its charter) MASSACHUSETTS 04-2511897 (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 124 ACTON STREET, MAYNARD, MASSACHUSETTS 01754 (Address of principal executive offices and Zip Code) (508) 461-1000 (Registrant's Telephone Number, including area code) --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A COMMON STOCK, $.01 PAR VALUE (Title of Class) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of Class A Common Stock held by non-affiliates of the Registrant as of January 15, 1998 was $9,329,154 based on the closing sale price of such stock on the Nasdaq SmallCap Market(*) The number of shares outstanding of the Registrant's Class A Common Stock, $0.01 par value, was 23,819,399 on January 15, 1998. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Company's Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Commission"), no later than 120 days after October 31, 1997, pursuant to Regulation 14A in connection with the 1998 Annual Meeting of Stockholders to be held on April 8, 1998 are incorporated herein by reference into Part III of this Form 10-K. - -------- (*) Excludes 18,078,381 shares of Common Stock held by directors and officers and shareholders whose beneficial ownership equaled or exceeded 10% of the shares outstanding on January 15, 1998. Exclusion of shares held by any person should not be construed to indicate that such person possess the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. ================================================================================ 2 This Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. The Company's actual future results could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, those found in this Annual Report on Form 10-K in Part I, Item 1 under the caption "Certain Risk Factors Related to the Company's Business", in Part II, Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and additional factors discussed elsewhere in this Annual Report. PART I ITEM 1. BUSINESS INTRODUCTION IPL Systems, Inc. ("IPL" or the "Company") was incorporated in Massachusetts in January 1973. Unless the context indicates otherwise, the "Company" and "IPL" each refers to the Company and its consolidated subsidiaries. On June 3, 1997, IPL completed a business combination with ANDATACO, a California corporation ("ANDATACO"), whereby ANDATACO was merged with a wholly-owned subsidiary of IPL (the "Merger"). Although as a legal matter the Merger resulted in ANDATACO becoming a wholly-owned subsidiary of IPL, for financial reporting purposes the Merger was treated as a recapitalization of ANDATACO and an acquisition of IPL by ANDATACO. The financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by IPL subsequent to the Merger be those of ANDATACO, which include the results of operations of IPL from the date of the Merger. The Company intends to submit a proposal to its Stockholders at the 1998 Annual Meeting of Stockholders that the Company name be changed from IPL Systems, Inc. to ANDATACO, Inc. OVERVIEW IPL designs, manufactures, and distributes storage solutions based on its Application-Specific Architecture ("ASA") for Windows NT and UNIX environments. The Company develops products to meet the individual performance and availability profiles of storage-intensive applications in its target markets. The Company's open-architecture solutions include Redundant Array of Independent Disks ("RAID") and RAID-ready disk arrays; tape backup and restore products; web storage management and other storage management utilities; and data sharing, remote mirroring and disaster recovery software. These products support multiple server platforms, including Sun Microsystems, Hewlett-Packard, Silicon Graphics, Inc. and various NT systems. The Company backs its products with maintenance, technical support and customized consulting services programs. The customers for the Company's products represent a cross-section of industries and government agencies operating in distributed client/server as well as centralized computing environments. These customers range in size from FORTUNE 1000 companies to small businesses, and from national to local governments. No one customer accounted for more than 10 percent of total revenue during fiscal years 1997, 1996 or 1995. The Company focused its efforts in 1997 on identifying, and developing solutions for, selected market segments in which ASA-based technology could provide customers with application-specific storage. These markets include, high technology development companies, oil and gas exploration, financial and retail markets with large data warehouse and relational database installations, and video and entertainment. The Company distributes internally developed products, as well as products from other manufacturers through direct, indirect and original equipment manufacturer ("OEM") sales and service channels throughout the world. Historically the reseller business or the sale of third party non-GigaRAID products 1 3 accounted for the majority of the Company's revenues, representing 100% of revenues in fiscal 1995 and declining to 37.2% and 34.6% in fiscal 1996 and 1997, respectively. The Company's goal is to become the leading provider of open systems storage solutions. The principal elements of the Company's business strategy are as follows: - - Develop open systems products based on its intelligent enclosure and controller technology. - - Cooperate with leading hardware and software developers, resellers and systems integrators to enhance its storage and storage management product offerings for end users. - - Develop solutions for the OEM market based on its enclosure and controller technology as well as its web storage management software. - - Expand its service business through the Professional Services Group which was established during the past year. - - Focus on increasing gross margins, following the improvement from fiscal 1996 to fiscal 1997. - - Focus increased resources on the design, development, manufacturing and marketing of internally developed and GigaRAID products. SIGNIFICANT BUSINESS DEVELOPMENTS Merger with ANDATACO On June 3, 1997, IPL consummated the Merger with ANDATACO. Under the terms of the merger agreement, the shareholders of ANDATACO were issued a total of 18,078,381 shares of IPL Class A Common Stock (the "Common Stock") in exchange for all outstanding shares of capital stock of ANDATACO. The business combination with ANDATACO has allowed the Company to achieve several strategic objectives, including acquiring ANDATACO's customer base, increasing the Company's revenues, realizing certain cost savings and adding ANDATACO's skilled and experienced personnel. The Merger was accounted for using the purchase method. Accordingly, the purchase price was allocated to the estimated fair market value of identifiable tangible and intangible assets acquired and liabilities assumed. Based upon an independent valuation, the Company allocated $2,400,000 to acquired in-process research and development for which there is no future alternative use and $400,000 to existing proprietary technology for which technological feasibility had been established. As required by generally accepted accounting principles, the amount allocated to in-process technology was recorded as a one-time charge to operations and the amount allocated to existing technology was amortized over its estimated remaining economic life. The excess of the purchase price over the identifiable net assets acquired of $8,362,000 was recorded as goodwill and is being amortized on a straight line basis over its estimated useful life of five years. PRODUCTS The Company strives to meet its customers' storage and information management needs by providing the market with comprehensive, performance-oriented and flexible storage solutions. During 1997, the Company developed and introduced ASA. Through ASA, the attributes of storage products are matched to the unique data patterns of the applications driving storage growth in the Company's target markets. These applications include digital video, seismic processing, data warehousing, online transaction processing (OLTP) and general technology development. ASA-based products announced in 1997 include GigaRAID/HA and GigaRAID/SX. These products are additions to the GigaRAID High Availability Series (the "GigaRAID Series") of advanced disk arrays, RAID-ready disk arrays, disk and tape library systems, and data management software consisting of distributed network backup recovery and restore solutions. The GigaRAID Series is a family of RAID and RAID-ready disk and tape storage systems that are combined with ANDATACO's proprietary, award-winning modular packaging architecture, Enterprise Storage Packaging ("ESP"), to create complete storage solutions. The GigaRAID/HA provides high 2 4 performance and availability for database/OLTP applications characterized by small block/random data processing. Other GigaRAID Series products, including the GigaRAID/SX, offer high performance and availability for certain data warehouse, seismic processing and video applications characterized by large block, sequential processing. RAID is a method of storing data on disk/tape drives controlled either by software in the host computer or by a hardware-based controller board that either physically resides in the host computer or inside the storage system itself. In contrast, RAID-ready storage systems do not use any of the foregoing RAID storage system methodologies; rather they rely on the host system to perform the RAID functions, while maintaining the high-availability attributes required of a RAID enclosure. GigaRAID products differ from other RAID and RAID-ready systems. The primary difference is that GigaRAID incorporates the Company's ESP, which contains features that provide for (i) hot swappable disk and tape canisters; (ii) error reporting of critical components, such as temperature, power and fan health, and hard and soft disk/tape error rates, all of which can be reported through visual, audible and electronic media; (iii) the ability to support most types of older and newer generation SCSI disk/tape interfaces, such as Ultra SCSI; (iv) cableless architecture; and (v) the ability to support drives that operate at 10,000 RPMs. Another key differentiator for the GigaRAID Series is its software, Web Storage Manager (WSM). WSM was one of the first browser-based storage management software to be released on the market, and allows easy-to-use graphical user interface for both RAID-ready and RAID products. The GigaRAID Series includes GigaRAID/SA, which is a rackmount or deskside-tower single controller Ultra SCSI RAID system, and GigaRAID/HA, which is a rackmount single or dual controller Ultra SCSI RAID system. The GigaRAID Series product line also includes GigaRAID 3000, which is a desktop disk/tape based non-RAID storage system and GigaRAID 8000, which is a rackmount or deskside tower disk/tape based non-RAID storage system. The Company also markets automatic tape libraries and DLT tape technology. SALES AND MARKETING The Company distributes its internally developed products, and products from other manufacturers, through a network of 23 sales offices, and through distributors in Europe, Asia, Latin America, Canada and Australia. In the United States, the Company sells its products directly to end users through its field sales organization and indirectly through selected distributors. The Company's domestic sales organization consists of approximately 71 persons located in 23 sales offices in 12 states. The Company's sales force is supported by its Professional Services Group, a group comprised of the professional services division and technical support personnel consisting of approximately 12 system engineers who provide on-site maintenance, help desk support, contract programming, project management, and consulting services. The Professional Services Group, which was formed in late fiscal 1997, will serve an integral role in the Company's sales and marketing strategy, by providing superior customer service and technical support. During 1997, the Company transitioned its sales force from a distribution sales model to a solution-selling model. This transition was necessary in order to attain higher margin and higher volume sales. The Company recruited and hired a senior level vice president of worldwide sales to implement the solution- selling model by attracting senior sales executives with the ability to penetrate large accounts. The multi-billion dollar open systems market continues to demonstrate rapid growth in storage requirements, primarily driven by continued deployment of new client/server applications. This market is characterized by a broad mix of computing platforms that offer customers the ability to quickly develop new applications required for today's highly competitive business environment. The Company's primary market, RAID disk storage, is estimated by International Data Corporation (IDC) to account for 83% of total storage revenue, or $19 billion, currently. By the year 2000, IDC projects that 90% of all multi-user storage subsystem revenue will be RAID-based. IDC further projects that the UNIX market will grow to $12.5 billion in revenues by the year 2000, and that the Windows NT market will grow to $8.4 billion in the same year. The Company intends to continue product development based on Ultra SCSI and fibre 3 5 channel drive interfaces. IDC projects a continuing strong market for Ultra SCSI with some flattening out by 1999, and growth for fibre channel through the year 2000. ORDER BACKLOG The Company generally ships products within 30 days after receipt of a purchase order. Historically, the Company has had little backlog at any given time and does not consider backlog to be a significant or important measure of sales for any future period. As a result, net product revenue in any quarter is dependent on orders booked and products shipped during that quarter. MANUFACTURING AND SUPPLIERS Manufacture of the Company's disk drive sub-systems and tape drive systems involves the assembly of purchased electro/mechanical components, custom-made printed circuit boards fabricated in accordance with the Company's proprietary designs, storage devices, standard integrated circuits and power supplies. All products manufactured by the Company in this manner are then tested in the Company's quality assurance program. The Company has, and will continue to, rely on outside vendors to manufacture certain electronic components and subassemblies used in the production of the Company's products. Certain components, subassemblies, materials and equipment necessary for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. The Company's reliance on sole suppliers or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required products, reduced control over the price, timely delivery, reliability and quality of finished products. The Company does not have any long-term supply agreements with its suppliers. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain timely deliveries of products and services having acceptable qualities, or any other circumstance that could require the Company to seek alternative sources of supply or to manufacture its own electronic components, subassemblies and manufacturing equipment internally, could delay the Company's ability to ship its products. Any such delay could damage relationships with customers and could have a material adverse effect on the Company's business and operating results. See "Certain Risk Factors Related to the Company's Business - Dependence on Suppliers." COMPETITION The computer data storage industry is intensely competitive and is characterized by rapid technological change and constant price pressure. The Company competes with a number of companies in various markets, including EMC Corporation, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq Computer Corporation and Digital Equipment Corporation ("DEC"), each of which has substantially greater name recognition, engineering, manufacturing and marketing capabilities, and greater financial and personnel resources than the Company. The Company believes that to date no dominant leader has emerged in the high bandwidth segment of the open systems market. The Company expects to experience increased competition from established and emerging computer storage hardware and management software companies, particularly DEC, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq and EMC Corporation. 4 6 In addition, increased competitive pressure could lead to intensified priced-based competition, which could result in a decline in both sales volume and price reductions. These factors would have a material adverse effect on the Company's results of operations. There also has been, and may continue to be, a willingness on the part of certain large competitors to reduce prices in order to preserve or gain market share, which cannot be foreseen by the Company. The Company believes that pricing pressures are likely to continue as competitors develop more competitive product offerings. The principal elements of competition in the Company's markets include rapid introduction of new technology, product quality and reliability, price and performance characteristics, service and support, and responsiveness to customers. The Company believes that, in general, it competes favorably in many of these areas. However, there can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's results of operations. See "Certain Risk Factors Related to the Company's Business - Competition and Risks Associated with New Product Introductions and Rapid Technological and Market Changes." PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY The Company believes that its success in developing new products depends primarily upon the technical competence and creative skills of its personnel rather than on the ownership of copyrights or patents. Although the Company believes that its products and other proprietary rights do not infringe the proprietary rights of third parties, there can be no assurance that other third parties will not assert infringement claims against the Company or that such claims will not be successful. If any infringement exists the Company would seek, based upon industry practice, licenses to such patents, but there can be no assurance that the Company will be able to obtain any such licenses on terms which would not have a material adverse effect on its business. The Company also relies on unpatented proprietary technology, and there can be no assurance that others may not independently develop the same or similar technology or otherwise obtain access to the Company's proprietary technology. To protect its rights in these areas, the Company requires all employees to enter into confidentiality agreements. There can be no assurance that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If the Company is unable to maintain the proprietary nature of its technologies, the Company's business could be adversely affected. REGULATORY APPROVALS All of the Company's current and proposed products have to comply with and have regulatory or independent laboratory approval based on emissions and safety standards for computing equipment. Delays in complying with such standards or in obtaining any such approvals could delay introductions of new products. International sales are subject to compliance with laws of various countries, import/export restrictions and tariff regulations. While IPL is aware that it may be subject to export restrictions with respect to certain countries, it has not experienced difficulty in obtaining export licenses from the United States Department of Commerce for sales into countries where it presently sells. EMPLOYEES As of January 15, 1998, the Company employed approximately 218 full-time employees, of whom approximately 20 were employed in research and development, 110 in sales, marketing and customer support and 88 in operations and administration. None of the Company's employees is represented by a labor union or subject to a collective bargaining agreement. The Company's management believes its employee relations to be good. 5 7 Executive Officers and Key Employees The executive officers and key employees of the Company and their ages as of January 15, 1998 are as follows:
NAME AGE POSITIONS HELD Harris Ravine 55 Chief Executive Officer of the Company W. David Sykes 41 President Richard A. Hudzik 54 Vice President Finance, Chief Financial Officer, Treasurer and Clerk Peter W. Bell 32 Vice President of Worldwide Sales Anita D. Buchanan 55 Vice President of Marketing
Harris Ravine was elected Chairman of the Board and appointed Chief Executive Officer of the Company upon the consummation of the Merger. Mr. Ravine has served as Chief Executive Officer and as Chairman of the Board of Directors of ANDATACO since June 1997. From 1995 through May 1997, he was a principal in BI Capital, a private venture capital group investing in technology and medical start up opportunities. From 1985 to 1994, Mr. Ravine held senior executive positions with Storage Technology Corporation, most recently as Executive Vice President, Chief Administrative Officer and Group Officer for midrange and UNIX applications. Mr. Ravine is a member of the board of directors of Amplicon Financial, Inc., a publicly-held financial services company. W. David Sykes founded ANDATACO in November 1986 and served as its President and Chief Executive Officer until the Merger, at which time Mr. Sykes was elected Vice Chairman of the Board of Directors and appointed President of the Company. He has also served as a director of ANDATACO since November 1986. Richard A. Hudzik joined ANDATACO as Chief Financial Officer in October 1996 and was appointed Vice President - Finance, Chief Financial Officer, Treasurer and Clerk of the Company at the time of the Merger. From November 1990 through October 1996, Mr. Hudzik served as Vice President and Chief Financial Officer of Autosplice, Inc., a privately held manufacturer of printed circuit board components and related equipment. Prior to November 1990, Mr. Hudzik served in various executive capacities with certain manufacturing and high technology companies, including ITT and Johnson and Johnson. Peter W. Bell has served as Vice President of Worldwide Sales of the Company since July 1997. Prior to joining the Company, Mr. Bell was Executive Vice President of NetXchange Communications, an emerging Internet telephony software company, where he was responsible for worldwide sales and marketing. From 1986 to 1996, Mr. Bell held various management positions at EMC Corporation, including, sales, marketing and operations, and most recently, Director of the Open Systems Group for North America. Anita D. Buchanan joined the Company in 1991 as Director of Corporate Communications and Investor Relations. Ms. Buchanan was named Vice President of Marketing in October 1995. Prior to joining the Company, Ms. Buchanan was Vice President of Marketing and Software Sales for Selectrum, Inc., an IBM industry remarketer and provider of local network solutions for IBM systems. 6 8 CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS Rapid Technological and Market Changes. The market for the Company's products is characterized by rapidly changing technology and evolving customer needs which increasingly shorten the life cycles of existing products and require ongoing development and introduction of new products at an increasingly rapid rate. The Company's ability to realize its expectations will depend on its success at enhancing its current offerings, developing new products that keep pace with developments in technology and meet evolving customer requirements for performance and price, and delivering those products with appropriate customer service and support. This will require, among other things, correctly anticipating customer needs, hiring and retaining personnel with the necessary skills and creativity, and providing adequate resources for product development. Failure by the Company to anticipate or respond adequately to technological developments and customer requirements, significant delays in the development, product testing, or availability of new or enhanced products, or the failure of customers to accept such products could adversely affect the Company's technological position and operating results. Furthermore, there can be no assurance that the Company's competitors will not succeed in developing products or technologies that have superior price or performance characteristics compared to any products being offered or developed by the Company. Fluctuations in Operating Results; Recent Losses. The Company has recently experienced losses from operations and may in the future experience further losses and significant period-to-period fluctuations in operating results. The Company's revenues in any quarter are dependent on the timing of product shipments as well as the status of competing product introductions. Like many other high technology companies, a disproportionately large percentage of quarterly sales occur in the closing weeks of each quarter. Dependence on Key Personnel. The success of the Company's operations depends on its ability to attract and retain experienced technical, sales, marketing and management personnel. Such personnel are in great demand and the Company must compete for their services. Any failure to attract and retain such personnel could have a material adverse effect on the Company's ability to develop and market competitive products. Dependence on Suppliers. The Company has and will continue to rely on outside vendors to manufacture certain subsystems and electronic components and subassemblies used in the production of the Company's products. Certain components, subassemblies, materials and equipment necessary for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. The Company's reliance on sole suppliers or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required products and reduced control over the price, timely delivery, reliability and quality of finished products. The Company does not have any long-term supply agreements with its suppliers. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain timely deliveries of products and services having acceptable qualities, or any other circumstance that could require the Company to seek alternative sources of supply or to manufacture its own electronic components, subassemblies and manufacturing equipment internally, could delay the Company's ability to ship its products. Any such delay could damage relationships with customers and could have a material adverse effect on the Company's business and operating results. Quarterly Trends; New Product Introductions. The Company historically has experienced significant fluctuations in its quarterly revenues and operating results, including net income, and anticipates that these fluctuations will continue. Quarterly results have been or may in the future be influenced by the timing of announcements or introductions of new products and product upgrades by the Company or its competitors, 7 9 customer ordering patterns, and delays in product development. In addition, new products typically have a lengthy evaluation period before any purchase is made. Competition and Risks Associated with New Product Introductions. The market for the Company's products is intensely competitive. Increased competition could result not only in a decline in sales volume, but also in price reductions that could have a material adverse effect on the Company's business, operating results and financial condition. In addition, certain of the Company's suppliers are also competitors. Price reductions made by these suppliers to their customers without similar price reductions to the Company could have a material adverse effect on the Company. Stock Price Volatility. Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Shortfalls could be caused by shortfalls in revenues and/or increased levels of expenditures. Additionally, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's stock price. Control of Majority Stockholder. W. David Sykes the Company's President and Vice Chairman of the Board and his affiliates beneficially own 75.9% of the Company's outstanding Common Stock. As a result, Mr. Sykes will have the ability to control the election of all the Company's directors, to determine the outcome of most corporate actions submitted to the vote of the Company's stockholder and to generally control the affairs and management of the Company. In addition, the voting power of Mr. Sykes under certain circumstances could have the effect of delaying or preventing a change in control of the Company. Transition From Reseller Business to Manufacturing Business. Historically, the reseller business of the Company accounted for the majority of the Company's revenues. In fiscal 1997, revenue from the sale of third party non-GigaRAID products accounted for 34.6% of revenues. Such decline is attributed to the Company's strategy to focus increased resources on the design, development, manufacturing and marketing of internally developed products. There can be no assurance, however, that the Company will be successful in developing any new products. The Company's success will depend, in part, on its ability to maintain and enhance its existing products and broaden its product offerings by developing and introducing new products that keep pace with technological developments in a cost effective manner, respond to evolving customer preferences and requirements and achieve market acceptance. Lack of market acceptance for the Company's existing or new products, the Company's failure to introduce new products in a timely or cost-effective manner, or the Company's failure to achieve a technological advantage over its competition while also remaining price competitive, would materially adversely affect the Company's results of operations and financial condition. There can be no assurance that the Company will be successful in its product development efforts. In addition, there can be no assurance that the Company's products, even if successfully developed, will achieve timely market acceptance. Moreover, the introduction of products embodying new technology and the emergence of new industry standards could render the Company's existing products obsolete and unmarketable. The Company's future success will depend on its ability to continue to develop and manufacture new competitive products and to enhance its existing products, both of which will require continued investment in engineering and product development. The success of product enhancements and new products depends on a variety of factors, including product selection and specification, timely and efficient completion of product design, cost effective implementation of manufacturing and assembly processes and effective sales and marketing efforts. There can be no assurance that the Company will be able to successfully manage all of the diverse aspects of successful new product development in order to develop and maintain competitive products. ITEM 2. PROPERTIES The Company's principal administrative, marketing and sales activities are located in approximately 42,400 square feet of facilities in San Diego, California leased from an entity owned by the president and principal shareholder of the Company. The space is occupied under a lease agreement that expires in March 2003. The Company also leases approximately 24,400 square feet of office and manufacturing space located in Maynard, Massachusetts, primarily for research and development activities, for a term extending through March 31, 1998. See Note 9 of the Notes to Consolidated Financial Statements for information regarding the Company's obligations under its facilities leases. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which the Company is a party, other than routine litigation incidental to its business, which, in the opinion of its management, is unlikely to have a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the quarter ended October 31, 1997. 8 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq SmallCap Market under the symbol IPLS. The following table reflects, for the period indicated, the high and low sales prices for the Common Stock as reported by Nasdaq.
Price ----- Year High Low - ---- ---- --- 1997 First Quarter $2.125 $1.3375 Second Quarter 2.625 1.4175 Third Quarter 1.75 0.9375 Fourth Quarter 2.75 1.3125 1996 First Quarter 5.875 2.50 Second Quarter 8.25 3.50 Third Quarter 4.25 1.875 Fourth Quarter 2.50 1.25
On January 15, 1998, the last sale price of the Company's Common Stock was $1.625, and there were approximately 273 record holders and more than 2,565 beneficial holders of the Company's Common Stock. The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings to finance the growth and development of its business. Recent Sales of Unregistered Securities During fiscal 1997, the Company has sold and issued the following securities which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). (1) On June 3, 1997, the date the Merger was consummated, the Company issued 92,199 shares of Common Stock to Richard A. Hudzik pursuant to the terms of an offer letter entered into between ANDATACO and Mr. Hudzik. (2) On October 31, 1997, the Company issued 15,000 shares of Common Stock to Thomas Linnell pursuant to the terms of an employment agreement. The issuance of the Common Stock described in paragraphs (1) and (2) above were deemed to be exempt from registration under the Securities Act of 1933, as amended ("Securities Act") by virtue of section 4(2) and/or Regulation D promulgated thereunder and by virtue of Rule 701 promulgated thereunder in that the shares were issued pursuant to written contracts relating to compensation, as provided by Rule 701. ITEM 6. SELECTED FINANCIAL DATA. The following financial data, insofar as it relates to each of the fiscal years 1993 through 1997, have been derived from audited consolidated financial statements and notes thereto. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and related notes thereto set forth at the pages indicated in Item 14(a)(1). 9 11
Year Ended October 31, ------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands, except for per share amounts) Sales $93,259 $99,733 $ 100,048 $83,559 $71,703 Operating (loss) income (5,098) 811 2,838 181 520 Net (loss) income (6,209) 39 2,106 (202) 45 Net (loss) income per share (0.30) 0.00 0.12 (0.01) 0.00 Shares used to compute per share data 20,464 18,168 18,184 18,078 18,078 Working capital $ 5,169 $ 8,932 $ 3,639 $ 2,069 $ 2,104 Total assets 29,989 23,667 26,481 18,285 19,948 Shareholders' equity (deficit) 4,736 (798) 2,118 12 214
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion contained herein as well as elsewhere in this report contains forward-looking statements based on the current expectations of the Company's management. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include but are not limited to fluctuations in the Company's operating results, continued new product introductions by the Company, market acceptance of the Company's new product introductions, new product introductions by competitors, technological changes in the computer storage industry and other factors referred to herein including but not limited to the factors discussed under the caption "Certain Risk Factors Related to the Company's Business." Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW IPL designs, manufactures, and distributes storage solutions based on its ASA for Windows NT and UNIX environments. The Company's open-architecture solutions include RAID and RAID-ready disk arrays; tape backup and restore products; and storage management, data sharing, remote mirroring and disaster recovery software. The Company distributes internally developed products, as well as products from other manufacturers, through direct, indirect and OEM sales and service channels throughout the world. The Company's key markets, NT and UNIX storage, are expected to continue their rapid growth. IPL's recently announced ASA is driving all of the Company's product development efforts, from additions to the GigaRAID Series to the development of new software. The Company strives to meet its customers' storage and information management needs by providing the market with comprehensive, performance-oriented and flexible storage solutions. Recognizing that applications have unique data patterns, the Company developed a design process that matches its storage solution systems to these individual patterns. The Company's products include the GigaRAID Series of advanced disk arrays, RAID-ready disk arrays, disk and tape library systems, and data management software consisting of distributed network backup recovery and restore solutions. The GigaRAID Series is a family of RAID and RAID-ready disk and tape storage systems that are combined with ANDATACO's proprietary, award-winning modular packaging architecture, ESP, to create complete storage solutions. Historically, the reseller business or the sale of third party non-GigaRAID products accounted for the majority of the Company's revenues, representing 100% of revenues in fiscal 1995 and declining to 37.2% and 34.6% in fiscal 1996 and 1997, respectively. Although the Company plans to continue to sell third 10 12 party products, management's strategy is to focus increased resources on the design, development, manufacturing and marketing of internally developed and GigaRAID products. Effective June 3, 1997, the Company consummated the Merger with ANDATACO. Under the terms of the merger agreement, the shareholders of ANDATACO were issued a total of 18,078,381 shares of IPL Common Stock in exchange for all outstanding shares of capital stock of ANDATACO. The combination with ANDATACO has allowed the Company to achieve several strategic objectives, including acquiring ANDATACO's customer base, increasing the Company's revenues, realizing certain cost savings and adding ANDATACO's skilled and experienced personnel. The Merger was accounted for using the purchase method. Accordingly, the purchase price was allocated to the estimated fair market value of identifiable tangible and intangible assets acquired and liabilities assumed. Based upon an independent valuation, the Company allocated $2,400,000 to acquired in-process research and development for which there is no future alternative use and $400,000 to existing proprietary technology for which technological feasibility had been established. As required by generally accepted accounting principles, the amount allocated to in-process technology was recorded as a one-time charge to operations and the amount allocated to existing technology was amortized over its estimated remaining economic life. The excess of the purchase price over the identifiable net assets acquired of $8,362,000 was recorded as goodwill and is being amortized on a straight line basis over its estimated useful life of five years. Included in the results of operations for fiscal 1997 are certain Merger-related costs, including $2,400,000 for acquired in-process research and development; $400,000 of amortization expense for existing purchased technology and $697,000 for goodwill amortization. The Company's cash position at October 31, 1997 was impacted by one-time transaction costs related to the Merger for both IPL and ANDATACO of approximately $912,000. In addition, the Merger impacted the Company's performance as the time required to affect the integration of operations and administration, and the restructuring of its combined sales and service organization, diverted personnel and management resources from day to day operating activities to the one-time activities required for the Merger. As part of the Company's plans to reshape and position the Company for a return to profitability, the Company incurred an increase in its selling, general and administrative ("SG&A") costs in fiscal 1997 in order to develop its sales organization and its overall infrastructure. In late 1997 the Company announced the creation of the Professional Services Group. The Professional Services Group provides customized service programs for customers including on-site maintenance, help desk support, contract programming, project management, and consulting. This new element of the Company's business required an initial investment in 1997 for key management, technical and support personnel. The following discussion should be read in conjunction with the consolidated financial statements included elsewhere within this Annual Report. Fluctuations in annual and quarterly results may occur as a result of factors affecting demand for the Company's products such as the timing of the Company's and competitors' new product introductions and upgrades. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period. 11 13 RESULTS OF OPERATIONS The following table sets forth for the Company's results of operations and the percentage relationship of certain items to sales during the periods shown:
Year ended October 31, ---------------------- 1997 1996 1995 ---- ---- ---- Sales 100.0% 100.0% 100.0% Cost of sales 76.9 80.6 79.0 ---- ----- ---- Gross profit 23.1 19.4 21.0 ---- ----- ---- Operating expenses: Selling, general and administrative 24.3 17.4 17.9 Rent expense to shareholder 0.3 0.3 0.3 Purchased research and development 2.6 - - Research and development 1.4 0.9 - --- ----- ---- Total operating expenses 28.6 18.6 18.2 ---- ----- ---- (Loss) income from operations (5.5) 0.8 2.8 Other expense, net (1.2) (0.8) (0.7) ---- ----- ---- Net (loss) income (6.7)% 0.0% 2.1% ==== ===== ====
The following table sets forth the Company's product mix as a percentage of sales during the periods shown:
Year ended October 31, ---------------------------------------- 1997 1996 1995 ---- ---- ---- GigaRAID Product Family: GigaRAID/SA/HA 15.0% 0.5% - GigaRAID FT 13.8 9.6 - GigaRAID 3000/8000 20.0 5.0 - ---- ----- ----- 48.8 15.1 - ---- ----- ----- Non-GigaRAID Mass Storage Products: Rapid Tape 1.1 1.9 - RAID Lite 1.4 11.8 - RAID-ready Disk Arrays 4.9 20.9 - Tape Library Systems 9.2 13.1 - ---- ----- ----- 16.6 47.7 - ---- ----- ----- Non-GigaRAID Distribution Product: ATL 3.3 2.3 - Other 31.3 34.9 100.0% ---- ----- ----- 34.6 37.2 100.0 ---- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
Revenues in fiscal 1997 were $93,259,000 compared with $99,733,000 in fiscal 1996. The 6.5% decrease in revenue is primarily attributable to a decrease of $32,127,000 in sales of non-GigaRAID mass storage 12 14 products including RAID Lite and RAPID-Tape products and a decrease of $4,760,000 in sales of non-GigaRAID distribution products. This decrease was partially offset by a $27,112,000 increase in sales of internally developed GigaRAID products and a $3,300,000 increase in distribution of GigaRAID products. The decrease in non-GigaRAID distribution product sales in fiscal 1997 compared to fiscal 1996 is consistent with the Company's strategy to focus its sales organization on internally designed products capable of producing higher margins. Although the Company plans to continue to sell third-party non-GigaRAID products, management's strategy is to focus increased resources on the design, development, manufacturing and marketing of internally developed products. The decrease in revenues was further impacted by the Merger. The time required of management to affect the integration of operations and administration, and the restructuring of the combined sales and service organization, diverted personnel and management resources from day to day operating activities. In fiscal 1996, the Company's revenues remained relatively flat at $99,733,000 compared to $100,048,000 in fiscal 1995. Notwithstanding the decline in revenues, gross profit in fiscal 1997 was $21,577,000, representing approximately 23.1% of revenues, compared to $19,358,000 in fiscal 1996, representing 19.4% of revenues. This increase in gross profit was primarily attributable to increased revenues from higher margin internally designed and integrated GigaRAID products as a percentage of total revenues in fiscal 1997 as compared to fiscal 1996. In addition, there was a reduction in costs of certain components used to manufacture products in fiscal 1997 compared to fiscal 1996. Gross margins decreased slightly to 19.4% in fiscal 1996 compared with 21.0% in fiscal 1995. SG&A expenses increased $5,322,000, or 30.8%, to $22,620,000 in fiscal 1997 as compared with $17,298,000 in fiscal 1996. SG&A consists primarily of salaries, commissions and employee benefits, as well as consulting, advertising, promotion and certain merger related expenses. In fiscal 1997, the Company had an additional $2,133,000 of SG&A related to the Merger between ANDATACO and IPL, including $1,036,000 representing the portion of IPL expenses not eliminated as a result of the Merger in order to effect the integration, goodwill amortization of $697,000, and $400,000 of amortization of existing purchased technology related to the Merger. Before the impact of these charges in fiscal 1997, SG&A expenses increased $3,189,000, or 18.4%. This increase is primarily due to costs associated with the development of the Company's sales organization and overall infrastructure including the addition of sales and support personnel; the focus of its sales organization on internally designed and other GigaRAID products capable of producing higher margins; the development of alternative distribution channels; and the addition of key management, service and engineering personnel. SG&A expenses decreased approximately $506,000, or 2.8%, to $17,298,000 in fiscal 1996 from $17,804,000 in fiscal 1995. Fiscal 1995 SG&A expenses included a $1,000,000 bonus paid to the Company's principal stockholder. No such bonus was paid in fiscal 1996. The decrease was partially offset by costs associated with additional sales and support personnel and related overhead costs. Research and development increased $406,000, or 44.2%, in fiscal 1997 to $1,325,000 from $919,000 as compared with fiscal 1996. Such expenses consist primarily of salaries, employee benefits, overhead and outside contractors. The increase in product development costs in fiscal 1997 over fiscal 1996 was primarily due to an increase in personnel and related expenses resulting from the Merger, including additional costs incurred to further develop the acquired in-process research and development. This is in line with the Company's strategy to continue to focus increased resources on design and development of products and differentiating technologies for which it believes there is a need in the market. However, there can be no assurance that product development programs invested in by the Company will be successful or that products resulting from such programs will achieve market acceptance. 13 15 Research and development expense was $919,000 in fiscal 1996 as compared to $0 in fiscal 1995. The increase in development costs in fiscal 1996 over fiscal 1995 was due to the establishment of research and development efforts in fiscal year 1996 by the Company. New products developed include ANDATACO's ESP product line. The acquisition of IPL by ANDATACO was accounted for using the purchase method. Accordingly, the purchase price was allocated to the estimated fair market value of identifiable tangible and intangible assets acquired and liabilities assumed. Based upon an independent valuation, the Company allocated $2,400,000 to acquired in-process research and development for which there is no future alternative use and $400,000 to existing proprietary technology for which technological feasibility had been established. As required by generally accepted accounting principles, the amount allocated to in-process technology was recorded as a one-time charge to operations and the amount allocated to existing technology was amortized over its estimated remaining economic life. The in-process research and development purchased in the acquisition generally relates to the next generation of Database RAID Architecture which merges IPL's Advanced Controller Technology with ANDATACO's ESP. The research and development costs incurred after the Merger were largely incurred to merge the IPL Advanced Controller Technology with the ANDATACO packaging technology, resulting in the initial beta shipment of the GigaRAID/HA in July 1997 and general availability in September 1997. The post-merger effort in developing this technology represented 33% of the product development cycle, or a two month period of a total six month product development period. Interest expense increased $178,000, or 37.7%, to $650,000 in fiscal 1997 from $472,000 in fiscal 1996. The increase is primarily a result of an increase in bank borrowings throughout the year and an increase in the Company's effective borrowing rate in fiscal 1997 as compared to fiscal 1996. Interest expense on the shareholder loan increased $160,000, or 53.2%, to $461,000 in fiscal 1997 from $301,000 in fiscal 1996. The increase is the result of an increase in the shareholder loan balance. Interest expense increased $60,000, or 14.6%, to $472,000 in fiscal 1996 from $412,000 in fiscal 1995. The increase is primarily a result of increased bank borrowings in fiscal 1996 as compared to fiscal 1995. In 1997 the Company had a net loss of $6,209,000, or $ 0.30 per share, compared with 1996 net income of $39,000, or $0.00 per share. In 1996 the Company had net income of $39,000, or $0.00 per share, compared with 1995 net income of $2,106,000, or $0.12 per share. QUARTERLY TRENDS The Company historically has experienced significant fluctuations in its revenues and operating results, including net income, and anticipates that these fluctuations will continue. The Company operates with relatively little backlog of its products, and the majority of its revenues each quarter result from orders received in that quarter. Consequently, if near-term demand for the Company's products weakens in a given quarter or if inventory of the Company's products in the distribution channel satisfies near-term demand, the Company's operating results for that quarter would be adversely affected. In addition, when the Company announces enhanced versions of its products, the announcement may have the effect of slowing sales of the current version of the product as buyers delay their purchase. Quarterly results have been or may in the future be influenced by the timing of announcements or introductions of new products and product upgrades by the Company or its competitors, distributor ordering patterns, delays in product development, and licensing of the Company's products and core technology. In addition, new products typically have a lengthy evaluation period before any purchase is made. 14 16 STOCK PRICE VOLATILITY Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Shortfalls could be caused by shortfalls in revenues, timing of the receipt of technology license fees, and/or increased levels of expenditures. Additionally, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's stock price. LIQUIDITY AND CAPITAL RESOURCES The Company's cash as of October 31, 1997 was $41,000 compared with $765,000 at October 31, 1996. The decrease in cash is primarily attributable to net cash used in financing activities for payments on notes payable and a net reduction in the bank line of credit of $449,000 in fiscal 1997, and expenditures made in the normal course of business. (The changes in assets and liabilities summarized in the statement of cash flows reflect decreases and increases resulting from the operating activities of the Company and do not include the increases in assets and liabilities resulting from the Merger). The Company acquired approximately $1,154,000 of cash in the Merger. The Company's cash position at October 31, 1997 was impacted by one-time transaction costs related to the Merger for IPL of $434,000 and for ANDATACO of approximately $478,000. The IPL transaction costs were accrued and expensed prior to the Merger date and the ANDATACO transaction costs were capitalized as part of the purchase price. Accounts receivable decreased 16.4% from $12,980,000 at October 31, 1996 to $10,846,000 at October 31, 1997, primarily as a result of the decrease in revenue. As a result, working capital decreased by $3,763,000 to $5,169,000 at October 31, 1997 from that of the prior year. The Company expects to be able to satisfy all working capital and capital expenditure requirements through internally generated cash flows from operations, and borrowings available on its credit facility. Management believes that its financial position and available borrowings on its credit facility will be sufficient to meet the operating requirements of its business for a period of at least twelve months. SELECTED QUARTERLY FINANCIAL DATA (In thousands, except per share data) The following table presents selected quarterly financial information for the periods indicated. This information has been derived from unaudited consolidated financial statements which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information. These operating results are not necessarily indicative of results for any future period.
Jan. 31, April 30, July 31, Oct. 31, Fiscal 1997 1997 1997 1997 1997 --------- --------- --------- ------ Sales $ 25,497 $ 21,540 $ 22,057 $ 24,165 Gross profit 5,992 4,587 4,906 6,092 Income (loss) from operations 235 (111) (3,896) (1,326) Net loss (110) (339) (4,169) (1,591) Net loss per share (0.01) (0.02) (0.19) (0.07)
15 17
Jan. 31, April 30, July 31, Oct. 31, Fiscal 1996 1996 1996 1996 1996 --------- --------- --------- ------ Sales $ 25,551 $ 20,385 $ 26,026 $ 27,771 Gross profit 4,650 3,641 4,968 6,099 (Loss) income from operations (218) (1,249) 675 1,603 Net (loss) income (404) (1,426) 469 1,400 Net (loss) income per share (0.02) (0.08) 0.03 0.07
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements and supplementary data required by this item are set forth in the pages indicated in Item 14(a)(1). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ON FINANCIAL DISCLOSURE Prior to the Merger, Deloitte & Touche LLP ("Deloitte & Touche") had served as the Company's independent accountants, and Price Waterhouse LLP ("Price Waterhouse") had served as ANDATACO's independent accountants. Price Waterhouse, as independent accountants for ANDATACO, was consulted by ANDATACO's management on the proposed accounting for the Merger. The new management of the Company following the Merger determined to engage Price Waterhouse as the Company's independent accountants after completion of the Merger and so notified Deloitte & Touche. On June 10, 1997, the Company's Board of Directors ratified management's decision to engage Price Waterhouse as the Company's independent accountants for the fiscal year ending October 31, 1997. The reports of Deloitte & Touche for the two fiscal years ended December 31, 1995 and 1996 do not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles, financial statement disclosure or practice, except that the report for the year ended December 31, 1996 included an explanatory paragraph relating to an uncertainty regarding the ability of the Company (prior to the Merger) to continue as a going concern. Moreover, during such two fiscal years and any subsequent interim period preceding the date of the Company's change in accountants, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche would have caused Deloitte & Touche to make reference to the subject matter of the disagreement in connection with their report. The Company has furnished a copy of the disclosure contained in this item to Deloitte & Touche requesting such firm to respond as to whether it agrees with the information set forth herein relating to such firm. Deloitte & Touche has responded that it agrees with the statements made herein with respect to such firm. 16 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the section entitled "Executive Officers" in Part I Item 1 hereof for information regarding executive officers. The information required by this item with respect to directors is incorporated by reference from the information under the caption "Election of Directors" contained in the Company's Definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A in connection with the solicitation of proxies for the Company's 1998 Annual Meeting of Stockholders to be held on April 8, 1998 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information appearing under the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information appearing under the caption "Certain Transactions" of the Proxy Statement and Note 10 of the Notes to Consolidated Financial Statements contained elsewhere in this report. 17 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page Number ----------- (a)(1) Index to Consolidated Financial Statements: The financial statements required by this item are contained in a separate section beginning on page F-1 of this Annual Report on Form 10-K. Report of Independent Accountants............................................... F-1 Consolidated Balance Sheet as of October 31, 1997 and 1996...................... F-2 Consolidated Statement of Operations for the Years Ended October 31, 1997, 1996 and 1995.......................................... F-3 Consolidated Statement of Cash Flows for the Years Ended October 31, 1997, 1996 and 1995.......................................... F-4 Consolidated Statement of Shareholders' Equity (Deficit) For the Years Ended October 31,1997, 1996, and 1995............................ F-5 Notes to Consolidated Financial Statements...................................... F-6 (a)(2) Index to Financial Statement Schedules: The financial statement schedules required by this item are submitted in a separate section beginning on page S-1 of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements. Schedule VIII -- Valuation and Qualifying Accounts S-1 All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto appearing elsewhere in this Annual Report on Form 10-K. (a)(3) Index to Exhibits:
Exhibit Number Description of Document ------ ----------------------- 2.1 Agreement and Plan of Merger and Reorganization dated as of February 28, 1997, by and among the Company, IPL Acquisition Corp., ANDATACO and W. David Sykes, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated as of February 28, 1997 and incorporated herein by reference. 3.1 Restated Articles of Organization dated March 24, 1981, and Articles of Amendment, dated May 12, 1981, and July 8, 1992, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K"), and incorporated herein by reference.
18 20 3.2 By-Laws, as amended, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (Commission File No. 0-10370) and incorporated herein by reference. 10.1 Stockholder Agreement dated as of April 25, 1980, as amended, filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 2-71414) "1981 Registration Statement") and incorporated herein by reference. 10.2 Second Amendment to Stockholder Agreement dated as of May 24, 1989, filed as Exhibit 10.3. to the Company's Registration Statement on Form S-1 (File No. 33-40454) (the "1991 Registration Statement") and incorporated herein by reference. 10.3 Form of Indemnification Agreement, filed as Exhibit 10.8 to the Company's 1991 Registration Statement and incorporated herein by reference. 10.4 Lease dated August 20, 1992 between the Company and Maynard Industrial Park Associates, filed as Exhibit 10.2 to the 1992 Form 10-K and incorporated herein by reference. 10.5 1993 Director Stock Option Plan, filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 Form 10-K") and incorporated herein by reference. 10.6 Form of Executive Severance Agreement, filed as Exhibit 10.13 to the 1993 Form 10-K and incorporated herein by reference. 10.7 1991/1993 Consolidated Equity Incentive Plan, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (the "1994 Form 10-K") and incorporated herein by reference. 10.8 Consulting Agreement dated as of January 1, 1995 between the Company and Firecracker Technology Corp., filed as Exhibit 10.8 to the 1994 Form 10-K and incorporated herein by reference. 10.9 Employment Agreement with Ronald J. Gellert dated as of December 4, 1995 between the Company and Ronald J. Gellert, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 Form 10-K") and incorporated herein by reference. 10.10 Stock Option Agreement dated as of December 4, 1995 between the Company and Ronald J. Gellert, filed as Exhibit 10.10 to the 1995 Form 10-K and incorporated herein by reference. 10.11 1996 Consolidated Equity Incentive Plan, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K") and incorporated herein by reference. 10.12 Consulting Agreement dated as of October 1, 1996 between the Company and Cornelius P. McMullan, filed as Exhibit 10.12 to the 1996 Form 10-K and incorporated herein by reference. 10.13 Consulting Agreement dated as of October 1, 1996 between the Company and Harris Ravine, filed as Exhibit 10.13 to the 1996 Form 10-K and incorporated herein by reference. 10.14 Consulting Agreement dated as of January 1, 1997 between the Company and BI Capital, Ltd., filed as Exhibit 10.14 to the 1996 Form 10-K and incorporated herein by reference.
19 21 10.15 Consulting Agreement dated as of March 1, 1997 between the Company and Harris Ravine, filed as Exhibit 10.15 to the 1996 Form 10-K and incorporated herein by reference. 10.16 OEM Agreement dated as of February 25, 1997 between the Company and ANDATACO, filed as Exhibit 10.16 to the 1996 Form 10-K and incorporated herein by reference. 10.17 Lease Agreement dated as of January 1, 1993 and Addendum dated as of October 1, 1994, between the Company and Syko Properties, Inc. 10.18 Line of Credit Agreement dated as of December 1, 1997 and Addendum dated as of December 15, 1997 between Imperial Savings Bank and the Company. 10.19 Employment Agreement dated as of May 1, 1997 between ANDATACO and Harris Ravine. 10.20 Employment Agreement dated as of May 1, 1997 between ANDATACO and W. David Sykes. 10.21 Noncompetition Agreement dated as of June 3, 1997 between ANDATACO and W. David Sykes. 10.22 Letter Agreement regarding employment terms dated September 20, 1996 between the Company and Richard A. Hudzik. 10.23 Compensation Agreement dated as of July 8, 1997 between the Company and Peter W. Bell, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997 and incorporated herein by reference. 10.24 Promissory Note dated February 10, 1997, between the Company and W. David Sykes. 11.1 Computation of Net Income per Common Share. 21.1 List of subsidiaries. 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 27.1 Financial Data Schedule
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Exhibits 10.3, 10.5 through 10.15 and 10.19 through 10.23 to this Form 10-K are management contracts or compensatory plan arrangements. REPORTS ON FORM 8-K There were no reports on Form 8-K filed for the quarter ended October 31, 1997. 20 22 SIGNATURES Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange Act of 1934, IPL Systems, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City and County of San Diego, State of California on the 28th day of January, 1998. IPL SYSTEMS, INC. By: /s/ Harris Ravine ----------------------------- Harris Ravine Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harris Ravine and W. David Sykes, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their of his substitute or substituted, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Harris Ravine Chief Executive Officer January 28, 1998 - ------------------------------- and Director (Principal Harris Ravine Executive Officer) /s/ W. David Sykes President and Chairman January 28, 1998 - ------------------------------- of the Board and Director W. David Sykes /s/Richard A. Hudzik Vice President - Finance, January 28, 1998 - ------------------------------- Chief Financial Officer, Treasurer Richard A. Hudzik and Clerk (Principal Financial and Accounting Officer) /s/ Cornelius P. McMullan Director January 28, 1998 - ------------------------------- Cornelius P. McMullan /s/ Melville Straus Director January 28, 1998 - ------------------------------- Melville Straus
21 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of IPL Systems, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) of this Form 10-K present fairly, in all material respects, the financial position of IPL Systems, Inc. and its subsidiaries at October 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP San Diego, California December 12, 1997 F-1 24 IPL SYSTEMS, INC. CONSOLIDATED BALANCE SHEET
OCTOBER 31, -------------------------------- 1997 1996 ------------ ------------ ASSETS Current assets: Cash $ 41,000 $ 765,000 Accounts receivable, net 10,846,000 12,980,000 Inventories 7,458,000 7,149,000 Other current assets 353,000 214,000 ------------ ------------ Total current assets 18,698,000 21,108,000 Goodwill, net 7,665,000 -- Property and equipment, net 3,599,000 2,463,000 Other assets 27,000 96,000 ------------ ------------ $ 29,989,000 $ 23,667,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 7,660,000 $ 10,053,000 Accrued expenses 4,202,000 1,559,000 Deferred revenue 1,554,000 400,000 Current portion of notes payable 113,000 164,000 ------------ ------------ Total current liabilities 13,529,000 12,176,000 ------------ ------------ Bank line of credit 6,500,000 7,053,000 Bonuses payable -- 167,000 Notes payable, less current portion 28,000 142,000 Shareholder loan 5,196,000 4,927,000 ------------ ------------ Total long-term liabilities 11,724,000 12,289,000 ------------ ------------ Commitments and contingencies (Note 9) Shareholders' equity (deficit): Common stock, $0.01 par value; 30,000,000 shares authorized; 23,819,399 shares issued and outstanding 238,000 2,000 Additional paid in capital 10,107,000 -- Accumulated deficit (5,609,000) (800,000) ------------ ------------ Total shareholders' equity (deficit) 4,736,000 (798,000) ------------ ------------ $ 29,989,000 $ 23,667,000 ============ ============
See accompanying notes to consolidated financial statements. F-2 25 IPL SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, ------------------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Sales $ 93,259,000 $ 99,733,000 $ 100,048,000 Cost of sales 71,682,000 80,375,000 79,076,000 ------------- ------------- ------------- Gross profit 21,577,000 19,358,000 20,972,000 Operating expenses: Selling, general and administrative 22,620,000 17,298,000 17,804,000 Rent expense to shareholder 330,000 330,000 330,000 Purchased research and development 2,400,000 -- -- Research and development 1,325,000 919,000 -- ------------- ------------- ------------- 26,675,000 18,547,000 18,134,000 ------------- ------------- ------------- (Loss) income from operations (5,098,000) 811,000 2,838,000 Other income (expense): Interest income -- 1,000 8,000 Interest expense (650,000) (472,000) (412,000) Interest expense to shareholder (461,000) (301,000) (298,000) ------------- ------------- ------------- (1,111,000) (772,000) (702,000) ------------- ------------- ------------- (Loss) income before provision for taxes (6,209,000) 39,000 2,136,000 Provision for income taxes -- -- 30,000 ------------- ------------- ------------- Net (loss) income $ (6,209,000) $ 39,000 $ 2,106,000 ============= ============= ============= Net (loss) income per share $ (0.30) $ 0.00 $ 0.12 ============= ============= ============= Shares used in computing net (loss) income per share 20,464,000 18,168,000 18,184,000 ============= ============= ============= Unaudited Pro forma data: Loss (income) before pro forma provision for income taxes $ (6,209,000) $ 39,000 $ 2,106,000 Pro forma provision for income taxes 78,000 16,000 863,000 ------------- ------------- ------------- Net (loss) income after pro forma provision for income taxes $ (6,287,000) $ 23,000 $ 1,243,000 ============= ============= ============= Pro forma net (loss) income per share $ (0.31) $ 0.00 $ 0.07 ============= ============= =============
See accompanying notes to consolidated financial statements. F-3 26 IPL SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, ---------------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net (loss) income $ (6,209,000) $ 39,000 $ 2,106,000 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,335,000 446,000 440,000 Amortization of goodwill 697,000 -- -- Purchased research and development 2,400,000 -- -- Stock compensation 137,000 -- -- Changes in assets and liabilities, net of Merger transaction (Note 2): Accounts receivable 3,149,000 492,000 (2,318,000) Inventories 192,000 3,176,000 (5,302,000) Other assets 73,000 (70,000) (41,000) Accounts payable (3,525,000) (4,866,000) 6,055,000 Accrued expenses 328,000 (569,000) 404,000 Deferred revenue 1,154,000 74,000 (55,000) ------------ ------------ ------------ Net cash (used in) provided by operating activities (269,000) (1,278,000) 1,289,000 ------------ ------------ ------------ Cash flows from investing activities: Cash acquired in Merger transaction (net of cash expended of $478,000) (Note 2) 676,000 -- -- Payments for purchases of property and equipment (682,000) (770,000) (680,000) ------------ ------------ ------------ Net cash used in investing activities (6,000) (770,000) (680,000) ------------ ------------ ------------ Cash flows from financing activities: (Payments) proceeds under bank line of credit agreement, net (553,000) 4,508,000 (990,000) Dividends paid -- (2,955,000) -- Proceeds from shareholder loan 269,000 2,000,000 555,000 Payments on shareholder loan -- (758,000) (120,000) Borrowings under notes payable -- -- 450,000 Payments on notes payable (165,000) (287,000) (209,000) ------------ ------------ ------------ Net cash (used in) provided by financing activities (449,000) 2,508,000 (314,000) ------------ ------------ ------------ Net (decrease) increase in cash (724,000) 460,000 295,000 Cash at beginning of year 765,000 305,000 10,000 ------------ ------------ ------------ Cash at end of year $ 41,000 $ 765,000 $ 305,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 1,127,000 $ 812,000 $ 898,000 ============ ============ ============ Cash paid for income taxes $ -- $ 27,000 $ 3,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Issuance of stock in Merger transaction (Note 2) $ 11,606,000 $ -- $ -- ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 27 IPL SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL COMMON STOCK PAID IN ACCUMULATED SHARES AMOUNT CAPITAL EARNINGS (DEFICIT) TOTAL ------------ ------------ ------------ ------------------ -------------- Balance at October 31, 1994 10,000 $ 2,000 $ 10,000 $ 12,000 Net income 2,106,000 2,106,000 ------------ ------------ ------------ ------------ ------------- Balance at October 31, 1995 10,000 2,000 2,116,000 2,118,000 Dividends paid (2,955,000) (2,955,000) Net income 39,000 39,000 ------------ ------------ ------------ ------------ ------------- Balance at October 31, 1996 10,000 2,000 (800,000) (798,000) Recapitalization of ANDATACO as a result of Merger with IPL Systems, Inc. (10,000) (2,000) $ 2,000 -- (Note 2) Elimination of S Corporation deficit against additional paid in capital at date of Merger (Note 2) (1,400,000) 1,400,000 -- IPL common stock outstanding immediately before Merger 5,633,819 56,000 (56,000) -- (Note 2) Issuance of IPL common stock in Merger (Note 2) 18,078,381 181,000 11,425,000 11,606,000 Issuance of common stock for compensation 107,199 1,000 136,000 137,000 Net loss (6,209,000) (6,209,000) ------------ ------------ ------------ ------------ ------------- Balance at October 31, 1997 23,819,399 $ 238,000 $ 10,107,000 $ (5,609,000) $ 4,736,000 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 28 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY IPL Systems, Inc. (the "Company" or "IPL"), founded in 1973, designs, manufactures, and distributes storage solutions based on its Application Specific Architecture for Windows NT and UNIX environments. The Company's products include RAID (Redundant Array of Independent Disks) and RAID-ready disk arrays; tape backup and restore products; and storage management, data sharing, remote mirroring and disaster recovery software. The Company supplies its products through direct, indirect and original equipment manufacturer sales and service channels throughout the world. The Company's president and principal shareholder and his affiliates beneficially own 75.9% of the Company's outstanding common stock. NOTE 2 - BUSINESS COMBINATION On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. completed a business combination with ANDATACO, whereby ANDATACO was merged with a wholly-owned subsidiary of IPL (the "Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO were issued a total of 18,078,381 shares of IPL Class A Common Stock in exchange for all outstanding shares of capital stock of ANDATACO. Although as a legal matter the Merger resulted in ANDATACO becoming a wholly-owned subsidiary of IPL, for financial reporting purposes the Merger was treated as a recapitalization of ANDATACO and an acquisition of IPL by ANDATACO (reverse acquisition). The financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by IPL subsequent to the Merger be those of ANDATACO, which include the results of operations of IPL from the Closing Date. The acquisition of IPL by ANDATACO was accounted for using the purchase method. Accordingly, the purchase price was allocated to the estimated fair market value of identifiable tangible and intangible assets acquired and liabilities assumed. Based upon an independent valuation, the Company allocated $2,400,000 to acquired in-process research and development for which there is no future alternative use and $400,000 to existing proprietary technology for which technological feasibility had been established. As required by generally accepted accounting principles, the amount allocated to in-process technology was recorded as a one-time charge to operations and the amount allocated to existing technology was amortized over its estimated useful life. The excess of the purchase price over the identifiable net assets acquired of $8,362,000 was recorded as goodwill and is being amortized on a straight-line basis over its estimated useful life of five years. The following table sets forth the allocation of the purchase price to the estimated fair value of identifiable tangible and intangible assets acquired and liabilities assumed: Purchase Price: Fair Value of IPL stock of 5,633,819 shares outstanding immediately before the Merger $ 11,606,000 Transaction costs 478,000 ------------- 12,084,000 ------------- Allocation of Purchase Price to Identifiable Net Assets: Tangible assets 4,203,000 Assumed liabilities (3,281,000) In-process research and development 2,400,000 Intangible asset 400,000 ------------- 3,722,000 ------------- Excess of Purchase Price Over Identifiable Net Assets $ 8,362,000 =============
F-6 29 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Historically, IPL had a December 31 fiscal year end. In June 1997, IPL changed its fiscal year end from December 31 to October 31. ANDATACO has an October 31 year end. Because of the requirement to account for the Merger as a reverse acquisition, the financial information contained in this report is that of ANDATACO, which includes the results of operations of IPL for the five months ended October 31, 1997. The following are unaudited pro forma results of operations as if the transaction had been consummated at the beginning of fiscal years ended October 31, 1997 and 1996:
YEAR ENDED OCTOBER 31, 1997 1996 (UNAUDITED) (UNAUDITED) --------------- --------------- Sales $ 97,507,000 $ 119,860,000 =============== =============== Net loss $ (12,500,000) $ (1,693,000) =============== =============== Net loss per share $ (0.53) $ (0.07) =============== ===============
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The financial statements as of and for the year ended October 31, 1997 consolidate the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make 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. REVENUE RECOGNITION Revenue from the sale of products is recognized as of the date shipments are made to customers net of an allowance for returns and provision for warranty costs in excess of those provided for by the original equipment manufacturer. Revenue related to extended warranty contracts is deferred and recognized over the period in which costs are expected to be incurred, based upon historical evidence, in performing services under the contract. The Company also contracts with outside vendors to provide service relating to various on-site warranties which are offered for sale to customers; on-site warranty revenues and amounts paid in advance to outside service organizations are recognized in the financial statements in sales and cost of goods sold, respectively, over the warranty period. INVENTORIES Inventories are stated at the lower of cost, determined using the first-in-first-out method, or market. F-7 30 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided using the straight-line basis over the assets' estimated useful lives of five to seven years. Leasehold improvements are amortized over the shorter of the term of the leases or their estimated useful lives. Total depreciation and amortization was $935,000, $446,000 and $440,000 in fiscal 1997, 1996 and 1995, respectively. LONG-LIVED ASSETS The Company assesses potential impairments to its long-lived assets, certain identifiable intangibles and associated goodwill when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss would be recognized when the asset's fair value is less than its carrying amount. No such impairment losses have been identified by the Company. GOODWILL The Company has classified as goodwill the purchase price in excess of fair value of the identifiable net assets acquired in the Merger. Goodwill is being amortized on a straight-line basis over its estimated useful life of five years. Amortization charged to operations amounted to $697,000 for the year ended October 31, 1997. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. STOCK-BASED COMPENSATION The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net income and earnings per share as if fair value based methods had been applied in measuring compensation expense. Compensation charges related to non-employee stock-based compensation are measured using fair value based methods. INCOME TAXES The Company records a provision (benefit) for income taxes using the liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax liability or asset is established for the expected future consequences resulting from the differences between the financial reporting and income tax bases of assets and liabilities and from net operating loss and credit carryforwards. Deferred income tax expense or benefit represents the net change during the year in the deferred income tax liability or asset. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be more likely than not realized. Concurrent with the Merger, ANDATACO changed its taxpayer status from a Subchapter S Corporation to a Subchapter C Corporation. Effective with that change, the Company transferred the amount of its accumulated deficit at that date to additional paid in capital. Therefore, the Company's accumulated deficit at October 31, 1997 includes losses solely incurred by the Company since the Merger. Prior to the consummation of the Merger, ANDATACO elected to be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended, and consequently all federal income taxes and most state taxes were paid directly by its shareholders. Because of the change in taxpayer status to a Subchapter C Corporation, the Company will be subject to federal and state income taxes. The tax provision in fiscal 1997 is calculated giving effect to the change of ANDATACO from a Subchapter S Corporation to a Subchapter C Corporation, and resultant adjustments for federal and state income taxes, as if ANDATACO had been taxed as a C Corporation rather than an S Corporation since inception. PRO FORMA AMOUNTS (UNAUDITED) The pro forma amounts presented in the statement of operations reflect the Company's conversion from a Subchapter S Corporation to a Subchapter C Corporation, and the resultant adjustments for federal and state income taxes, as if the Company had been taxed as a Subchapter C Corporation rather than a Subchapter S Corporation since inception. PRO FORMA NET INCOME (LOSS) PER SHARE (UNAUDITED) Pro forma net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during the periods presented. F-8 31 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount shown for the bank line of credit approximates its fair value due to the relatively short term nature of this arrangement and to its adjustable interest rate. The carrying amounts shown for notes payable and shareholder loan are reasonable approximations of their fair values based upon the interest rates at which the Company could enter into similar borrowing arrangements. NET INCOME (LOSS) PER SHARE Net income (loss) per common share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding. For the purpose of this computation, the IPL shares issued to the ANDATACO shareholders in connection with the Merger have been treated as outstanding at the beginning of each period. The number of shares of IPL common stock outstanding immediately before the Merger have been treated as having been issued at the Closing Date. Shares issuable upon exercise of outstanding stock options and warrants have been excluded from the computation as their effect would be anti-dilutive. CONCENTRATION OF CREDIT RISK The Company grants credit to customers from a broad cross section of industries, based on an evaluation of the customers' financial condition. Accounts receivable from sales are generally not collateralized. Credit losses have been within management's expectations. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 will be adopted by the Company as required in the first quarter of fiscal 1998. Upon adoption of SFAS No. 128, the Company will present basic earnings per share as well as diluted earnings per share. Basic earnings per share will be computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share will be computed based on the weighted average number of shares of common stock outstanding during the period increased by the effect of dilutive stock options using the treasury stock method. Pro forma basic (loss) earnings per share for the years ended October 31, 1997, 1996 and 1995 are $(0.30), $0.00 and $0.12, respectively. Pro forma diluted (loss) earnings per share for the years ended October 31, 1997, 1996 and 1995 are $(0.30), $0.00 and $0.12, respectively. F-9 32 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." The Company will adopt SFAS No. 130 as required for all periods beginning after December 15, 1997. This statement establishes standards for reporting and presentation of comprehensive income and its components in the financial statements. Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners or distributions to owners." In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company will adopt SFAS No. 131 as required for all periods beginning after December 15, 1997. This statement requires the disclosure of certain information about operating segments in the financial statements. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. NOTE 4 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
OCTOBER 31, 1997 1996 ------------- ------------- Accounts receivable: Accounts receivable - trade $ 11,106,000 $ 13,199,000 Less allowance for doubtful accounts and returns (260,000) (219,000) -------------- ------------- $ 10,846,000 $ 12,980,000 ============== ============= Inventories: Purchased components $ 5,541,000 $ 5,937,000 Work in progress 125,000 366,000 Finished goods 1,792,000 846,000 ------------- ------------- $ 7,458,000 $ 7,149,000 ============= ============= Property and equipment: Equipment $ 4,241,000 $ 2,784,000 Leasehold improvements 942,000 864,000 Furniture and fixtures 797,000 261,000 Vehicles 119,000 119,000 ------------- ------------- 6,099,000 4,028,000 Less accumulated depreciation and amortization (2,500,000) (1,565,000) ------------- ------------- $ 3,599,000 $ 2,463,000 ============= ============= Accrued expenses: Sales commissions $ 1,807,000 $ 1,140,000 Other 2,395,000 419,000 ------------- ------------- $ 4,202,000 $ 1,559,000 ============= =============
F-10 33 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BONUSES PAYABLE The Company has recorded a long-term obligation related to ten-year bonus agreements (the "Agreements") with certain employees. Under the Agreements, a bonus will be payable to an employee ten years after the date employment commenced with the Company. Continuous employment during the ten years is a condition precedent to the Company's obligation to pay the bonus. The bonus is accrued over the ten year service period; amounts forfeited are credited to operations. At October 31, 1997 and 1996, the Company has accrued $172,000 as a short-term liability and $167,000 as a long-term liability, respectively. A net charge of $5,000, a net credit of $108,000 and a net charge of $6,000 are included in the results of operations for the years ended October 31, 1997, 1996 and 1995, respectively. The Company has a management incentive award plan which provides for the payment of cash awards or bonuses to officers and other key employees when the Company achieves specified objectives. Awards earned under the plan were $17,000, $0 and $1,300,000 during the years ended October 31, 1997, 1996 and 1995, respectively. NOTE 5 - BANK LINE OF CREDIT The Company has a revolving line of credit with a bank which provides for it to borrow the lesser of (i) $10,000,000 or (ii) 80 percent of eligible domestic accounts receivable plus the lesser of $1,000,000 or 25 percent of eligible inventory, at the bank's prime rate plus one percent (9.5 percent at October 31, 1997). The revolving line of credit was renewed in December 1997 for a thirteen month period. The line is secured by all of the Company's property and accounts receivable and is guaranteed by the Company's principal shareholder. As of October 31, 1997 and 1996, there was $6,500,000 and $7,053,000 outstanding and $3,311,000 and $947,000 available under the line of credit, respectively. The credit agreement includes covenants which, among other things, require the Company to maintain stated minimum working capital and net worth amounts plus specific liquidity and long-term solvency ratios. In connection with the line of credit, there are warrants outstanding with a right to purchase 180,783 shares of the Company's common stock at an exercise price of $1.94 per share. The warrants expire in March 1999. NOTE 6 - NOTES PAYABLE
OCTOBER 31, 1997 1996 ------------- ------------- Notes payable are comprised as follows: Note payable to a bank, payable in monthly installments of $9,375 principal plus interest at the bank's prime rate plus 1 percent (9.5 percent at October 31, 1997) through November 1998 (secured by certain assets) $ 141,000 $ 254,000 Note payable to an individual due on demand with interest at 7 percent per annum payable quarterly (unsecured) - 52,000 ------------- ------------- 141,000 306,000 Less current portion (113,000) (164,000) ------------- ------------- $ 28,000 $ 142,000 ============= =============
Maturities of the Company's outstanding debt at October 31, 1997 are $113,000 and $28,000 in fiscal 1998 and 1999, respectively. F-11 34 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - INCOME TAXES Due to its change in taxpayer status to a Subchapter C Corporation concurrent with the Merger, the Company is subject to federal and state income taxes and has recorded deferred tax assets and liabilities in fiscal 1997. The Company has recorded a valuation allowance in full for deferred tax assets which, more likely than not, will not be realized based on recent operating results. Deferred income taxes at October 31, 1997 and 1996 are comprised as follows:
OCTOBER 31, 1997 1996 ------------- ------------- Deferred tax assets: Inventory $ 1,299,000 $ - Allowance for doubtful accounts and returns 194,000 - Warranty reserves 102,000 - Vacation and deferred compensation 268,000 - Net operating loss carryforwards 3,991,000 - State income taxes 4,000 - Other 259,000 - ------------- ------------- Gross deferred tax asset 6,117,000 - ------------- ------------- Deferred tax liabilities: Property and equipment depreciation (33,000) - ------------- ------------- Gross deferred tax liability (33,000) - ------------- ------------- Valuation allowance (6,084,000) - ------------- ------------- Net deferred income taxes $ - $ - ============= =============
The Company has approximately $11,070,000 in federal and $3,898,000 in state net operating loss carryforwards which expire through 2012 and 2002, respectively. The Company experienced a change of control as a result of the Merger, which limits the ability of the Company to utilize the carryforward amounts. Any future change of control, as defined in Section 382 of the Internal Revenue Code, could further limit the Company's ability to utilize the carryforwards. The provision (benefit) for income taxes is comprised of the following:
YEAR ENDED OCTOBER 31, 1997 1996 1995 ------------ ------------ --------------- Current tax expense (benefit) Federal $ - $ - $ - State - - 30,000 ------------ ------------ --------------- - - 30,000 ------------ ------------ --------------- Deferred tax expense (benefit) Federal $ - $ - $ - State - - - ------------ ------------ --------------- - - - ------------ ------------ --------------- $ - $ - $ 30,000 ============ ============ ===============
F-12 35 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes follows:
YEAR ENDED OCTOBER 31, 1997 1996 1995 ------------ ------------ --------------- Amount computed at statutory Federal rate of 34% $ (2,111,000) $ 13,000 $ 716,000 Benefit of "S" Corporatoin status 209,000 (13,000) (716,000) State income taxes, net of Federal benefit - - 30,000 Increase in valuation allowance 783,000 - - Expenses not deductible for tax purposes 1,257,000 - - Conversion from "S" to "C" Corporation (138,000) - - ------------ ------------ --------------- $ - $ - $ 30,000 ============ ============ ===============
NOTE 8 - STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS The Company has a number of stock option plans, administered by its Board of Directors or its designees, which provide for the issuance of options to employees, officers and directors. The exercise price of a stock option is generally equal to the fair market value of the Company's common stock on the date the option is granted. Certain of the plans permit options granted to qualify as "Incentive Stock Options" under the Internal Revenue Code while other plans are specified as non-qualified. Additionally, certain of the non-qualified plans call for 100% vesting of outstanding options upon a change of control of the Company. Options generally vest at a rate of 20 percent per year over a period of five years from the date of grant and expire after a period not to exceed ten years. However, the Board may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. A total of 3,225,000 shares of Class A Common Stock has been reserved for issuance under the Company's stock option plans. Transactions under the Company's stock option plans during the years ended October 31, 1997, 1996 and 1995 are summarized as follows:
1993, 1996 CONSOLIDATED AND 1997 PLANS 1993 DIRECTOR PLAN -------------------------------------- ------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED WEIGHTED NUMBER EXERCISE AVERAGE NUMBER AVERAGE AVERAGE OF OPTIONS PRICE FAIR VALUE OF OPTIONS EXERCISE PRICE FAIR VALUE ---------- -------- --------------- ---------- -------------- ---------- Outstanding, October 31, 1994 640,000 $ 3.84 24,000 $ 8.92 Granted 209,500 3.38 $ 1.79 20,000 4.44 $ 2.35 Exercised (206,000) 3.18 - Canceled (121,200) 7.62 (12,000) 8.92 --------- -------- Outstanding, October 31, 1995 522,300 3.04 32,000 6.12 Granted 243,500 2.40 1.08 12,000 14.54 3.27 Exercised (46,300) 2.66 - Canceled (143,900) 3.48 (7,200) 8.92 --------- -------- Outstanding, October 31, 1996 575,600 2.69 36,800 8.32 Granted 1,989,500 1.56 1.07 - Exercised - - Canceled (380,600) 2.79 - --------- -------- Outstanding, October 31, 1997 2,184,500 1.64 36,800 8.32 ========= ======== Exercisable, October 31, 1997 328,873 19,600 ========= ========
F-13 36 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth information regarding options outstanding at October 31, 1997 under the 1993, Consolidated 1996 and 1997 Plans:
WEIGHTED AVERAGE WEIGHTED WEIGHTED EXERCISE RANGE OF NUMBER AVERAGE AVERAGE PRICE FOR EXERCISE CURRENTLY EXERCISE REMAINING CURRENTLY NUMBER OF OPTIONS PRICES EXERCISABLE PRICE LIFE (YEARS) EXERCISABLE - ----------------- ------ ----------- ----- ------------ ----------- 1,180,000 $ 1.125 - $ 1.25 204,998 $1.18 9.65 $1.17 989,500 $ 2.00 - $ 2.50 117,875 2.17 9.68 2.26 15,000 $3.25 6,000 3.25 8.00 3.25 --------- -------- 2,184,500 328,873 ========= =======
The following table sets forth information regarding options outstanding at October 31, 1997 under the Director Plan:
WEIGHTED AVERAGE WEIGHTED WEIGHTED EXERCISE RANGE OF NUMBER AVERAGE AVERAGE PRICE FOR EXERCISE CURRENTLY EXERCISE REMAINING CURRENTLY NUMBER OF OPTIONS PRICES EXERCISABLE PRICE LIFE (YEARS) EXERCISABLE - ----------------- ------ ----------- ----- ------------ ----------- 10,000 $ 3.25 2,000 $3.25 8.08 $3.25 10,000 $ 5.63 4,000 5.63 7.67 5.63 16,800 $ 7.25 - $ 20.50 13,600 12.93 5.78 14.04 ------ ------ 36,800 19,600 ====== ======
No compensation expense has been recognized for its employee option grants, which are fixed in nature, as the options have been granted at fair market value. Had compensation cost for the Company's stock-based compensation awards issued during 1997 and 1996 been determined based on the fair value at the grant dates of awards consistent with the method prescribed by Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net (loss) income and pro forma net (loss) income per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED OCTOBER 31, 1997 1996 ---- ---- Net (loss) income: As reported $ (6,209,000) $ 39,000 ============= ============= Pro forma $ (6,385,000) $ (69,000) ============= ============= Net (loss) income per share: As reported $ (0.30) $ 0.00 ============= ============= Pro forma $ (0.31) $ 0.00 ============= =============
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the years ended October 31, 1997 and 1996, respectively: dividend yield of 0.0% for both years, risk-free interest rates of 6.13% and 6.16%, expected volatility of 80% for both years, and expected lives of 5.0 years for both years. F-14 37 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 401(k) PLAN During 1992, the Company adopted an employee savings and retirement plan (the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan permits, but does not require, matching contributions by the Company on behalf of all participants. No such contributions were made in fiscal 1997, 1996 or 1995. NOTE 9 - COMMITMENTS AND CONTINGENCIES The Company currently conducts its operations in twenty-three facilities throughout the United States. Certain of these facilities are leased from various parties, including related parties, under noncancelable operating leases that expire at various times through March 2003. Future minimum rental commitments under non-cancelable operating leases, inclusive of the Company's obligation to its president and principal shareholder (Note 10), are reflected in the following table:
YEAR ENDING OCTOBER 31, 1998 $ 840,000 1999 525,000 2000 491,000 2001 437,000 2002 437,000 Thereafter 147,000 ------------- $ 2,877,000 =============
Total rent expense was $918,000, $853,000 and $687,000 for the years ended October 31, 1997, 1996 and 1995, respectively. The Company may be subject to various claims and legal proceedings in the ordinary course of conducting its business. In the opinion of management, the liability associated with the resolution of such matters, if any, will not have a material adverse effect on the Company's financial position, results of operations or cash flows. NOTE 10 - CERTAIN RELATED PARTY TRANSACTIONS The Company currently leases its corporate headquarters from an entity owned by the president and principal shareholder of the Company. The Company paid this entity approximately $330,000 during each of the years ended October 31, 1997, 1996 and 1995 under the terms of the lease agreement. The Company paid its president and principal shareholder $900,000, $1,200,000 and $2,251,000 during the years ended October 31, 1997, 1996 and 1995, respectively, for his services. Included in fiscal 1997 compensation is $67,000 paid as part of a non-competition agreement. Under this agreement, the president and principal shareholder will receive additional compensation of $200,000 per year through fiscal 2002. Included in the fiscal year 1995 compensation was a bonus for $1,000,000. No bonus was paid for fiscal years 1997 or 1996. The shareholder loan to the president and principal shareholder is unsecured, due in June 2004, with interest payable monthly at 9 percent per annum. This loan is subordinate to the bank line of credit. Interest expense from the shareholder loan was $461,000, $301,000 and $298,000 during the years ended October 31, 1997, 1996 and 1995, respectively. F-15 38 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Fiscal Years Ended October 31, 1997, 1996 and 1995
Balance at Additions Beginning Charged to Balance at of Year Income Deductions* End of Year ---------- ------------ ----------- ----------- Allowance for Doubtful Accounts Receivable: 1997 $ 219,000 $ 236,000 $ 195,000 $ 260,000 1996 272,000 60,000 113,000 219,000 1995 184,000 133,000 45,000 272,000 Allowance for Inventory Obsolescence: 1997 $ 200,000 $ 600,000 $ 2,000 $ 798,000 1996 183,000 30,000 13,000 200,000 1995 293,000 244,000 354,000 183,000
- ------------------------------------------ * Deductions represent amounts written off against the allowance, net of recoveries. S-1 EX-10.17 2 EXHIBIT 10.17 1 Exhibit 10.17 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL COMMERCIAL SINGLE-TENANT LEASE - NET DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1. Basic Provisions ("Basic Provisions") Parties: This Lease ("Lease"), dated for reference purposes only is made by and between SYKO PROPERTIES, INC., a California Corporation, ("Lessor") and ANDATACO, a California Corporation ("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 as 10140 Mesa Rim Road, located in the county of San Diego, State of California and generally described as (describe briefly the nature of the property and, if applicable, the "Project", if the property is located within a Project) ("Premises"). (See also Paragraph 2) 1.3 Term: five (5) years and zero (0) months ("Original Term") commencing April 1, 1993 ("Commencement Date") and ending March 31, 1998 ("Expiration Date"). (See also Paragraph 3) 1.4 Early Possession: ("Early Possession Date"). (See also Paragraphs 3.2 and 3.3) 1.5 Base Rent: $ 27,549.60 per month ("Base Rent"), payable in advance on the first day of each month commencing on the Commencement date (See also Paragraph 4) If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $ 27,549.60 as Base Rent for the first month's rent 1.7 Security Deposit: $5,000 ("Security Deposit"). (See also Paragraph 5) 1.8 Agreed Use: The premise shall be used and occupied only for general office and computer assembly and storage or any other use which is reasonably comparable and for no other purpose. (See also Paragraph 6) 1.9 Insuring Party. Lessor is the "Insuring Party" unless otherwise stated herein. (See also Paragraph 8) 1.10 Real Estate Brokers: (See also Paragraph 1.5) (a) Representation: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): represents Lessor exclusively ("Lessor's Broker"); represents Lessee exclusively ("Lessee's Broker") or represents both Lessor and Lessee ("Dual Agency"). (b) Payment to Brokers: Upon execution and delivery of this Lease by both Pal Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of % of the total Base Rent for the brokerage services rendered by said Broker). 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by ("Guarantor"). (See also Paragraph 37) 2 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Exhibit "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 size set forth in this Lease, or trial may rave been used in calculating rental. is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 Condition, Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date. whichever first occurs ("Start Date"), and, so long as the required service contracts described in Paragraph 7.1b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors. if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof. bearing walls and foundation of any buildings on the Premises (the "Building") shall be free of material defects. It a non-compliance with said warranty exists as of the Start Date. Lessor shall, as Lessor's sole obligation with respect to such matter, 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. It, after the Start Date. Lessee does not give Lessor written notice of any non-compliance with this warranty within (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls. (ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance. Lessor warrants that the improvements on the Premises comply with all applicable laws. covenants or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements") in effect on the Start 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. NOTE Lessee is responsible for determining whether or not the zoning is appropriate for Lessees intended use. and acknowledges that past uses of the Premises may no longer be allowed If the Premises do not comply with said warranty, Lessor shall. except as otherwise provided. promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such noncompliance, 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 Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense, If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance. or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general. Lessee shall be fully responsible for the cost thereof, provided, however that if such, Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination. Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. 3 (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1 (c): provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure. Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis. Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor. Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sale responsibility to investigate the financial capability and/or suitability of a(( proposed tenants. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately Prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed. Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, 4 cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder, If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent. 4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent"). 4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing, Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, 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, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at ail times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessors reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced. Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below. Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 5 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, 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 damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's 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, or waste whose presence, use, manufacture, disposal, transportation, or release, 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 Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof, Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "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/or (ml the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (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, other than as previously consented to by Lessor, Lessee shall immediately give written notice of Such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense. take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that 6 Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties), Lessee's obligations 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, removal, remediation, restoration and/or abatement, and shall survive the expiration or 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. (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) Lessor Termination Option. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) 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 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 a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such 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 provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information 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 the failure of Lessee or the Premises to comply with any Applicable Requirements. 7 6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into 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. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. PAGE 3 Initials FORM 204N-R-2/97 8 7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises. Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or ire 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, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the Procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. 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, Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repairing of the Building. (b) Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor, (c) Replacement, Subject to Lessees indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance Practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is clue, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 Utility Installations; Trade Fixtures; Alterations. 9 (a) Definitions; Consent Required. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion, "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to 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 such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (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. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (6) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000. Lessor may condition its consent upon Lessee providing a lien and completion pond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any 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. If Lessee shall 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. If Lessor shall require, Lessee shall furnish a surety bond 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. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys fees and costs. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises, Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) Removal. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender/Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in 10 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. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment 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 groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. Insurance; Indemnity. 8.1 Payment For Insurance. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 Liability Insurance. (,a), Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon 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 $2.000,000 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 shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance 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 maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor, it the coverage is available and commercially appropriate, such 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 debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor 11 Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve It 2) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 Lessee's Property/Business Interruption Insurance. (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted 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, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. 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. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 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 against the other, for loss of or 12 damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers 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 gross negligence or willful misconduct, Lessee shall indemnity, 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, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice 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 defended or 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, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor, Notwithstanding Lessor's 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 improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor snail notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction, Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "Insured Loss" shall mean damage or destruction to improvements on 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 Requirements, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and 13 Utility installations) as soon as reasonably possible and this Lease shall continue in full force and effect: provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially :reasonable and available, Lessor snail 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, it Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect, if such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) 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, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of 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, 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 a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may 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 (6) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (1 0) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available, If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. It the damage or destruction was caused by the gross negligence or willful misconduct of Lessee. Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, 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 (i) the date which is ten 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 Lessors commercially reasonable 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 on the date specified in the termination notice and Lessee's option shall be extinguished. 14 9.6 Abatement of Rent; Lessee's Remedies. (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage snail be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect, "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Termination-Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor, Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor 9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 Definition of "Real Property Taxes." As used herein, the term "Real Property Taxes" shall include any form of assessment: real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. 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 during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. It any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment, if Lessee shall fail to pay any required Real Property Taxes. Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. 15 (b) Advance Payment. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate 'he current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base event. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. It any of Lessee's said personal property shall be assessed with Lessors real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring 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, 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 by an amount greater than twenty-five percent (25%) of such Net Worth as it was represented at the time of the execution 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, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent, "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. 16 (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach. Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. 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 one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (1 10%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of 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, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept 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 Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore 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 fee of $1,000 or ten percent (1 0%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed 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 to in writing. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease, provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. 17 Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. 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 all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee. Lessor may, at its option, require 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 prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach, Remedies. 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises: or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) 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 (1 0) days following written notice 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, 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; 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 if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor 18 statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (6) 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 basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or 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 time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, 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 upon receipt of invoice therefor If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashiers check. In the event of a Breach, Lessor may, 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: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor, In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (6) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided: (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of 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 the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any 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. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. 19 (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. 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. Any agreement for free or abated rent or other charges, 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. Upon Breach 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, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent 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 any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each 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 such late payment. 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 the exercise of 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 any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 Breach by Lessor. (a) Notice of Breach. 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, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 20 (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor, Lessee shall document the cost of said cure and supply said documentation to Lessor. 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 (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the premises, or more than twenty-five percent (25%) of the land area portion of the premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (1 0) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. It 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 proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and ail compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. Brokers' Fee. 15.1 Additional Commission. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.2 Assumption of Obligations, Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, it Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker. 15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith, Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 21 16. Estoppel Certificates. (a) Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" 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. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) it Lessor is the Requesting Party, not more than one month's rent has been paid in advance, Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such tender 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. Definition of Lessor. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease. Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessors interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 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. Days. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. Limitation on Liability. Subject to the provisions of Paragraph 1 7 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. 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. 22. No Prior or Other Agreements: Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter 22 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. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the tee received by such Broker pursuant to this Lease: provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 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 courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given it 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 notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessees taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 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 date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment 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 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 termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (1 50%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as 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 23 other remedies at law or in equity. 28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa, This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 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 upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof, Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon 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 (1) 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 a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, 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. Further, within sixty (60) days after the execution of this Lease. Lessor shall use its commercially reasonable efforts to obtain a NonDisturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's action, directly contact Lessors lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents: provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or NonDisturbance Agreement provided for herein. 31. Attorneys' Fees. It any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to 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 24 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' fees 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, in addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises: Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times for the purpose at showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary, All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs, Lessee may at any time place on or about the Premises any ordinary "For Sublease" sign. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessors prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction, 34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements 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, that Lessor may elect to continue any one or all existing subtenancies, Lessor's failure within ten (11 0) days following any such event to elect 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. Except 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, 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 upon receipt at an invoice and supporting documentation therefor, Lessor's consent to any act, assignment or subletting 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. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. Guarantor. 37.1 Execution. The Guarantors, if any, shall each execute a guaranty 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. 25 37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. Options. 39.1 Definition. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or 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, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 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 have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessees inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same, Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their properly from the acts of third parties. 26 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest and such payment shall not be regarded as a voluntary payment and there shall survive the right on the Dart 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 Day 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. 44. Authority, If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, 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, Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence 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 Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. 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. As long as they do not materially change Lessee's obligations hereunder. Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. Multiple Parties. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease is [ ] is not attached to this Lease. 50. Lessee to have four (4) five (5) year options at market rents. 51. Lessee to pay for and install all tenant improvements. Lessee shall deliver to Lessor a space plan of improvements for approval. Lessor shall not unreasonably withhold approval. 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. 27 ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES, THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES, SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. LESSOR: Executed at: SYKO PROPERTIES, INC., a California Corporation ------------------------------------------------ By: /s/ W. David Sykes ------------------------------------------------ By LESSOR: its President W. David Sykes ------------------------------------------------ LESSEE: Executed at: ANDATACO, a California Corporation ------------------------------------------------ By: /s/ W. David Sykes ------------------------------------------------ By LESSEE: W. David Sykes as President ------------------------------------------------ 28 EXHIBIT "A" ADDENDUM TO STANDARD LEASE DATED JANUARY 1, 1993 BETWEEN ANDATACO, A CALIFORNIA CORPORATION AND SYKO PROPERTIES, INC., A CALIFORNIA CORPORATION As of October 1, 1994, and in agreement with the Lessor, the Lessee desires to extend the original lease set forth for a term of five (5) years to a term of ten (10) years. The lease term will now end on March 31, 2003. The following parties affix their signatures for approval. /s/ W. David Sykes October 31, 1994 - ----------------------------------- ---------------- SYKO PROPERTIES, Inc. A California Date Corporation, Lessee /s/ Laura D'Agrosa October 31, 1994 - ----------------------------------- ---------------- ANDATACO, A California Corporation, Date Lessee EX-10.18 3 EXHIBIT 10.18 1 EXHIBIT 10.18 SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE AND/OR INVENTORY) This Agreement is entered into between ANDATACO , a CALIFORNIA CORPORATION (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance, the following Borrowing Base: 80% of Eligible Accounts 25% of the Value of Inventory 1,000,000.00 and in no event more than $10,000,000.00 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's Loan Account on demand and (b) on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of ONE percent (1.000%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest at any time. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. The amount of interest payable each month by Borrower shall not be less than a minimum monthly charge of $250.00. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used in this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Inventory" means all of the Borrower's goods, merchandise and other personal property which are held for sale or lease, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service or are raw materials, work in process or materials used or consumed, or to be used or consumed in Borrower's business, and shall include all property rights, patents, plans, drawings, diagrams, schematics, assembly and display materials relating thereto. C. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. D. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within 90 days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account and (3) any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. E. "Value of Inventory" means the value of Borrower's Inventory determined in accordance with generally accepted accounting principles consistently applied excluding, however, the amount of progress payments, pre-delivery payments, deposits and any other sums received by Borrower in anticipation of the sale and delivery of inventory, all Inventory on consignment or lease to others, and all property on consignment or lease from others to Borrower. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor and all merchandise giving rise thereto, and hereby grants to Bank a continuing security interest in all Borrower's Inventory and in all proceeds and products thereof, whether now owned or hereafter existing or acquired, including all moneys in the Collateral Account referred to in Section 6 hereof, as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or Bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. 6. Until Bank exercises its rights to collect the Accounts and Inventory proceeds pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts and Inventory proceeds, provided that no legal action shall be maintained thereon or in connection therewith without Bank's prior written consent. Any collection of Accounts or Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections, together with the proceeds of all cash sales, daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts and Inventory proceeds shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. 7. Until Bank exercises its rights to collect the Accounts or Inventory proceeds pursuant to paragraph 10, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts or constituting Inventory and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts or constituting Inventory and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. Until payment is made as provided herein or until release by Bank from its security interest, all merchandise returned to or repossessed by Borrower shall be set aside and identified as the property of Bank and Bank shall be entitled to enter upon any premises where such merchandise is located and take immediate possession thereof and remove same. AC 8 E (6/97) Page 1 of 2 2 8. Borrower represents and warrants to Bank: (1) If Borrower is a corporation, that Borrower is duly organized and existing in the State of its incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is found or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. 9. Borrower will: (i) Furnish Bank from time to time such financial statements and information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; (ii) Furnish Bank periodically, in such form and detail and at such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon, and reports as to the inventory and sales thereof; (iii) Permit representatives of Bank to inspect the Inventory and Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; (v) Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (vi) Notify Bank of each location at which the Inventory is or will be kept, other than for temporary processing, storage or similar purposes, and of any removal thereof to a new location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (vii) Provide, maintain and deliver to Bank policies insuring the Collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any unearned or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating to the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; (viii) Do all acts necessary to maintain, preserve and protect all Inventory, keep all Inventory in good condition and repair and not to cause any waste or unusual or unreasonable depreciation thereof, and (ix) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds and not from the proceeds of Collateral, for credit to Borrower's Loan Account the amount of such excess. 10. Bank may at any time, without prior notice to Borrower, collect the Accounts and Inventory proceeds and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts or as proceeds of Inventory; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral in favor of any secured part or person other than Bank. 12. Should: (i) Default be made in the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commenced by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law or statute; then in any such event, Bank may, at its option and without demand first made and without notice to Borrower do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at as option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any such disposition of Collateral to pay Bank any deficiency. 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower, or if any assessment for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 15. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. *16 Additional Provisions: SEE EXHIBIT "A" ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF BY THIS REFERENCE. Executed this 1st day of DECEMBER, 1997 ANDATACO, A CALIFORNIA CORPORATION --------------------------------------- (Name of Borrower) IMPERIAL BANK BY: /s/ RICHARD HUDZIK C.F.O. --------------------------------------- (Authorized Signature and Title) BY: /s/ TIM BUBNACK BY: None ------------------------------- -------------------------------------- Title (Authorized Signature and Title) *If none, Insert "None" Page 2 of 2 3 GENERAL SECURITY AGREEMENT (Tangible and Intangible Personal Property) (LOGO) IMPERIAL BANK Member FDIC This Agreement is executed on DECEMBER 1, 1997 , by ANDATACO, A CALIFORNIA CORPORATION (hereinafter called "Obligor"). In consideration of financial accommodations given, to be given or continued, the Obligor grants to IMPERIAL BANK (hereinafter called "Bank") a security interest in (a) all property (i) delivered to Bank by Obligor, (ii) which shall be in Bank's possession or control in any matter or for any purpose, (iii) described below, (iv) now owned or hereafter acquired by Obligor of the type or class described below and/or in any supplementary schedule hereto, or in any financing statement filed by Bank and executed by or on behalf of Obligor; (b) all deposits accounts of Obligor at Bank and (c) the proceeds, increase and products of such property, all accessions thereto, and all property which Obligor may receive on account of such collateral which Obligor will immediately deliver to Bank (collectively referred to as "Collateral") to secure payment and performance of all of Obligor's present or future debts or obligations to Bank, whether absolute or contingent (hereafter referred to as "Debt"). Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. Collateral: A. VEHICLE, VESSEL, AIRCRAFT: - ----------------------------
Identification License or Year Make/Manufacturer Model and Serial No. Registration No. New or Used - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
Engine or other equipment:______________________________________________________ (For aircraft - original ink signature on copy to FAA) B. DEPOSIT ACCOUNTS: Type __________________ Account Number ________________________ Amount $ _______ In name of ____________________________________ Depository _____________________ AND ALL EXTENSIONS OR RENEWALS THEREOF. C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe) All personal property, whether presently existing or hereafter created or acquired, including but not limited to: All accounts, chattel paper, documents, instruments, money, deposit accounts and general intangibles including returns, repossessions, books and records relating thereto, and equipment containing said books and records. All Investment property including securities and securities entitlements. All goods including equipment and inventory. All proceeds including, without limitation, insurance proceeds. All guarantees and other security therefor. The collateral not in Bank's possession will be located at: 10140 MESA RIM, SAN DIEGO, CA 92121 [ ] If checked, the Obligor is executing this Agreement as an Accommodation Debtor only and the Obligor's liability is limited to the security interest granted in the Collateral described herein. The party being accommodated is ("Borrower"). All the terms and provisions on page 2 hereof are incorporated herein as though set forth in full, and constitute a part of this Agreement.
Name Signature Address (indicate title, if applicable) ANDATACO, A CALIFORNIA CORPORATION By: /s/ RICHARD A. HUDZIK 10140 MESA RIM - ---------------------------------- ----------------------------------- -------------------- SAN DIEGO, CA 92121 - ---------------------------------- ----------------------------------- -------------------- - ---------------------------------- ----------------------------------- --------------------
4 SECURITY AGREEMENT (CONTINUED) Obligor represents, warrants and agrees: 1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of collecting the Debt, of protecting, insuring or realizing on Collateral, and any expenditure of Bank pursuant hereto, including attorney's fees and expenses, with interest at the rate of 24% per year, or the rate applicable to the Debt, whichever is less, from the date of expenditure, and (c) any deficiency after realization of Collateral. 2. Obligor will use the proceeds of any loan that becomes Debt hereunder for the purpose indicated on the application therefore, and will promptly contract to purchase and pay the purchase price of any property which becomes Collateral hereunder from the proceeds of any loan made for that purpose. 3. As to all Collateral in Obligor's possession (unless specifically otherwise agreed to by Bank in writing). Obligor will: (a) Have, or has, possession of the Collateral at the location disclosed to Bank and will not remove the Collateral from the location. (b) Keep the Collateral separate and identifiable. (c) Maintain the Collateral in good and saleable condition, repair it if necessary, clean, feed, shelter, water, medicate, fertilize, cultivate, irrigate, prune and otherwise deal with the Collateral in all such ways as are considered good practice by owners of like property, use it lawfully and only as permitted by insurance policies, and permit Bank to inspect the Collateral at any reasonable time. (d) Not sell, contract to sell, lease, encumber or transfer the Collateral (other than inventory Collateral) until the Debt has been paid, even though Bank has a security interest in proceeds of such Collateral. 4. As to Collateral which is inventory and accounts, Obligor: (a) May, until notice from Bank, sell, lease or otherwise dispose of inventory Collateral in the ordinary course of business only, and collect the cash proceeds thereof. (b) Will, upon notice from Bank, deposit all cash proceeds as received in a demand deposit account with Bank, containing only such proceeds and deliver statements identifying units of inventory disposed of, accounts which give rise to proceeds, and all acquisitions and returns of inventory as required by Bank. (c)Will receive in trust, schedule on forms satisfactory to the Bank and deliver to Bank all non-cash proceeds other than inventory received in trade. (d) If not in default, may obtain release of Bank's interest in individual units of inventory upon request, therefore, payment to Bank of the release price of such units shown on any Collateral schedule supplementary hereto, and compliance herewith as to proceeds thereof. 5. As to Collateral which are accounts, chattel paper, general intangibles and proceeds described in 4(c) above, Obligor warrants, represents and agrees: (a) All such Collateral is genuine, enforceable in accordance with its terms, free from default, prepayment, defense and conditions precedent (except as disclosed to and accepted by Bank in writing), and is supported by consecutively numbered invoices to, or rights against, the debtors thereon. Obligor will supply Bank with duplicate invoices or other evidence of Obligor's rights on Bank's request; (b) All persons appearing to be obligated on such Collateral have authority and capacity to contract; (c) All Chattel paper is in compliance with law as to form, content and manner of preparation and execution and has been properly registered, recorded, and/or filed to protect Obligor's interest thereunder; (d) If an account debtor shall also be indebted to Obligor on another obligation, any payment made by him not specifically designated to be applied on any particular obligation shall be considered to be a payment on the account in which Bank has a security interest. Should any remittance include a payment not on account, it shall be delivered to Bank and, if no event of default has occurred, Bank shall pay Obligor the amount of such payment; (e) Obligor agrees not to compromise, settle or adjust any account or renew or extend the time of payment thereof without Bank's prior written consent. 6. Obligor owns all Collateral absolutely, and no other person has or claims any interest in any Collateral, except as disclosed to and accepted by Bank in writing. Obligor will defend any proceeding which may affect title to or Bank's security in any Collateral, and will indemnify and hold Bank free and harmless from all costs and expenses of Bank's defense. 7. Obligor will pay when due all existing or future charges, liens or encumbrances on and all taxes and assessments now or hereafter imposed on or affecting the Collateral and, if the Collateral is in Obligor's possession, the realty on which the Collateral is located. 8. Obligor will insure the Collateral with Bank as loss payee in form and amounts with companies, and against risks and liability satisfactory to Bank, and hereby assigns such policies to Bank, agrees to deliver them to Bank at Bank's request, and authorizes Bank to make any claim thereunder, to cancel the insurance on Obligor's default, and to receive payment of and endorse any instrument in payment of any loss or return premium. If Obligor should fail to deliver the required policy or policies to the Bank, Bank may, at Obligor's cost and expense, without any duty to do so, get and pay for insurance naming as the insured, at Bank's option, either both Obligor and Bank, or only Bank, and the cost thereof shall be secured by this Security Agreement, and shall be repayable as provided in Paragraph 1 above. 9. Obligor will give Bank any information it requires. All information at any time supplied to Bank by Obligor (including, but not limited to, the value and condition of Collateral, financial statements, financing statements, and statements made in documentary Collateral) is correct and complete, and Obligor will notify Bank of any adverse change in such information. Obligor will promptly notify Bank of any change of Obligor's residence, chief executive office or mailing address. 10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act which Obligor is obligated hereby to do, to exercise such rights as Obligor may exercise, to use such equipment as Obligor might use, to enter Obligor's premises to give notice of Bank's security interest, and to collect Collateral and proceeds and to execute and file in Obligor's name any financing statements and amendments thereto required to perfect Bank's security interest hereunder, all to protect and preserve the Collateral and Bank's rights hereunder. Bank may: (a) Endorse, collect and receive delivery or payment of instruments and documents constituting Collateral; (b) Make extension agreements with respect to or affecting Collateral, exchange it for other Collateral, release persons liable thereon or take security for the payment thereof, and compromise disputes in connection therewith; (c) Use or operate Collateral for the purpose of preserving Collateral or its value and for preserving or liquidating Collateral. 11. If more than one Obligor signs this Agreement, their liability is joint and several. Any Obligor who is married agrees that recourse may be had against separate property for the Debt. Discharge of any Obligor except for full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of Collateral or any impairment or suspension of Bank's rights against an Obligor, or any transfer of an Obligor's interest to another shall not affect the liability of any other Obligor. Until the Debt shall have been paid or performed in full, Bank's rights shall continue even if the debt is outlawed. All Obligors waive: (a) any right to require Bank to proceed against any Obligor before any other, or to pursue any other remedy; (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale, and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until the Debt shall have been paid; (d) and any right of subrogation to Bank until Debt shall have been paid or performed in full. 12. Upon default, at Bank's option, without demand or notice, all or any part of the Debt shall immediately become due. Bank shall have all rights given by law, and may sell, in one or more sales, Collateral in any county where Bank has an office. Bank may purchase at such sale. Sales for cash or on credit to a wholesaler, retailer or user of the Collateral, or at public or private auction, are all to considered commercially reasonable. Bank may require Obligor to assemble the Collateral and make it available to Bank at the entrance to the location of the Collateral, or a place designated by Bank. Defaults shall include: (a) Obligor's failure to pay or perform this or any agreement with Bank or breach of any warranty herein, or Borrower's failure to pay or perform any agreement with Bank. (b) Any change in Obligor's or Borrower's financial condition which in Bank's judgment impairs the prospect of Borrower's payment or performance. (c) Any actual or reasonably anticipated deterioration of the Collateral or in the market price thereof which causes it, in Bank's judgment, to become unsatisfactory as security. (d) Any levy or seizure against Borrower or any of the Collateral. (e) Death, termination of business, assignment for creditors, insolvency, appointment of receiver, or the filing of any petition under bankruptcy or debtor's relief laws of, by or against Obligor or Borrower or any guarantor of the Debt. (f) Any warranty or representation which is false or is believed in good faith by Bank to be false. 13. Bank's acceptance of partial or delinquent payments or the failure of Bank to exercise any right or remedy shall not waive any obligation of Obligor or Borrower or right of Bank to modify this Agreement, or waive any other similar default. 14. On transfer of all or any part of the Debt, Bank may transfer all or any part of the Collateral. Bank may deliver all or any part of the Collateral to any Obligor at any time, any such transfer or delivery shall discharge Bank from all liability and responsibility with respect to such Collateral transferred or delivered. This Agreement benefits Bank's successors and assigns and binds Obligor's heirs, legatees, personal representatives, successors and assigns. Obligor agrees not to assert against any assignee of Bank any claim or defense that may exist against Bank. Time is of the essence. This Agreement and supplementary schedules hereto contain the entire security agreement between Bank and Obligor. Obligor will execute any additional agreements, assignments or documents reasonably required by Bank to carry this Agreement into effect. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of California, to the jurisdiction of whose courts the Obligor hereby agrees to submit. Obligor agrees that service of process may be accomplished by any means authorized by California law. All words used in the singular shall be considered to have been used in the plural where the context and construction so require. 16. To the extent that Obligor acquires any trademarks, service marks, trade names and service names and/or the goodwill associated therewith, copyrights, patents and/or patent applications (collectively "Intellectual Property"), Obligor shall give prompt notice thereof to Bank and shall take any and all actions requested from time to time by Bank to perfect Obligor's interest in such Intellectual Property and to perfect Bank's first priority interest therein. Without limiting the generality of the foregoing, the Obligor agrees as follows: Upon Obligor creating, writing, producing or acquiring any software, computer source codes or other computer programs (collectively, the "Software"), Obligor shall promptly register such Software with the U.S. Copyright Office and to the extent Obligor's rights therein are acquired from any third party, Obligor shall promptly upon such acquisition file with the U.S. Copyright Office any and all documents necessary to perfect Obligor's rights therein. Upon Obligor creating, writing, producing or otherwise acquiring any Software, Obligor shall give prompt notice thereof to Bank. Obligor shall execute and deliver to Bank any and all copyright mortgages, UCC financing statements and other documents and instruments which Bank may request in connection with the Bank perfecting its first priority security interest in such Software. 5 "EXHIBIT A" ADDENDUM TO SECURITY AND LOAN AGREEMENT BETWEEN ANDATACO AND IMPERIAL BANK DATED DECEMBER 15, 1997 This Addendum is made and entered into as of December 15, 1997, between ANDATACO (Borrower") and IMPERIAL BANK ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement. 1. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on FEBRUARY 15, 1999, subject to Bank's right to renew said commitment in its sole discretion. Any such renewal of the commitment shall not be binding upon Bank unless it is in writing and signed by an officer of the Bank. 2. Borrower represents and warrants that: a. LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. b. FINANCIAL CONDITION. The balance sheet of Borrower of SEPTEMBER 30, 1997, and the related profit and loss statement on that date, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with this request for credit are true and correct, and said balance sheet and profit and loss statement truly present the financial condition of Borrower as of the date thereof and the results of the operations of Borrower for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no materially adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. c. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with valid trademarks, trade names, copyrights, patents and license rights of others. 6 EXHIBIT A PAGE 2 d. TAX STATUS. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. 3. Borrower agrees that so long as it is indebted to Bank, it WILL NOT, without Bank's WRITTEN CONSENT: a. TYPE OF BUSINESS. MANAGEMENT. Make any substantial change in the character of its business; or make any change in its executive management (for purposes of this section "executive management" shall refer to the Chairman of the Board and the Chief Executive Officer). b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from Bank except obligations now existing as shown in financial statement dated SEPTEMBER 30, 1997, including those being refinanced by Bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. c. LIENS AND ENCUMBRANCES. Create, incur, assume any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by it, other than liens for taxes not delinquent, and liens in Bank's favor. d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the ordinary and normal course of its business as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefore; or sell any assets except in the ordinary and normal course of its business as now conducted; or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same. f. DIVIDENDS, STOCK PAYMENTS. Declare or pay any dividend (other than dividends payable in common stock of Borrower) or make any other distribution on any of its capital stock now outstanding or hereafter issued, or purchase, redeem or retire any of such stock. 7 EXHIBIT A PAGE 3 g. CAPITAL EXPENDITURES. Make or incur obligations for capital expenditures in excess of $1,600,000 in any one fiscal year. h. LEASE LIABILITY. Make or incur liability for payments of rent under leases of real property in excess of $1,500,000 and personal property in excess of $100,000 in any one fiscal year. 4. Should there be a default under the Security and Loan Agreement, the General Security Agreement, or under the Note, all obligations, loans and liabilities of Borrower to Bank, due or to become due, whether now existing or hereafter arising, shall, at the option of Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies. The default rate of interest shall be five percent per year in excess of the rate otherwise charged. 5. As a condition precedent to Bank's obligation to make any advances to Borrower, Borrower shall, among other things: cause a guarantee to be executed by IPL Systems, Inc. in the amount of $10,141,000 in form and substance satisfactory to Bank. 6. In addition to the provisions in the Security and Loan Agreement, Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. "Eligible Accounts" shall also NOT include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of Borrower. b. Accounts with respect to which 25% or more of the account debtor's total accounts or obligations outstanding to Borrower are more than 90 days from invoice date. c. Salesmen's accounts for promotional purposes. d. For accounts representing more than 20% of total accounts receivable, the balance in excess of the 20%. However, the Bank may deem, at its sole discretion, the entire amount, or any portion thereof, eligible. e. Accounts with respect to international transactions unless insured by an insurance company acceptable to the Bank or covered by letters of credit issued or confirmed by a bank acceptable to the Bank. f. Credit balances greater than 90 days from invoice date. g. U.S. Government receivables, unless formally assigned to the Bank. h. Accounts over 90 days from invoice date. 8 EXHIBIT A PAGE 4 i. Accounts where the account debtor is a seller to Borrower, whereby a potential offset exists. j. Consignment or guaranteed sales. k. Contract receivables; bill and hold accounts. l. Equipment and rental offsets; collection accounts (aged up to 90 days from invoice date). 7. Borrower may borrow against eligible inventory consisting of raw material, deemed acceptable to Bank, up to a $1,000,000 sublimit within the line of credit, not to exceed 25% of the balance outstanding, contingent upon Borrowing Base availability, and substantiated by monthly inventory certification submitted by Borrower to Bank. Inventory eligible for advance under the Security and Loan Agreement shall NOT include the following: a. Goods on consignment. b. Inventory reserve amounts. c. Obsolete inventory. d. Inventory not insured, or inventory for which Bank is not named as loss payee. e. Work in Process. f. Finished goods. g. Inventory located in areas making it difficult to verify its existence, or which will cause undue expense in liquidation due to transportation costs, or other logistical reasons. 8. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a quarterly basis. 9. Borrower affirmatively covenants that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, it WILL: 9 EXHIBIT A PAGE 5 a. Have and maintain a Minimum Tangible Net Worth (meaning the excess of all assets, excluding any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, over its liabilities, less subordinated debt) of not less than $2,200,000 as of 10/31/97; not less than $2,100,000 as of 01/31/98; not less than $2,400,000 as of 04/30/98, not less than $3,300,000 as of 07/31/98 and not less than $4,400,000 as of FYE 10/31/98 and thereafter. Minimum tangible net worth requirements to be increased by equal amount of any future increase in net worth as a result of an equity or subordinated debt placement. b. Have and maintain a ratio of total liabilities to Tangible Net Worth of not greater than 10.8 to 1.0. as of 10/31/97; not greater than 10.8 to 1.0 as of 01/31/98; not greater than 10.80 to 1.0 as of 04/30/98; not greater than 8.50 to 1.0 as of 7/31/98 and not greater than 7.0 to 1.0 as of FYE 10/31/98 and thereafter. c. Have and maintain minimum Trading Capital (meaning the sum of the Borrower's Cash, Accounts Receivable and Inventory minus the sum of the Borrower's Accounts Payable, Bank Credit Line Outstandings and Deferred Revenue) of not less than $2,100,000 as of 10/31/97; not less than $2,500,000 as of 01/31/98; not less than $2,200,000 as of 04/30/98; not less than $3,000,000 as of 07/31/98 and not less than $3,400,000 as of FYE 10/31/98 and thereafter. . d. At all times maintain a Trading Ratio of at least 1.00 to 1.0. Trading Ratio shall mean the Borrower's Trading Assets (the sum of cash, accounts receivable and inventory) divided by the Borrower's Trading Liabilities (the sum of accounts payable, outstandings on the Bank credit line and deferred revenue). e. Maintain all significant bank deposit accounts and banking relationship with Bank. f. On a weekly basis, deliver to Bank sales and cash receipts together with a borrowing base certificate. Within 10 days from each month-end, deliver to Bank an accounts receivable aging reconciled to the general ledger of Borrower, a detailed accounts payable aging reconciled to the Borrower's general ledger and setting forth the amount of any book overdraft or the amount of checks issued but not sent and an inventory certification outlining both inventory composition and activity for the month. All the foregoing will be in a form and with such detail as Bank may request from time to time. g. Within 30 days after the end of each month, deliver to Bank a profit and loss statement and a balance sheet in form satisfactory to Bank all certified by an officer of Borrower, and a letter certifying compliance with all loan covenants signed by the Chief Financial Officer of Borrower. h. Within 90 days after the end of Borrower's fiscal year, deliver to Bank the same financial statements as otherwise provided monthly together with Changes in Financial 10 EXHIBIT A PAGE 6 Position Statement, prepared on an audited basis by an independent certified public accountant selected by Borrower, but acceptable to Bank. i. On a quarterly basis, provide Bank with an alphabetized list of customers including addresses. j. Guarantor shall provide annually updated financial statements within 90 days of Guarantor's FYE. k. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. l. INSURANCE. Maintain public liability, property damage and workers compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrower shall provide evidence of property insurance in amounts and types acceptable to the Bank and Bank shall be named as Loss Payee in a Lender's Loss Payable Endorsement form 438BFU or equivalent. m. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and any of its other liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto. n. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times. o. SUBORDINATION. Cause $5,196,000 due to W. David Sykes to be subordinated to Bank's line of credit by a subordination agreement acceptable to Bank. 10. The extensions of credit under the Security and Loan Agreement shall be available as follows: 11 EXHIBIT A PAGE 7 a. Up to $10,000,000 in direct advances. b. Up to $500,000 for the issuance of sight and usance commercial letters of credit. c. Up to 75% of the Borrowing Base for domestic Bankers Acceptances (individual "BA" and collectively "BA's") in minimum, amounts of $250,000. Each BA must be an eligible acceptance under applicable Federal Rules and Regulations. The maturity of each BA is not to exceed 60 days. d. The combined outstandings of a. b. and c. shall not exceed $10,000,000 . 11. FEES AND INTEREST: a. The rate of interest applicable to the Line of Credit Loan Account shall be 1.0% per year in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. A commitment fee of $15,000 shall be due upon execution of documents. A documentation fee of $250 shall be due upon execution of documents. b. Bankers Acceptances shall be priced at Bank's prevailing BA rate plus 350 basis points. Pricing on currently outstanding BA's will be converted to Prime plus 1.0%. c. Letters of credit shall be priced at Bank's prevailing rate(s). d. Borrower will pay 0.25% on the unused portion of the commitment, as a non-utilization fee, on a quarterly average basis should average loan outstandings, inclusive of Banker Acceptances, be less than $4,000,000 for any quarter. e. Upon Borrower reaching a debt to tangible net worth ratio of 5.25 to 1.0 and two consecutive quarters of net profits (with combined aggregate profits at or above $2,000,000), pricing shall adjust to Prime +0.75% with a BA option of BA rate plus 250 basis points. Upon Borrower reaching a debt to tangible net worth ratio of 2.00 to 1.0 and two or more consecutive quarters of net profits, (with combined aggregate profits at or above $2,000,000), pricing shall adjust to Prime rate with BA option of BA rate plus 225 basis points. Interest shall be computed at the above rates on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. The default rate shall be five percent per year in excess of the rate otherwise applicable. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent twenty or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the 12 EXHIBIT A PAGE 8 payment; but nothing in this paragraph is to be construed as any obligation on the part of Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or delay on the part of your Bank or any holder or Notes Issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or of any other right, power or privilege. All rights and remedies existing under this agreement or any not issued in connection with a loan that your Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. NOTICE OF DEFAULT. Borrower shall promptly notify Bank in writing of the occurrence of any event of default hereunder or any event which upon notice and lapse of time would be an event of default. 14. REFERENCE PROVISION. a. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to the Security and Loan Agreement, this Exhibit A, any General Security Agreement executed by Borrower in favor of Bank, or any Note executed by Borrower in favor of Bank (collectively, in this Paragraph 14, the "Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure ("CCP"), or their successor section , which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) 13 EXHIBIT A PAGE 9 days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following the notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Paragraph 14 shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Court is empowered to issue temporary and/or provisional remedies, as appropriate. b. Except as expressly set forth in this Paragraph 14, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. c. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. d. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein 14 EXHIBIT A PAGE 10 described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. This addendum is executed by and on behalf of the parties as of the date first above written. ANDATACO "BORROWER" BY:/s/ Harris Ravine ------------------------------- Chief Executive Officer ----------------------- Title IMPERIAL BANK, "BANK" BY:/s/ Tim Bubnack -------------------------------- V.P. - Commercial Loan Officer ------------------------------ Title December 15, 1997 ----------------- Date EX-10.19 4 EXHIBIT 10.19 1 EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of May 1, 1997, by and between ANDATACO, a California corporation (the "Company"), and Harris Ravine ("Employee"). Capitalized terms used herein and not otherwise defined shall have the meaning given to such terms in that certain Agreement and Plan of Merger and Reorganization dated as of February 28, 1997 by and among IPL Systems, Inc., IPL Acquisition Corp., W. David Sykes and the Company. 1. DUTIES. (a) GENERAL. The Company hereby employs Employee, and Employee hereby agrees to serve, as the Chief Executive Officer and Chairman of the Board of Directors of the Company during the Term (as defined in Section 2) hereof. Employee shall have such duties and powers as are normally accorded to a Chief Executive Officer of a corporation and shall loyally, conscientiously and in good faith perform such duties as may be assigned to him from time to time by the Board of Directors of the Company. (b) BUSINESS PLAN COMMITTEE. Prior to the beginning of each fiscal year of the Company, Employee and the Company's Board of Directors (the "Business Plan Committee") shall work together to establish performance goals for the Company and Employee for the coming fiscal year. The performance goals shall be mutually agreeable to the parties and shall be set forth in a formal business plan (the "Business Plan") to be adopted by the Board of Directors of the Company. The Business Plan shall set forth the performance goals in a manner that permits a quantitative determination that such performance goals have been satisfied. Performance goals subject to quantitative analysis may include, for example, target total sales, target net income, target earnings per share, or any other number or financial ratio that the Business Plan Committee shall adopt. The performance goals set forth in the Business Plan may be amended or modified only by written consent of each member of the Business Plan Committee. 2. TERM AND TERMINATION. (a) TERM OF AGREEMENT. (i) ORIGINAL TERM. Unless earlier terminated as provided in this Agreement, the term of Employee's employment shall commence on the Closing Date and shall continue until June 30, 2002 (the "Original Term"). (ii) ONE-YEAR RENEWALS. Unless (A) the Company or Employee delivers written notice of its or his intention not to extend the term of this Agreement on or prior to the date that is three (3) months prior to the expiration of the Original Term or the then applicable Annual Renewal Period (as defined below), if any, or (B) this Agreement is otherwise terminated prior to the expiration of the Original Term or the then applicable Annual Renewal Period as provided in this Agreement, this Agreement shall be automatically renewed for an 1. 2 unlimited number of additional one (1) year periods (each an "Annual Renewal Period"). The Original Term and any Annual Renewal Periods are hereinafter collectively referred to as the "Term." (b) TERMINATION BY COMPANY FOR CAUSE. Notwithstanding anything in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and Employee's employment) may be terminated immediately and without notice by the Company for "Cause." For the purposes of this Agreement, "Cause" shall be defined as Employee's: (i) material failure to perform his duties and obligations hereunder following notice from the Board of Directors specifying such failures in detail and Employee fails to cure or diligently commence curing such failures within thirty (30) days of receipt of such notice; (ii) engaging or participating in any activity which is directly competitive with or intentionally injurious to the Company; (iii) commission of any fraud against the Company or use or appropriation for his personal use and benefit of any funds, assets or properties of the Company not authorized by the Company to be so used or appropriated; or (iv) knowing violation of law, conviction for commission of a felony or conviction for a crime involving dishonesty or moral turpitude. Upon termination of this Agreement by the Company pursuant to this Section 2(b), Employee shall be entitled to receive on the date of termination an amount equal to Employee's Base Salary (as defined in Section 4) prorated through the date of termination. Upon any termination of this Agreement under this Section 2(b), Employee shall not be entitled to any Bonus amounts otherwise due under Section 4 and, except as expressly provided under this Section 2(b), the Company shall have no further obligations to Employee under this Agreement. (c) TERMINATION BY COMPANY WITHOUT CAUSE. Notwithstanding anything in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and Employee's employment) may be terminated at the will of the Company without Cause upon delivery of written notice to Employee. Upon any termination of this Agreement pursuant to this Section 2(c), Employee shall be entitled to receive an amount equal to (i) eighteen (18) months of Employee's Base Salary, plus (ii) any unpaid Bonus amounts then earned by Employee up through the date of termination. All amounts payable to Employee under clause (i) of the preceding sentence shall be paid to Employee in eighteen (18) equal monthly installments commencing on the date of termination and any Bonus amounts payable to Employee under clause (ii) shall be paid to Employee within thirty (30) days of termination. The total amount of Bonus due to Employee under clause (ii) above shall be determined as of the date of termination on a prorated basis and shall be calculated pursuant to Section 4(b)(i). Upon any termination of this Agreement under this Section 2(c), 2. 3 except as expressly provided under this Section 2(c), the Company shall have no further obligations to Employee under this Agreement. (d) VOLUNTARY TERMINATION BY EMPLOYEE. Employee may voluntarily terminate his employment with the Company by giving the Company thirty (30) days advance written notice. Upon any voluntary termination of his employment with the Company under this Section 2(d), Employee shall be entitled to receive an amount equal to Employee's Base Salary prorated through the date of termination. Upon any termination of Employee's employment with the Company pursuant to this Section 2(d), Employee shall not be entitled to any Bonus Amounts otherwise due under Section 4 and, except as expressly provided under this subsection (d), the Company shall have no further obligations to Employee under this Agreement. (e) AUTOMATIC TERMINATION. This Agreement (and Employee's employment) shall terminate immediately and without the necessity of any notice or any other action by any party hereto upon the first to occur of any of the following: (i) The death of Employee; (ii) The loss of Employee's legal capacity to contract; (iii) The inability of Employee to perform his duties or responsibilities hereunder, as a result of mental or physical ailment or incapacity, for an aggregate of ninety (90) days (whether or not consecutive) unless waived in writing by Company; (iv) the expiration of the Term of this Agreement, provided that timely notice has been given as required by Section 2(a)(ii); or Upon termination of this Agreement pursuant to any of clauses (i), (ii) or (iii) of this Section 2(e), Employee or Employee's estate, as the case may be, shall be entitled to an amount equal to (1) Employee's Base Salary prorated through the date of termination and any unpaid Bonus then earned by Employee as of the date of termination, plus (2) Employee's Base Salary for a period of twelve (12) months. The amounts payable under (1) above shall be payable on the date of termination. The amount payable under (2) above shall be payable in twelve (12) equal monthly installments commencing on the date of termination. Upon payment of such amounts, the Company shall have no further obligations to Employee or Employee's estate, as the case may be, under this Agreement. (f) TERMINATION UPON CHANGE OF CONTROL. In the event that Employee's employment with the Company (or its successor) is terminated without Cause within twelve (12) months after a "Change of Control" of the Company, Employee shall be entitled to receive an amount equal to (i) eighteen (18) months of Employee's Base Salary, plus (ii) any unpaid Bonus amounts then earned by Employee up through the date of termination. Such amount shall be paid to Employee in eighteen (18) equal monthly installments commencing on the date of termination. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred upon the consummation of a (1) merger or consolidation of the Company with 3. 4 or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than 30% of the Company's voting power immediately after such consolidation, merger or reorganization; (2) transaction or series of related transactions in which in excess of 30% of the Company's voting power is transferred; or (3) sale of all or substantially all of the assets of the Company." 3. EXCLUSIVITY OF EMPLOYMENT. (a) LOYAL AND CONSCIENTIOUS SERVICE. During the Term of this Agreement, Employee shall devote his full business time, interest, abilities and energies to the Company and use his best efforts, skills and abilities to promote the general welfare and interest of the Company and to preserve, maintain and enhance its business and business relationships with its customers and employees. (b) NONCOMPETITION. During Employee's employment with the Company, Employee shall not, directly or indirectly, render services of a business, professional or commercial nature to any other person or entity that competes with the Company's business or welfare, whether for compensation or otherwise, or engage in any business activities competitive with the Company's business or welfare, whether alone, as an employee, as a partner, or as a shareholder, officer or director of any other corporation or other business entity, or as a trustee, fiduciary or in any other similar representative capacity of any other entity. Notwithstanding the foregoing, the expenditure of reasonable amounts of time for educational, charitable or professional activities shall not be deemed a breach of this Agreement if those activities do not materially interfere with the services required under this Agreement. The noncompetition provisions of this Section 3(b) shall terminate on June 30, 2002. 4. COMPENSATION. (a) BASE SALARY. (i) Beginning on the date hereof, and continuing throughout the entire Term of this Agreement, the Company shall pay Employee a fixed annual salary in an amount equal to Three Hundred Thousand Dollars ($300,000) or such greater amount as may be determined by the Board of Directors from time to time (the "Base Salary"). (ii) The Base Salary shall be paid in equal installments (subject to proration for a period of employment of greater or less than a year or any applicable payroll period therein) on the Company's regular payroll dates. Employee authorizes the Company to make such deductions and withholdings from his Base Salary and any other earnings of Employee from Company as are required by law, which deductions shall include, without limitation, withholding for federal and state income tax and Social Security and Medicare withholdings. (b) BONUS. 4. 5 (i) Subject to Section 4(b)(ii) below, commencing on the fiscal year beginning November 1, 1997 and for each fiscal year of the Company thereafter during the Term of this Agreement, Employee shall be eligible to receive a cash bonus (the "Bonus"), assuming achievement of "100% of Plan," in an amount equal to fifty percent (50%) of (A) Employee's Base Salary in effect during the last fiscal year, or (B) in the event Employee's Base Salary increases or decreases during the last fiscal year, the Employee's average annual Base Salary during the last fiscal year. For the purposes of this Agreement, the term "100% of Plan" shall be understood to mean that the Company and Employee shall have satisfied each performance goal set forth in the Business Plan for a given fiscal year. (ii) Upon the Company and Employee achieving 100% of Plan during any fiscal year, the Company shall pay to Employee the Bonus set forth in Section 4(b)(i). In the event the Company and Employee fail to achieve 100% of Plan during any fiscal year, Employee shall be entitled to receive only that percentage of the Bonus that is equal to that percentage of the Business Plan which the Company and Employee have achieved, as determined by the Board of Directors; provided, however, that in no event shall Employee be entitled to any Bonus amounts if the Company and Employee fail to achieve at least 90% of Plan, as determined by the Board of Directors. (c) STOCK OPTIONS. (i) GENERAL TERMS. As soon as practicable after the Closing Date, the Company agrees to use its best efforts to cause to be granted to Employee an option to purchase up to seven hundred thousand (700,000) shares of Common Stock of IPL Systems, Inc., a Massachusetts corporation ("IPL"), at an exercise price equal to the fair market value of the Common Stock of IPL on the date of grant (the "Option"). The Option shall be a nonstatutory stock option and is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The Option shall be granted under IPL's standard form of nonstatutory stock option agreement used in connection with its employee stock option plans. The shares of Common Stock underlying the Option shall have been registered pursuant to the Securities Act of 1933, as amended, such that the shares when issued shall be shall be freely tradable (subject to any restrictions that may be imposed on "control shares" and restrictions generally placed on officers, directors or 5% or greater shareholders of a company). (ii) VESTING. The shares of Common Stock underlying the Option shall vest and the Option shall become exercisable as follows: (1) During the first year of this Agreement (the "Initial Vesting Period"), 250,000 shares shall vest ratably and monthly commencing on the date of this Agreement; (2) 225,000 shares shall vest at the rate of 56,250 shares per year at the end of each year during the four-year period commencing on the first anniversary of the end of the Initial Vesting Period; 5. 6 (3) an additional 225,000 shares shall vest at the rate of 56,250 per year at the end of each year during the four-year period commencing on the first anniversary of the end of the Initial Vesting Period, provided, that, the Company meets 100% of Plan for the fiscal year in which such vesting date occurs (that portion of the Option vesting in any fiscal year under this Section 4(c)(ii)(3) being referred to herein as the "Contingent Option"). If the Company fails to achieve 100% of Plan during any fiscal year, Employee shall be entitled to receive only that percentage of the Contingent Option that is equal to that percentage of the Business Plan that the Company and Employee have achieved; provided, however, that in no event shall Employee be entitled to any portion of the Contingent Option that would otherwise vest in any fiscal year if the Company and Employee fail to achieve at least 90% of Plan for such fiscal year, as determined by the Board of Directors. Any portion of the Contingent Option that fails to vest as set forth in this Section 4(c)(ii)(3) shall expire and no longer be exercisable and in no event shall the shares subject to any portion of the Contingent Option that expires under this Section 4(c)(ii)clause (3) be carried forward to any subsequent fiscal year. (iii) LOCK-UP PERIOD. Employee acknowledges that the shares of Common Stock of IPL underlying the Option shall be subject to certain restrictions on disposition and in that regard Employee shall execute the form of Lock-Up Agreement attached hereto as Exhibit A. (iv) GOOD FAITH NEGOTIATION. In the event the Company is unable to cause to be granted to Employee the Option, the Company and Employee agree to negotiate in good faith alternative compensation to be paid to Employee that is reasonably equivalent in value to the Option; provided, however, that payment of such alternative compensation shall be in a manner that reasonably correlates to the time period in which the Option would have vested in accordance with this Agreement. (d) ADDITIONAL COMPENSATION AND BENEFITS. During the term of this Agreement: (i) Employee shall be entitled to five (5) weeks paid vacation in each twelve-month period during Employee's employment hereunder; (ii) the Company shall pay or reimburse Employee for all reasonable and necessary travel and other business expenses incurred or paid by Employee in connection with the performance of his services under this Agreement upon approval of the Company and presentation of expense statements, vouchers, logs and such other supporting information as the Company may reasonably request from time to time; (iii) the Company shall pay or reimburse Employee for the annual cost of premiums for a term life insurance policy insuring the life of Employee and providing for death benefits in the amount of One Million Dollars ($1,000,000). If Employee's employment is terminated in accordance with this Agreement, Employee shall immediately assume sole financial responsibility for the payment of the premiums with respect to such life insurance policy; 6. 7 (iv) the Company shall provide a monthly car allowance (including the cost of leasing, maintaining and operating the car) in an amount to be determined by the Company and Employee upon the Employee's relocation to San Diego; (v) the Company shall reimburse Employee for reasonable costs and expenses of one professional organization membership upon prior written approval of the Company of such expenses; (vi) Employee shall be entitled to participate in any other policies, programs and benefits which the Company may, in its sole and absolute discretion, make generally available to its other senior executives from time to time including, but not limited to, disability insurance, pension and retirement plans, health or medical insurance and similar programs; and (vii) Employee shall be entitled to a relocation allowance in an amount to be reasonably determined by the Company and Employee. 5. NONDISCLOSURE AND ASSIGNMENT OF PROPRIETARY AND CONFIDENTIAL INFORMATION. In consideration and recognition of the fact that Employee has had, or during the course of his employment with the Company may have, access to Confidential Information (as hereinafter defined) of the Company or other information and data of a secret or proprietary nature of the Company which the Company desires to keep confidential, and that the Company has furnished, or during the course of Employee's employment will furnish, such Confidential Information to Employee, Employee agrees and acknowledges as follows: (a) CONFIDENTIAL INFORMATION. As used herein, the term "Confidential Information" shall mean and include, without limitation, any and all marketing and sales data, plans and strategies, financial projections, customer lists, prospective customer lists, promotional ideas, data concerning the Company's services, designs, methods, inventions, improvements, discoveries or designs, whether or not patentable, "know-how," training and sales techniques, and any other information of a similar nature disclosed to Employee or otherwise made known to him as a consequence of or through his employment with the Company (including information originated by Employee) during Employee's employment; provided, however, that the term Confidential Information shall not include any information that (i) at the time of the disclosure or thereafter is or becomes generally available to and known by the public, other than as a result of a disclosure by Employee or any agent or representative of Employee in violation of this Agreement, or (ii) was available to Employee on a non-confidential basis from a source other than the Company, or any of its officers, directors, employees, agents or other representatives. (b) EXCLUSIVE RIGHTS; ASSIGNMENT TO COMPANY. The Company has exclusive property rights to all Confidential Information, and Employee hereby assigns to Company all rights he might otherwise possess in any Confidential Information. Except as required in the performance of his duties to the Company, Employee will not at any time during or after his employment, directly or indirectly use, communicate, disclose, disseminate, lecture upon, publish articles or otherwise disclose or put in the public domain, any Confidential 7. 8 Information relating to the Company, or its services, products or business. Employee agrees to deliver to the Company any and all copies of Confidential Information in the possession or control of Employee upon the expiration or termination of this Agreement, or at any other time upon request. This Section 5 shall survive the termination of this Agreement and the termination of Employee's employment with the Company. 6. SOLICITATION OF EMPLOYEES. In consideration and recognition of the fact that Employee's position with the Company is an executive position involving fiduciary responsibility to the Company and access to the Company's Confidential Information, Employee agrees that he will not solicit or take away any employees of the Company for employment by any enterprise that competes with, or is engaged in a substantially similar business to, the business of, the Company. This Section 6 shall survive for a period of two (2) years from the date of termination of this Agreement. 7. REPRESENTATION BY EMPLOYEE. Employee represents and warrants that he is under no restriction or disability by reason of any prior contract or otherwise which would prevent him from entering into and performing his duties and obligations under this Agreement. 8. NOTICES. All notices, requests, demands and other communications under this Agreement must be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the date indicated on the return receipt as the date of receipt or refusal if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid, return receipt requested, and properly addressed as follows: to the Company: ANDATACO 10140 Mesa Rim Road San Diego, CA 92121 Attn: President Fax: (619) 453-9294 to the Employee: HARRIS RAVINE 8475 Greenwood Drive Niwot, CO 80503 Fax: (303) 652-0424 Any party may change its address for the purpose of this Section 8 by giving the other party written notice of the new address in the manner set forth above. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, written or otherwise. 8. 9 10. AMENDMENT. This Agreement may be amended, modified, superseded or canceled, and any of the terms, covenants or conditions hereof may be amended, only by a written instrument executed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 11. WAIVER. Any failure to exercise or delay in exercising any right, power or privilege herein contained, or any failure or delay at any time to require the other party's performance of any obligation under this Agreement, shall not affect the right to subsequently exercise that right, power or privilege, or to require performance of that obligation. A waiver of any of the provisions of this Agreement shall not be deemed, nor shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. A waiver shall not be binding unless executed in writing by the party making the waiver. 12. ASSIGNMENT; BINDING EFFECT. This Agreement shall inure to the benefit of, and be enforceable by, the Company and its successors and assigns; however, this Agreement is personal to Employee and may not be assigned by Employee in whole or in part. 13. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be valid and effective under applicable law. If any provision of this Agreement shall be unlawful, void or for any reason unenforceable, it shall be deemed separable from, and shall in no way affect the validity or enforceability of, the remaining provisions of this Agreement, and the rights and obligations of the parties shall be enforced to the fullest extent possible. 14. ATTORNEYS' FEES. In any judicial action or proceeding or any arbitration proceeding between the parties to enforce any of the provisions of this Agreement, to seek damages on account of the breach hereof, to seek injunctive relief to prevent the breach hereof, to seek a judicial determination of the rights or obligations of any party hereto, or in any judicial action or proceeding or any arbitration proceeding between the parties in which this Agreement is raised as a defense, regardless of whether the action or proceeding is prosecuted to judgment, and in addition to any other remedy, the unsuccessful party shall pay the successful party all costs and expenses, including reasonable attorneys' fees, incurred by the successful party. 15. GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of California, excluding any choice of law principles which direct the application of the laws of another jurisdiction. 16. EFFECT OF HEADINGS. The subject headings of this Agreement are included for convenience only, and shall not affect the construction or interpretation of any of its provisions. 17. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "Company" ANDATACO, a California corporation By: /s/ W. DAVID SYKES -------------------------------------- Name: W. David Sykes -------------------------------- Title: President ------------------------------- "Employee" /s/ HARRIS RAVINE ----------------------------------------- HARRIS RAVINE 10. EX-10.20 5 EXHIBIT 10.20 1 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of May 1, 1997, by and between ANDATACO, a California corporation (the "Company"), and W. David Sykes ("Employee"). Capitalized terms used herein and not otherwise defined shall have the meaning given to such terms in that certain Agreement and Plan of Merger and Reorganization dated as of February 28, 1997 by and among IPL Systems, Inc., IPL Acquisition Corp., the Company and Employee. 1. DUTIES. (a) GENERAL. The Company hereby employs Employee, and Employee hereby agrees to serve, as the President and Vice Chairman of the Board of Directors of the Company during the Term (as defined in Section 2) hereof. Employee shall have such duties and powers as are normally accorded to a President of a corporation and shall loyally, conscientiously and in good faith perform such duties as may be assigned to him from time to time by the Board of Directors of the Company. (b) BUSINESS PLAN COMMITTEE. Prior to the beginning of each fiscal year of the Company, Employee and the Company's Board of Directors (the "Business Plan Committee") shall work together to establish performance goals for the Company and Employee for the coming fiscal year. The performance goals shall be mutually agreeable to the parties and shall be set forth in a formal business plan (the "Business Plan") to be adopted by the Board of Directors of the Company. The Business Plan shall set forth the performance goals in a manner that permits a quantitative determination that such performance goals have been satisfied. Performance goals subject to quantitative analysis may include, for example, target total sales, target net income, target earnings per share, or any other number or financial ratio that the Business Plan Committee shall adopt. The performance goals set forth in the Business Plan may be amended or modified only by written consent of each member of the Business Plan Committee. 2. TERM AND TERMINATION. (a) TERM OF AGREEMENT. (i) ORIGINAL TERM. Unless earlier terminated as provided in this Agreement, the term of Employee's employment shall commence on the Closing Date and shall continue until June 30, 2002 (the "Original Term"). (ii) ONE-YEAR RENEWALS. Unless (A) the Company or Employee delivers written notice of its or his intention not to extend the term of this Agreement on or prior to the date that is three (3) months prior to the expiration of the Original Term or the then applicable Annual Renewal Period (as defined below), if any, or (B) this Agreement is otherwise terminated prior to the expiration of the Original Term or the then applicable Annual Renewal Period as provided in this Agreement, this Agreement shall be automatically renewed for an 1. 2 unlimited number of additional one (1) year periods (each an "Annual Renewal Period"). The Original Term and any Annual Renewal Periods are hereinafter collectively referred to as the "Term." (b) TERMINATION BY COMPANY FOR CAUSE. Notwithstanding anything in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and Employee's employment) may be terminated immediately and without notice by the Company for "Cause." For the purposes of this Agreement, "Cause" shall be defined as Employee's: (i) engaging or participating in any activity which is directly competitive with or intentionally injurious to the Company; (ii) commission of any fraud against the Company or use or appropriation for his personal use and benefit of any funds, assets or properties of the Company not authorized by the Company to be so used or appropriated; or (iii) knowing violation of law, conviction for commission of a felony or conviction for a crime involving dishonesty or moral turpitude. Upon termination of this Agreement by the Company pursuant to this Section 2(b), Employee shall be entitled to receive on the date of termination an amount equal to Employee's Base Salary (as defined in Section 4) prorated through the date of termination. Upon any termination of this Agreement under this Section 2(b), Employee shall not be entitled to any Bonus amounts otherwise due under Section 4 and, except as expressly provided under this Section 2(b), the Company shall have no further obligations to Employee under this Agreement. (c) TERMINATION BY COMPANY WITHOUT CAUSE. Notwithstanding anything in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and Employee's employment) may be terminated at the will of the Company without Cause upon delivery of written notice to Employee; provided, however, that Employee shall nonetheless be entitled to receive (i) his Base Salary for the number of years (or part thereof for any partial year) remaining on the Original Term or if less than one (1) year remains on the Original Term or the Original Term shall have expired, then for a period of one (1) year from the date of termination, and (ii) any unpaid Bonus amounts then earned by Employee up through the date of termination. All amounts payable to Employee under clause (i) of the preceding sentence shall be paid to Employee in that number of equal monthly installments as are remaining on the Original Term or part thereof, or if the Original Term shall have expired, then in twelve (12) equal monthly installments, and all amounts payable to Employee under clause (ii) above shall be paid within thirty (30) days of termination. If the Company elects to terminate this Agreement pursuant to this subparagraph (c), the Company shall have no further obligations to Employee under this Agreement other than the payment of the Base Salary referenced in the preceding sentence. Notwithstanding the foregoing, in the event Employee is terminated by the Company under this Section 2(c) and Employee thereafter 2. 3 engages or participates in any activity described in Section 2(b)(i), the Company shall have no further obligations to pay Employee as set forth in this Section 2(c). (d) VOLUNTARY TERMINATION BY EMPLOYEE. Employee may voluntarily terminate his employment with the Company by giving the Company fourteen (14) days advance written notice. Upon any voluntary termination of his employment with the Company under this Section 2(d), Employee shall be entitled to receive an amount equal to Employee's Base Salary prorated through the date of termination. Upon any termination of Employee's employment with the Company pursuant to this Section 2(d), Employee shall not be entitled to any Bonus Amounts otherwise due under Section 4 and, except as expressly provided under this subsection (d), the Company shall have no further obligations to Employee under this Agreement. (e) AUTOMATIC TERMINATION. This Agreement (and Employee's employment) shall terminate immediately and without the necessity of any notice or any other action by any party hereto upon the first to occur of any of the following: (i) The death of Employee; (ii) The loss of Employee's legal capacity to contract; (iii) The inability of Employee to perform his duties or responsibilities hereunder, as a result of mental or physical ailment or incapacity, for an aggregate of ninety (90) calendar days during any calendar year (whether or not consecutive) unless waived in writing by Company; or (iv) the expiration of the Term of this Agreement, provided that timely notice has been given as required by Section 2(a)(ii). Upon termination of this Agreement pursuant to any of clauses (i), (ii) or (iii) of this Section 2(e), Employee or Employee's estate, as the case may be, shall be entitled to an amount equal to (1) Employee's Base Salary prorated through the date of termination and any unpaid Bonus then earned by Employee as of the date of termination, plus (2) Employee's Base Salary for a period of twelve (12) months. The amounts payable under (1) above shall be payable on the date of termination. The amount payable under (2) above shall be payable in twelve (12) equal monthly installments commencing on the date of termination. Upon payment of such amounts, the Company shall have no further obligations to Employee or Employee's estate, as the case may be, under this Agreement. (f) TERMINATION UPON CHANGE OF CONTROL. In the event that Employee's employment with the Company (or its successor) is terminated without Cause within twelve (12) months after a "Change of Control" of the Company and at no time during the six (6) months preceding such Change in Control did Employee beneficially own securities representing more than 30% of the Company's voting power, Employee shall be entitled to receive an amount equal to (i) eighteen (18) months of Employee's Base Salary, plus (ii) any unpaid Bonus amounts then earned by Employee up through the date of termination. Such amount shall be paid to Employee 3. 4 in eighteen (18) equal monthly installments commencing on the date of termination. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred upon the consummation of a (1) merger or consolidation of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than 30% of the Company's voting power immediately after such consolidation, merger or reorganization; (2) transaction or series of related transactions in which in excess of 30% of the Company's voting power is transferred; or (3) sale of all or substantially all of the assets of the Company." 3. EXCLUSIVITY OF EMPLOYMENT. (a) LOYAL AND CONSCIENTIOUS SERVICE. During the Term of this Agreement, Employee shall devote his full business time, interest, abilities and energies to the Company and use his best efforts, skills and abilities to promote the general welfare and interest of the Company and to preserve, maintain and enhance its business and business relationships with its customers and employees. (b) NONCOMPETITION. During Employee's employment with the Company, Employee shall not, directly or indirectly, render services of a business, professional or commercial nature to any other person or entity that competes with the Company's business or welfare, whether for compensation or otherwise, or engage in any business activities competitive with the Company's business or welfare, whether alone, as an employee, as a partner, or as a shareholder, officer or director of any other corporation or other business entity, or as a trustee, fiduciary or in any other similar representative capacity of any other entity. Notwithstanding the foregoing, the expenditure of reasonable amounts of time for educational, charitable or professional activities shall not be deemed a breach of this Agreement if those activities do not materially interfere with the services required under this Agreement. The noncompetition provisions of this Section 3(b) shall terminate on June 30, 2002; provided, however, that in the event Employee is terminated by the Company pursuant to Section 2(c) prior to the expiration of the Original Term, Employee's obligations under this Section 3(b) to not compete with the Company shall be contingent upon the Company continuing to pay Employee his Base Salary pursuant to Section 2(c). 4. COMPENSATION. (a) BASE SALARY. (i) Beginning on the date hereof, and continuing throughout the entire Term of this Agreement, the Company shall pay Employee a fixed annual salary in an amount equal to Two Hundred Fifty Thousand Dollars ($250,000) or such greater amount as may be determined by the Board of Directors from time to time (the "Base Salary"). (ii) The Base Salary shall be paid in equal installments (subject to proration for a period of employment of greater or less than a year or any applicable payroll 4. 5 period therein) on the Company's regular payroll dates. Employee authorizes the Company to make such deductions and withholdings from his Base Salary and any other earnings of Employee from Company as are required by law, which deductions shall include, without limitation, withholding for federal and state income tax and Social Security and Medicare withholdings. (b) BONUS. (i) Subject to Section 4(b)(ii) below, commencing on the fiscal year beginning November 1, 1997 and for each fiscal year of the Company thereafter during the Term of this Agreement, Employee shall be eligible to receive a cash bonus (the "Bonus"), assuming achievement of "100% of Plan," in an amount equal to fifty percent (50%) of (A) Employee's Base Salary in effect during the last fiscal year, or (B) in the event Employee's Base Salary increases or decreases during the last fiscal year, the Employee's average annual Base Salary during the last fiscal year. For the purposes of this Agreement, the term "100% of Plan" shall be understood to mean that the Company and Employee shall have satisfied each performance goal set forth in the Business Plan for a given fiscal year. (ii) Upon the Company and Employee achieving 100% of Plan during any fiscal year, the Company shall pay to Employee the Bonus set forth in Section 4(b)(i). In the event the Company and Employee fail to achieve 100% of Plan during any fiscal year, Employee shall be entitled to receive only that percentage of the Bonus that is equal to that percentage of the Business Plan which the Company and Employee have achieved, as determined by the Board of Directors; provided, however, that in no event shall Employee be entitled to any Bonus amounts if the Company and Employee fail to achieve at least 90% of Plan, as determined by the Board of Directors. (c) ADDITIONAL COMPENSATION AND BENEFITS. During the Term of this Agreement: (i) Employee shall be entitled to five (5) weeks paid vacation in each twelve-month period during Employee's employment hereunder; (ii) the Company shall pay or reimburse Employee for all reasonable and necessary travel and other business expenses incurred or paid by Employee in connection with the performance of his services under this Agreement upon approval of the Company and presentation of expense statements, vouchers, logs and such other supporting information as the Company may reasonably request from time to time. (iii) the Company shall pay or reimburse Employee for the annual cost of premiums for a term life insurance policy insuring the life of Employee and providing for death benefits in the amount of One Million Dollars ($1,000,000). If Employee's employment is terminated in accordance with this Agreement, Employee shall immediately assume sole financial responsibility for the payment of the premiums with respect to such life insurance policy. 5. 6 (iv) the Company shall provide a monthly car allowance (including the cost of leasing, maintaining and operating the car) in an amount to be determined by the Company and Employee; (v) the Company shall reimburse Employee for reasonable costs and expenses of one professional organization membership upon prior written approval of the Company of such expenses; (vi) Employee shall be entitled to participate in any other policies, programs and benefits which the Company may, in its sole and absolute discretion, make generally available to its other senior executives from time to time including, but not limited to, disability insurance, pension and retirement plans, health or medical insurance and similar programs. 5. NONDISCLOSURE AND ASSIGNMENT OF PROPRIETARY AND CONFIDENTIAL INFORMATION. In consideration and recognition of the fact that Employee has had, or during the course of his employment with the Company may have, access to Confidential Information (as hereinafter defined) of the Company or other information and data of a secret or proprietary nature of the Company which the Company desires to keep confidential, and that the Company has furnished, or during the course of Employee's employment will furnish, such Confidential Information to Employee, Employee agrees and acknowledges as follows: (a) CONFIDENTIAL INFORMATION. As used herein, the term "Confidential Information" shall mean and include, without limitation, any and all marketing and sales data, plans and strategies, financial projections, customer lists, prospective customer lists, promotional ideas, data concerning the Company's services, designs, methods, inventions, improvements, discoveries or designs, whether or not patentable, "know-how," training and sales techniques, and any other information of a similar nature disclosed to Employee or otherwise made known to him as a consequence of or through his employment with the Company (including information originated by Employee) during Employee's employment; provided, however, that the term Confidential Information shall not include any information that (i) at the time of the disclosure or thereafter is or becomes generally available to and known by the public, other than as a result of a disclosure by Employee or any agent or representative of Employee in violation of this Agreement, or (ii) was available to Employee on a non-confidential basis from a source other than the Company, or any of its officers, directors, employees, agents or other representatives. (b) EXCLUSIVE RIGHTS; ASSIGNMENT TO COMPANY. The Company has exclusive property rights to all Confidential Information, and Employee hereby assigns to Company all rights he might otherwise possess in any Confidential Information. Except as required in the performance of his duties to the Company, Employee will not at any time during or after his employment, directly or indirectly use, communicate, disclose, disseminate, lecture upon, publish articles or otherwise disclose or put in the public domain, any Confidential Information relating to the Company, or its services, products or business. Employee agrees to deliver to the Company any and all copies of Confidential Information in the possession or control of Employee upon the expiration or termination of this Agreement, or at any other time 6. 7 upon request. This Section 5 shall survive the termination of this Agreement and the termination of Employee's employment with the Company. 6. SOLICITATION OF EMPLOYEES. In consideration and recognition of the fact that Employee's position with the Company is an executive position involving fiduciary responsibility to the Company and access to the Company's Confidential Information, Employee agrees that he will not solicit or take away any employees of the Company for employment by any enterprise that competes with, or is engaged in a substantially similar business to, the business of, the Company. This Section 6 shall survive for a period of two (2) years from the date of termination of this Agreement. 7. REPRESENTATION BY EMPLOYEE. Employee represents and warrants that he is under no restriction or disability by reason of any prior contract or otherwise which would prevent him from entering into and performing his duties and obligations under this Agreement. 8. NOTICES. All notices, requests, demands and other communications under this Agreement must be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the date indicated on the return receipt as the date of receipt or refusal if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid, return receipt requested, and properly addressed as follows: to the Company: ANDATACO 10140 Mesa Rim Road San Diego, CA 92121 Attn: President Fax: (619) 453-9294 to the Employee: W. DAVID SYKES 2016 Oceanfront Del Mar, CA 92014 Fax: (619) 755-3030 Any party may change its address for the purpose of this Section 8 by giving the other party written notice of the new address in the manner set forth above. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, written or otherwise. 10. AMENDMENT. This Agreement may be amended, modified, superseded or canceled, and any of the terms, covenants or conditions hereof may be amended, only by a written instrument executed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 7. 8 11. WAIVER. Any failure to exercise or delay in exercising any right, power or privilege herein contained, or any failure or delay at any time to require the other party's performance of any obligation under this Agreement, shall not affect the right to subsequently exercise that right, power or privilege, or to require performance of that obligation. A waiver of any of the provisions of this Agreement shall not be deemed, nor shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. A waiver shall not be binding unless executed in writing by the party making the waiver. 12. ASSIGNMENT; BINDING EFFECT. This Agreement shall inure to the benefit of, and be enforceable by, the Company and its successors and assigns; however, this Agreement is personal to Employee and may not be assigned by Employee in whole or in part. 13. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be valid and effective under applicable law. If any provision of this Agreement shall be unlawful, void or for any reason unenforceable, it shall be deemed separable from, and shall in no way affect the validity or enforceability of, the remaining provisions of this Agreement, and the rights and obligations of the parties shall be enforced to the fullest extent possible. 14. ATTORNEYS' FEES. In any judicial action or proceeding or any arbitration proceeding between the parties to enforce any of the provisions of this Agreement, to seek damages on account of the breach hereof, to seek injunctive relief to prevent the breach hereof, to seek a judicial determination of the rights or obligations of any party hereto, or in any judicial action or proceeding or any arbitration proceeding between the parties in which this Agreement is raised as a defense, regardless of whether the action or proceeding is prosecuted to judgment, and in addition to any other remedy, the unsuccessful party shall pay the successful party all costs and expenses, including reasonable attorneys' fees, incurred by the successful party. 15. GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of California, excluding any choice of law principles which direct the application of the laws of another jurisdiction. 16. EFFECT OF HEADINGS. The subject headings of this Agreement are included for convenience only, and shall not affect the construction or interpretation of any of its provisions. 17. COUNTERPARTS. This Agreement may be executed simultaneously 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. 8. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "Company" ANDATACO, a California corporation By: /s/ ANDATACO -------------------------------------- Name: -------------------------------- Title: ------------------------------- "Employee" /s/ W. DAVID SYKES ----------------------------------------- W. DAVID SYKES 9. EX-10.21 6 EXHIBIT 10.21 1 EXHIBIT 10.21 NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT ("Agreement ") is made and entered into by and between W. DAVID SYKES ("Shareholder") and IPL SYSTEMS, INC., a Massachusetts corporation ("Parent") as of June 3, 1997. RECITALS WHEREAS, this Agreement is entered into in connection with that certain Agreement and Plan of Merger and Reorganization dated February 28, 1997 (the "Merger Agreement") by and among Shareholder, ANDATACO, a California corporation ("Andataco"), Parent and IPL Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Parent ("Merger Sub"), whereby Merger Sub will be merged with and into Andataco and Andataco will be the surviving corporation and become a wholly owned subsidiary of Parent (the "Merger"); WHEREAS, Shareholder is a key employee and the principal shareholder of Andataco; WHEREAS, pursuant to the Merger Agreement, Parent will acquire from Shareholder and certain trusts affiliated with Shareholder all of the outstanding capital stock of Andataco; WHEREAS, to protect the value of the business of Andataco being purchased, including the goodwill attendant thereto, by Parent, and in consideration of Parent completing the Merger and making payments to Shareholder in accordance with the terms of this Agreement, Parent desires that Shareholder enter into, and Shareholder is willing to enter into, this Agreement upon the term and conditions set forth herein; and WHEREAS, but for Shareholder entering into this Agreement, Parent would not have consummated the acquisition of all of the capital stock of Andataco as contemplated by the Merger Agreement. AGREEMENT NOW, THEREFORE, as a material inducement to Parent to purchase all of the outstanding shares of capital stock of Andataco from Shareholder pursuant to the Merger Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Parent and Shareholder, intending to be legally bound, hereby agree as follows: 1. TERM. The term of this Agreement shall be five years from the date of the consummation of the Merger ( the "Term"). 2. CONSIDERATION. In consideration of Shareholder entering into this Agreement and agreeing to be bound by the terms hereof, Parent shall pay Shareholder a total consideration of one million and twenty dollars ($1,000,020) payable in equal monthly installments of sixteen thousand six hundred sixty-seven dollars ($16,667) per month commencing on the last business 1. 2 day of each month following the date of the consummation of the Merger and ending on the date of expiration of the Term. No interest shall accrue or be payable upon any amounts due under this Agreement. 3. COVENANT NOT TO COMPETE. Until the earlier of (a) the expiration of the Term, (b) Parent ceasing to make the payments to Shareholder as provided in Section 2 above, or (c) Parent or Andataco ceasing to make the salary or severance payments to Shareholder as required under the terms of that certain Employment Agreement between Shareholder and Andataco dated as of February __, 1997 (the "Employment Agreement") or an employment agreement replacing or amending such Employment Agreement, Shareholder will not, directly or indirectly, own, operate or control, or be a director, officer, employee, shareholder or partner of any business, firm, entity or organization that is similar to, or directly or indirectly competes with, the business of Andataco. Notwithstanding the foregoing, Shareholder shall not be deemed to be engaged, directly or indirectly, in any business solely as a passive investor holding debt or equity securities of such business or if Shareholder is employed by a business enterprise that is not engaged in the same business as Andataco and Shareholder does not apply his expertise at such business or enterprise that is or could be competitive with the business of Andataco. 4. NO SOLICITATION OF CUSTOMERS OR EMPLOYEES. During the Term of this Agreement, Shareholder will not interfere with the business of Andataco or any of its affiliates by soliciting or attempting to divert, take away or call on, directly or indirectly, for himself or for any other person or entity, any customers of Andataco or any of its affiliates, nor directly or indirectly, induce or influence any employee, customer, supplier, reseller or distributor of Andataco or any of its affiliates to terminate his or her relationship with Andataco or any of its affiliates. 5. NON-DISCLOSURE OF PROPRIETARY INFORMATION. Shareholder will maintain in confidence and will not disclose to any person, firm, corporation or other entity any confidential or proprietary information or trade secrets of or relating to Andataco or any of its affiliates, including, without limitation, information with respect to its operations, inventories, products, business practices, finances, principals, vendors, suppliers, customers or potential customers, marketing methods, costs, prices, compensation paid to employees and other terms of employment. The parties hereby stipulate and agree that as between them the foregoing matters are important, material and confidential proprietary information and trade secrets and affect the successful conduct of the business of Andataco. 6. BOOKS AND RECORDS. All books, records, conversations, correspondence, files, lists, data and other information or documents pertaining to or concerning the business of Andataco or any of its affiliates are confidential information which may not be disclosed under the provisions of Paragraph 5 hereof and shall be and remain the sole and exclusive property of Andataco or such affiliate. Shareholder hereby acknowledges and agrees that he does not have, and shall not assert, any interest in or property right to any such information or documents. 7. GEOGRAPHICAL AREA OF RESTRICTIONS. The restrictions contained in this Agreement shall apply in the United States of America which Shareholder hereby acknowledges 2. 3 and agrees is where Andataco has carried on substantial business and in which Andataco presently conducts or, after the consummation of the Merger as contemplated by the Merger Agreement, will conduct, or its affiliates will conduct, a similar business. 8. SEVERABILITY OF PROVISIONS. Parent and Shareholder agree that the duration, scope and geographical area for which this Agreement is to be effective have been specifically negotiated by sophisticated, commercial parties and specifically agree that such duration, scope and geographical area are reasonable. If any provision of this Agreement is determined by any court of competent jurisdiction to be invalid or unenforceable by reason of such provision extending the covenants and agreements contained herein for too great a period of time or over too great a geographical area, or by reason of its being too extensive in any other respect, such agreement or covenant shall be interpreted to extend only over the maximum period of time and geographical area, and to the maximum extent in all other respects, as to which it is valid and enforceable, all as determined by such court in such action. In no event shall the consideration required to be paid pursuant to Paragraph 2 hereof be reduced on account of any reduction in the duration, scope or geographical area of the covenant contained herein. Any determination that any provision hereof is invalid or unenforceable, in whole or in part, shall have no effect on the validity or enforceability of any remaining provision hereof. 9. INJUNCTIVE RELIEF. Shareholder acknowledges that any breach by him of any of the covenants and agreements contained in Sections 3, 4 and 5 herein will cause irreparable damage to Parent and Andataco, the exact amount of which will be difficult or impossible to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, Shareholder agrees that Parent and Andataco shall be entitled to equitable relief in the form of a temporary restraining order and preliminary or permanent injunctive relief ordering Shareholder's specific performance of this Agreement and of the covenants and agreements contained in Sections 3, 4, and 5. 10. NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto): if to Parent or Andataco: IPL Systems, Inc. 124 Acton Street Maynard, MA 01754 Attention: Chief Executive Officer Facsimile: (508) 461-1321 3. 4 if to Shareholder: W. David Sykes 2016 Ocean Front Del Mar, CA 92014 Facsimile: (619) 755-3030 with a copy to (which shall not constitute notice): Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121 Attention: Jeremy D. Glaser, Esq. Facsimile: (619) 453-3555 All such notices and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of a telecopy, when the party receiving such telecopy shall have confirmed receipt of the communication, (c) in the case of delivery by nationally-recognized, overnight courier, on the business day following dispatch and (d) in the case of mailing, on the fifth business day following such mailing. 11. MODIFICATION. This Agreement may be amended, modified, superseded or canceled and any of the terms, covenants or provisions hereof may be amended only by a written instrument executed by both Shareholder and Parent. 12. WAIVER. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 13. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Parent (by operation of law, by merger or otherwise) without Shareholder's prior written consent. Except for the payment provisions set forth in Section 2 above, the obligations and rights under this Agreement may not be assigned by Shareholder but shall inure to the benefit of his executors and heirs. This Agreement shall be binding upon, and inure to the benefit of, Parent and its successors and permitted assigns. 14. ATTORNEYS' FEES. In any judicial action or proceeding or arbitration proceeding between Shareholder and Parent to enforce any of the provisions of this Agreement, to seek damages on account of the breach hereof, to seek injunctive relief to prevent the breach or continued breach hereof, to seek a determination of the rights and obligations of the parties hereunder, regardless of whether the action or proceeding is prosecuted to judgment and in addition to any other remedy, the unsuccessful party shall pay the successful party all costs and expenses, including reasonable attorneys' fees, incurred therein by the by the successful party. 4. 5 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California as such laws are applied to contracts entered into and performed entirely within the State of California by California residents. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. IPL SYSTEMS, INC. By: /s/ IPL SYSTEMS, INC. -------------------------------------- Name: -------------------------------- Title: ------------------------------- /s/ W. DAVID SYKES ----------------------------------------- W. DAVID SYKES 5. EX-10.22 7 EXHIBIT 10.22 1 EXHIBIT 10.22 September 20, 1996 Richard Hudzik 8889 Ragweed Court San Diego, CA 92129 RE: OFFER OF EMPLOYMENT Dear Richard, I am very pleased to confirm our offer to you of employment with ANDATACO (the "Company"). You will report to me, in the position of Chief Financial Officer. If you accept our offer, your effective date of hire will be October 3, 1996. The terms of our offer are as follows: 1. Your starting salary will be $135,000 per year, payable as earned in accordance with the Company's normal payroll policies. You are also eligible for the standard Andataco bonus plan: 10% of your yearly salary as the Company hits Budget one (1) numbers and an additional 10% of your yearly salary as the Company hits its Budget two (2) numbers. These Budgets are set by the Company and all Executives/Managers are on the same plan. 2. If your employment is terminated by Andataco without mutual consent by yourself, you will be entitled to six (6) months severance pay. This will be paid to you monthly at the regular payroll intervals. You will not be eligible for any bonus after your termination date. 3. You are granted a .5% stock option plan which vest in the following manner: a) .125% will vest every six (6) months of employment until the .5% is achieved. b) .5% will be vested upon the sale of more than 10% of Andataco stock to any outside company, and the cap which is stipulated in "d" below is removed. c) The value of Andataco will be set at $10,000,000.00 today. d) The value of Andataco will be $12,000,000.00 in two (2) years and this will be the cap for this stock option plan. e) Upon termination for any reason the stock option plan will vest and be purchased by the Company. 2 Letter to Richard Hudzik Offer of Employment September 20, 1996 Page Two of Three 4. You will be eligible for the group health insurance, paid holidays and sick days as stipulated in the Company's personnel policies. You are also eligible for two (2) weeks vacation per year beginning immediately. 5. As an employee of the Company you will have access to certain Company confidential information and you may, during the course of your employment, develop certain information or inventions which will be the property of the Company. To protect the interest of the Company, you will need to sign the Company's standard "Proprietary Rights & Confidentiality Agreement" as a condition of your employment. We wish to impress upon you that we do not wish you to bring with you any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employers. 6. Your employment with the company is terminable at will, which means that you will be free to terminate your employment with the Company at any time for any reason or no reason, with or without notice. Similarly, the Company may terminate your employment at any time for any reason or no reason, with or without notice. By accepting this offer of employment, you will be agreeing that your employment is terminable at will, and acknowledge that no one has the authority to promise you, either orally or in writing, anything to the contrary. 7. The terms of this letter constitutes the entire agreement between us regarding your employment with the Company and shall supersede any other agreements made prior to or on the date of this letter. This offer, if not accepted, will expire on September 23, 1996 at 5:00pm. The Company requires all new employees to provide information verifying authorization to work in the United States. This is considered an important condition to employment. Please be aware that as our Company evolves, there may be opportunities or changes in your initial responsibilities, salary, title, or reporting relationships. Any disputes or questions arising hereunder, including the construction or application of this Agreement, shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in force. If the parties cannot agree upon an arbitrator with ten (10) days after demand of either party, either or both parties may request the American Arbitration Association to name a panel of five (5) arbitrators. Andataco shall strike the names of two (2) on this list; the offeree shall then strike two (2) names and the remaining name shall be the arbitrator. The decision of the arbitrator shall be final and binding upon the parties, both as to law and to fact, and shall not be appealable to any court in any jurisdiction. The expenses of the arbitrator shall be shared equally by the parties, unless the arbitrator determines that the expenses shall be otherwise assessed. 3 Letter to Richard Hudzik Offer of Employment September 20, 1996 Page Three of Three The Company is an equal opportunity employer and does not discriminate based on age, color, disability, national origin, race, medical condition, marital status, religion or sex. We are pleased to extend this offer to you. To let us know that you have read it and accept all of its terms, please sign and return this letter to me. We look forward to you joining us Richard, and we are confident that your abilities and qualifications will contribute to our mutual success. If you have any questions, please feel free to contact me or Rosa Nava at (619) 453-9191. Sincerely, ANDATACO by: /s/ W. David Sykes W. David Sykes President Acknowledged, Accepted and Agreed by: /s/ Richard Hudzik Date signed 9/21/96 - ----------------------------------- -------------- Richard Hudzik EX-10.24 8 EXHIBIT 10.24 1 EXHIBIT 10.24 SUBORDINATED PROMISSORY NOTE $5,195,548.87 February 10, 1997 San Diego, California FOR VALUE RECEIVED, ANDATACO, a California corporation ("BORROWER"), hereby promises to pay to the order of W. David Sykes ("LENDER"), in lawful money of the United States of America and in immediately available funds, the principal sum of five million one hundred ninety-five thousand five hundred forty-eight and 87/100 Dollars ($5,195,548.87) (the "Loan"), or such lesser or greater amount as may be outstanding hereunder from time to time as indicated on the attached Schedule "A", together with accrued and unpaid interest thereon, payable on the dates and in the manner set forth below. 1. PRINCIPAL REPAYMENT. The outstanding principal amount of the Loan shall be due and payable in full on June 30, 2004. 2. INTEREST RATE. Borrower further promises to pay interest on the outstanding principal amount hereof from the date hereof until payment in full. Interest on this Note shall be payable as follows: (a) during the period commencing on the date hereof and ending on June 30, 2002, interest shall be payable at the rate of nine percent (9.0%) per annum compounded annually and (b) thereafter, interest shall be payable at a rate equal to the "applicable federal rate" per annum compounded annually published by the Internal Revenue Service for the month of June 2002 for an instrument with a two (2) year term, or in either case, the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less. Interest shall be payable in arrears on the last day of each month and shall be calculated on the basis of a 365-day year (or 366-day year in the case of leap years) for the actual number of days elapsed. 3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable to Lender at the executive offices of Borrower, 10140 Mesa Rim Road, San Diego, California, 92121, unless another place of payment shall be specified in writing by Lender. 4. APPLICATION OF PAYMENTS. Payments on this Note shall be applied first to accrued interest, and thereafter to the outstanding principal balance hereof. 5. DEFAULT RATE. Any principal repayment or interest payment on the Loan hereunder not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest at ten percent (10.0%) per annum compounded annually or the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less. 1. 2 6. DEFAULT. Each of the following events shall be an "Event of Default" hereunder: (a) Borrower fails to pay any of the principal amount due under this Note or any accrued interest or other amounts due under this Note on the date the same becomes due and payable or within five (5) calendar days thereafter; or (b) Borrower files any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law, or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors, or takes any corporate action in furtherance of any of the foregoing; or (c) An involuntary petition is filed against Borrower (unless such petition is dismissed or discharged within sixty (60) days), under any bankruptcy statute now or hereafter in effect, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of Borrower. Upon the occurrence of an Event of Default hereunder, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of Lender in the case of SECTION 6(A) or automatically, in the case of SECTION 6(B) or (C), be immediately collectible by Lender pursuant to applicable law. 7. SCHEDULE. Lender shall and is hereby irrevocably authorized by Borrower to endorse on the schedule attached hereto appropriate notations evidencing the date and amount of each payment of principal made by the undersigned with respect to the Loan and such notations shall create a rebuttable presumption regarding the aggregate unpaid principal amount of the Loan. No failure on the part of Lender to make any endorsement of a notation as provided herein shall in any way affect the Loan or any obligation of Lender or Borrower with respect thereto. 8. SUBORDINATION. (a) SENIOR DEBT. For purposes of this Note, "Senior Debt" shall mean all presently existing and hereafter arising indebtedness and other obligations for borrowed money of any kind or nature of the Borrower in favor of a bank or other financial institution incurred by Borrower for working capital or other general corporate purposes, and all renewals, extensions, modifications and refundings thereof. (b) AGREEMENT TO SUBORDINATE. Lender hereby agrees that Lender shall enter into such agreements and instruments in favor of any holder of Senior Debt as may be reasonably requested to evidence that the indebtedness represented by this Note is subordinated in right of payment to the extent and substantially in the manner provided in this Section 8 to the prior payment in full of all Senior Debt. (c) LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any distribution to creditors of Borrower in a liquidation or dissolution of Borrower or in a bankruptcy, 2. 3 reorganization, insolvency, receivership or similar proceeding relating to Borrower or its property: (i) holders of the Senior Debt shall be entitled to receive payment in full in cash of the principal of and interest (including interest accruing after the commencement of any such proceeding) to the date of payment on the Senior Debt before Lender shall be entitled to receive any payment of principal of or interest on this Note; and (ii) until the Senior Debt is paid in full in cash, any distribution to which Lender would be entitled but for this Section 8 shall be made to holders of the Senior Debt, except that Lender may receive securities that are subordinated to the Senior Debt to at least the same extent as this Note. (d) DEFAULT ON SENIOR DEBT. (i) Upon the maturity of the Senior Debt by lapse of time, acceleration or otherwise, all such Senior Debt shall first be paid in full, or such payment duly provided for in cash or in a manner satisfactory to holders of the Senior Debt, before any payment is made by Borrower or any person acting on behalf of Borrower on account of the principal of or interest on this Note. (ii) Borrower may not pay the principal of or interest on this Note and may not acquire this Note for cash or property (other than capital stock of Borrower or other securities of Borrower that are subordinated to the Senior Debt to at least the same extent as this Note) if a default on the Senior Debt occurs and is continuing that permits holders of such Senior Debt to accelerate its maturity and Borrower has not obtained a waiver from the holders of such Senior Debt waiving their rights to accelerate the maturity of the Note as a result of such default. (iii) Borrower may resume payments on this Note and may acquire the Note when the default on the Senior Debt referred to in subsection (ii) above is cured or waived. (e) ACCELERATION OF NOTE. If payment of this Note is accelerated because of an Event of Default, Borrower shall promptly notify the holder of the Senior Debt of the acceleration. Borrower shall pay the Note when 30 days pass after the acceleration occurs if this Section permits the payment at that time. (f) SUBROGATION. After all Senior Debt is paid in full and until this Note is paid in full, Lender shall be subrogated to the rights of holders of the Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to Lender have been applied to the payment of the Senior Debt. A distribution made under this Section to a holder of Senior Debt which otherwise would have been made to the Lender is not, as between Borrower and Lender, a payment by Borrower on Senior Debt. (g) RELATIVE RIGHTS. This Section defines the relative rights of Lender and the holder of the Senior Debt. Nothing in this Note shall: 3. 4 (i) impair, as between Borrower and Lender, the obligation of Borrower, which is absolute and unconditional, to pay principal of and interest on this Note in accordance with its terms. (ii) affect the relative rights of Lender and creditors of Borrower other than the holder of the Senior Debt; or (iii) prevent Lender from exercising Lender's available remedies upon a default or Event of Default, subject to the rights of holders of the Senior Debt to receive distributions otherwise payable to Lender. If Borrower fails because of this Section to pay principal of or interest on the Note on the due date, the failure is still a default or Event of Default. (h) SUBORDINATION MAY NOT BE IMPAIRED BY BORROWER. No right of a holder of the Senior Debt to enforce the subordination of the indebtedness evidenced by this Note shall be impaired by any act or failure to act by Borrower or by its failure to comply with this Note. 9. NEGOTIABILITY; BORROWER PURCHASE RIGHTS. (a) Subject to subsection (b) below, Lender may, at any time and from time to time, sell, assign, hypothecate, pledge or otherwise transfer (each a "Transfer") all or any portion of the outstanding principal of this Note and/or any accrued and unpaid interest thereon (the "Transfer Amount") to any person or entity (a "Third Party"). (b) If Lender proposes to Transfer to a Third Party any Transfer Amount, it shall give Borrower written notice (the "Transfer Notice") of its intention to do so, which Transfer Notice shall identify the Third Party and shall contain the terms and conditions upon which Lender proposes to effectuate the Transfer. Borrower shall have fifteen (15) days from the receipt of the Transfer Notice to purchase the Transfer Amount upon the terms and conditions specified in the Transfer Notice. If Borrower elects not to purchase the Transfer Amount, Lender shall have 120 days thereafter to Transfer such Transfer Amount at a purchase price and upon terms no more favorable to the Third Party purchaser thereof than specified in the Transfer Notice. In the event Lender has not made such Transfer within the 120-day period, Lender shall not thereafter Transfer any Transfer Amount without first offering such Transfer Amount to Borrower in the manner provided above. 10. WAIVER; PAYMENT OF FEES AND EXPENSES. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including, without limitation, reasonable attorneys' fees, costs and other expenses. The right to plead any and all statutes of limitations as a defense to any demands hereunder is hereby waived to the full extent permitted by law. 4. 5 11. GOVERNING LAW. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. 12. USURY LIMITATION. In no event shall the amount paid or agreed to be paid to Lender as interest hereunder exceed the amount that would result from the application of the highest lawful rate permissible under the then applicable usury laws. If it is hereafter determined by a court of competent jurisdiction that the interest payable hereunder is in excess of the amount which Lender may legally collect under the then applicable usury laws, such amount which would be excessive interest shall be applied to the payment of the unpaid principal balance due hereunder and not to the payment of interest or, if all principal shall previously have been paid, promptly repaid by Lender to Borrower. 13. SEVERABILITY. Every provision of this Note is intended to be severable. If any term or provision hereof is declared by a court of competent jurisdiction to be illegal or invalid, such illegal or invalid term or provision shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable. 14. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the benefit of and be binding on any successor to Borrower and shall extend to any permitted holder hereof. BORROWER ANDATACO, a California corporation By: /s/ W. DAVID SYKES ------------------------------------ Name: W. David Sykes Title: President 5. EX-11.1 9 EXHIBIT 11.1 1 EXHIBIT 11.1 IPL SYSTEMS, INC. COMPUTATION OF NET (LOSS) INCOME PER SHARE (in thousands, except per share amounts)
Year Ended October 31, ---------------------------------- 1997 1996 1995 -------- -------- -------- Fully diluted net (loss) income per share: Net (loss) income $ (6,209) $ 39 $ 2,106 -------- -------- -------- Weighted average shares outstanding 20,464 18,078 18,078 Dilutive stock options based on the treasury stock method using the higher of average or period end market price -- 90 106 -------- -------- -------- Shares used in computing net (loss) income per share 20,464 18,168 18,184 -------- -------- -------- Net (loss) income per common and equivalent share $ (0.30) $ 0.00 $ 0.12 ======== ======== ========
EX-21.1 10 EXHIBIT 21.1 1 EXHIBIT 21.1 IPL SYSTEMS, INC. SUBSIDIARIES OF REGISTRANT ANDATACO IPL International Sales Corporation IPL Investments, Inc. EX-23.1 11 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-35441 and 333-35467) of IPL Systems, Inc. of our report dated December 12, 1997 appearing on page F-1 of this Form 10-K. Price Waterhouse LLP San Diego, California January 27, 1998 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 YEAR OCT-31-1997 NOV-01-1996 OCT-31-1997 41,000 0 10,846,000 0 7,450,000 18,698,000 6,099,000 (2,500,000) 29,989,000 13,529,000 0 0 0 238,000 4,498,000 29,989,000 93,259,000 93,259,000 71,682,000 26,675,000 0 0 1,111,000 (6,209,000) 0 (6,209,000) 0 0 0 (6,209,000) (0.30) (0.30)
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