EXHIBIT 1
STOCK AND WARRANT PURCHASE AND INVESTOR RIGHTS AGREEMENT
This STOCK AND WARRANT PURCHASE AND INVESTOR RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of April 26, 2000, by and between
ESOFT, INC., a Delaware corporation (the "Company"), and GATEWAY COMPANIES,
INC., a Delaware corporation (the "Investor"), and is made with reference to the
following facts:
A. The Company desires to sell to the Investor, and the Investor
desires to purchase from the Company, shares of common stock, par value $.01 per
share, of the Company ("Common Stock"), and five-year warrants to purchase
600,000 shares of Common Stock, exercisable at the Per Share Purchase Price (as
defined in Section 1(b)) ("the Warrants"), on the terms and conditions set forth
in this Agreement.
B. The Company wishes to provide certain other agreements with respect
to the Investor's investment.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. AGREEMENT TO PURCHASE AND SELL STOCK AND WARRANTS.
(a) AUTHORIZATION. The Company's Board of Directors (the "Board") will,
prior to the Closing (as defined in Section 2(a)), authorize the issuance,
pursuant to the terms and conditions of this Agreement, of (i) shares of Common
Stock in an amount equal to the number of Purchased Shares (as defined in
Section 1(b)), (ii) the Warrants and (iii) the shares of Common Stock underlying
the Warrants (the "Warrant Shares").
(b) AGREEMENT TO PURCHASE AND SELL SECURITIES. The Company hereby
agrees to issue to the Investor, and the Investor hereby agrees to acquire from
the Company, at the times set forth in Section 2, a number of shares of Common
Stock (collectively, the "Purchased Shares") equal to $25,000,000 (the "Purchase
Price") divided by the Per Share Purchase Price (as defined below), rounded up
to the nearest whole share. As used in this Agreement, "Per Share Purchase
Price" means the lower of (i) $19.507 and (ii) a 6.5 percent discount to the
public offering price of any underwritten public offering of the Common Stock
consummated prior to nine months following the Closing Date (as defined in
Section 2(a)). For all purposes of this Agreement, the Per Share Purchase Price
shall be adjusted for any stock split, stock dividend or other event of similar
nature. The Per Share Purchase Price shall be payable as set forth in Section 2.
In the event that the Per Share Purchase Price shall be adjusted pursuant to
clause (ii) above after the Closing Date, such adjustment shall be made by the
Company by delivering to Investor additional shares of the Common Stock within
five business days of the Per Share Purchase Price adjustment.
(c) USE OF PROCEEDS. The Company intends to apply the net proceeds from
the sale of the Purchased Shares for general working capital purposes, which may
include acquisition of other entities or technologies.
2. CLOSING AND SECOND CLOSING.
(a) CLOSING. The purchase and sale of the first 50 percent of the
Purchased Shares shall take place at the offices of ▇▇▇▇, Scholer, Fierman, ▇▇▇▇
& Handler, ▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, at 10:00 a.m.,
California time, on the date that is two business days after all of the
conditions set forth in Section 5 have been satisfied or waived (which time and
place are referred to in this Agreement as the "Closing"); provided, however,
that if all of such conditions have not been satisfied or waived by May 15, 2000
(or such later date as may be agreed to by the Company and the Investor), the
obligations of the Company and the Investor shall terminate without further
effect or liability. At the Closing, the Company will deliver to the Investor
certificates representing 50 percent of the Purchased Shares against delivery to
the Company by the Investor of 50 percent of the Purchase Price in cash paid by
wire transfer of same-day funds to the Company. Closing documents may be
delivered by facsimile with original signature pages sent by overnight courier.
The date of the Closing sometimes is referred to herein as the "Closing Date."
(b) ESCROW CLOSING. On the date that is 90 days after the Closing Date
(the "Escrow Closing Date"), the Company will deliver to the Investor
certificates representing the remaining 50 percent of the Purchased Shares
against delivery of the remaining 50 percent of the Purchase Price in cash by
wire transfer of same-day funds to the Company (the "Escrow Closing"). Until the
Investor has paid to the Company such remainder of the Purchase Price, (i)
one-half of the Purchased Shares shall be held in escrow pursuant to an escrow
agreement in the form attached as Exhibit B (the "Escrow Agreement"), and (ii)
the Company shall be entitled to vote such shares held in escrow, pursuant to an
irrevocable proxy in the form attached as Exhibit C to be granted by the
Investor to the Company (the "Proxy").
(c) THE WARRANTS. At the Closing, the Company will issue to the
Investor the Warrants. The Warrants shall be in the form attached hereto as
Exhibit A and vest and become exercisable based upon performance milestones as
follows: (i) 100,000 warrants shall become exercisable if at any time the total
number of subscribers (the "Number of Subscribers") for a bundled ISP/server
program, or in the aggregate for all bundled ISP/server programs, implementing
the Company's software on the Investor's hardware (such as the "Basic Package"
referred to in Section 4.1.1 of the Statement of Work executed by the Company
and the Investor on April 11, 2000 (the "Statement of Work"), or any
modifications, enhancements or alterations thereof) equals or exceeds 10,000; an
additional 100,000 Warrants shall become exercisable if at any time the Number
of Subscribers equals or exceeds 25,000; an additional 100,000 Warrants shall
become exercisable if at any time the Number of Subscribers equals or exceeds
50,000; (ii) 100,000 Warrants shall become exercisable if at any time the
Investor and the Company have 1,000 customers for virtual private networking
("VPN") and firewall services incorporating the Company's VPN and firewall
software (such as the "Enhanced Firewall Package" referred to in Section 4.1.2
of the Statement of Work and the VPN Package IPSec and VPN Package PPTP referred
to in Sections 4.1.3 and 4.1.4 of the Statement of Work, or any modifications,
enhancements or alterations of any of the foregoing), (iii) 100,000 Warrants
shall become exercisable if at any time the Investor and the Company have 1,000
customers for application service provider ("ASP") services, including but not
limited to payroll, human resources or office productivity software (which may
be provided by third-party ASP providers), and (iv) 100,000 Warrants shall
become exercisable if at any time the Investor and the
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Company have agreements with at least five ASP providers to offer ASP service to
the Investor's and the Company's customers. The Warrants shall immediately vest
and become exercisable immediately prior to the occurrence of a Change in
Control of the Company (as defined in the Company's current equity incentive
plan).
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investor that the statements in this Section 3
are true and correct on the date hereof and will be true and correct on the
Closing Date, except as set forth in the Disclosure Schedule (as defined in
Section 7(a)):
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all corporate power and authority required to
(i) own or lease its properties and assets and carry on its business as
presently conducted, and (ii) enter into this Agreement and the other
agreements, instruments and documents contemplated hereby, and to consummate the
transactions contemplated hereby and thereby. Each of the Company's subsidiaries
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has all corporate power and
authority required to own or lease its properties and assets and carry on its
business as presently conducted. Each of the Company and its subsidiaries is
qualified to do business and is in good standing in each jurisdiction in which
the failure to so qualify or be in good standing, either individually or in the
aggregate, would have a Material Adverse Effect on the Company. As used in this
Agreement, "Material Adverse Effect" means a material adverse effect on, or a
material adverse change in, or a group of such effects on or changes in, the
business, operations, financial condition, results of operations, prospects,
assets or liabilities of the applicable party and its subsidiaries, taken as a
whole.
(b) CAPITALIZATION. The capitalization of the Company, without giving
effect to the transactions contemplated by this Agreement, is as follows. The
authorized capital stock of the Company consists only of 50,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, $.01 par value ("Preferred
Stock"), of which 14,289,075 shares of Common Stock and no shares of Preferred
Stock were issued and outstanding as of December 31, 1999. All such shares of
Common Stock have been duly authorized, and all such issued and outstanding
shares of Common Stock have been validly issued, are fully paid and
nonassessable and are free and clear of all liens, claims and encumbrances,
other than any liens, claims or encumbrances created by or imposed upon the
holders thereof. As of December 31, 1999, the Company had also reserved: (i)
2,752,187 shares of Common Stock for issuance upon exercise of outstanding
options granted to officers, directors, employees, independent contractors or
affiliates of the Company or its subsidiaries under the Company's equity
incentive plans; (ii) 657,602 shares of Common Stock issuable upon exercise of
the Company's outstanding warrants (the "Outstanding Warrants"); and (iii)
511,182 shares of Common Stock issuable upon conversion of the Company's
outstanding Convertible Debentures due June 10, 2002 (the "Debentures"). As of
December 31, 1999, (x) of the 3,293,770 shares of Common Stock reserved for
issuance upon exercise of options, 2,752,187 shares remained subject to
outstanding options and have a weighted average exercise price of approximately
$3.31, and 541,583 shares were reserved for future grant; (y) the weighted
average exercise price of the Outstanding Warrants was $4.42; and (z) the
conversion price of the Debentures was $3.9125. All
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shares of Common Stock subject to issuance as aforesaid, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and nonassessable.
There are no other equity securities, options, warrants, calls, rights,
commitments or agreements of any character to which the Company is a party or by
which it is bound obligating the Company to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of the Company or obligating the Company to grant,
extend or enter into any such equity security, option, warrant, call, right,
commitment or agreement. The issuance of the Purchased Shares, the Warrants or
the Warrant Shares (collectively, the "Securities") to the Investor will not,
except to the extent waived by the party holding such rights as of the date of
this Agreement, (i) trigger any rights of first refusal, maintenance rights,
preemptive rights or any other rights of any stockholder of the Company
(including, without limitation, Intel Corporation, ▇▇▇▇▇ ▇▇▇▇▇▇▇ Strategic
Growth Fund, Ltd. and ▇▇▇▇▇ ▇▇▇▇▇▇▇ Strategic Growth Fund, L.P.), or (ii)
trigger any change in control provisions in any of the Company's equity
incentive plans or stock option plans, except to the extent waived by the party
holding such rights as of the date of this Agreement.
(c) DUE AUTHORIZATION. All corporate actions on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery of, and the performance of all obligations of
the Company under, this Agreement, and the authorization, issuance, reservation
for issuance and delivery of all of the Securities being sold under this
Agreement, have been taken, and this Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
(d) VALID ISSUANCE OF STOCK.
(i) VALID ISSUANCE. The Purchased Shares and the Warrants to
be issued pursuant to this Agreement and the Warrant Shares to be issued upon
exercise of the Warrants are duly authorized and, upon payment of the Purchase
Price by the Investor in accordance with this Agreement, will be validly issued,
fully paid and non-assessable.
(ii) COMPLIANCE WITH SECURITIES LAWS. Assuming the correctness
of the representations made by the Investor in Section 4, the Securities will be
issued to the Investor in compliance with applicable exemptions from (A) the
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended (the "Securities Act"), and (B) the registration and qualification
requirements of all applicable securities laws of the states of the United
States.
(e) GOVERNMENTAL CONSENTS. Except for required filings under the
▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of ▇▇▇▇, (▇▇▇ "▇▇▇ ▇▇▇"), no
consent, approval, order or authorization of, or registration qualification,
designation, declaration or filing with, or notice to, any federal, state or
local governmental authority on the part of the Company or any of its
subsidiaries is required in connection with the issuance of the Securities to
the Investor, or the consummation of the other transactions contemplated by this
Agreement, except for (i) the listing of the Purchased Shares and the Warrant
Shares on Nasdaq, (ii) the filing of a Form D with the Securities and Exchange
4
Commission (the "SEC"), and (iii) the filing of a Notice of Transaction and a
Form U-2 with the California Department of Corporations.
(f) NON-CONTRAVENTION. The execution, delivery and performance of this
Agreement by the Company, and the consummation by the Company of the
transactions contemplated hereby (including the issuance of the Securities), do
not (i) contravene or conflict with the Company's Certificate of Incorporation
or Bylaws, in each case as amended; (ii) constitute a violation of any provision
of any federal, state, local or foreign law binding upon or applicable to the
Company or any of its subsidiaries; or (iii) constitute a default or require any
consent under, give rise to any right of termination, cancellation or
acceleration of, or to a loss of any benefit to which the Company or any of its
subsidiaries is entitled under, or result in the creation or imposition of any
lien, claim or encumbrance on any assets of the Company or any of its
subsidiaries under, any contract to which the Company or such subsidiary is a
party or any permit, license or similar right relating to the Company or such
subsidiary or by which the Company or such subsidiary may be bound or affected.
(g) LITIGATION. There is no action, suit, proceeding, claim,
arbitration or investigation (each an "Action") pending or, to the best of the
Company's knowledge, threatened: (i) against the Company or any of its
subsidiaries, or any of their respective activities, properties or assets, or
any of their respective officers, directors or employees of the Company or any
of its subsidiaries in connection with such officer's, director's or employee's
relationship with, or actions taken on behalf of, the Company or such
subsidiary, or (ii) that seeks to prevent, enjoin, alter or delay the
transactions contemplated by this Agreement (including the issuance of the
Securities). Neither the Company nor any of its subsidiaries is a party to or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. No Action by the Company or
any of its subsidiaries is currently pending nor does the Company or any of its
subsidiaries intend to initiate any Action that could reasonably be expected to
be material to the Company and its subsidiaries, taken as a whole.
(h) COMPLIANCE WITH LAW AND CHARTER DOCUMENTS. The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
Bylaws, in each case as amended. The Company and its subsidiaries have complied
and are in compliance with all applicable statutes, laws, rules, regulations and
orders of the United States of America and all states thereof, foreign countries
and other governmental bodies and agencies having jurisdiction over their
respective businesses or properties, except where such failure to comply would
not reasonably be likely to have a Material Adverse Effect on the Company.
(i) SEC DOCUMENTS.
(i) REPORTS. The Company has furnished to the Investor prior
to the date hereof copies of its Annual Report on Form 10-KSB/A-1 for the fiscal
year ended December 31, 1999 ("Form 10-K"), its Quarterly Reports on Form 10-QSB
for the fiscal quarters ended March 31, 1999, June 30, 1999 and September 30,
1999 (the "Form 10-Q's"), and all other registration statements, reports and
proxy statements filed by the Company with the SEC on or after December 31, 1999
(the Form 10-K, the Form 10-Q's and such registration statements, reports and
proxy statements are collectively referred to herein as the "SEC Documents").
Except to the extent that information
5
contained in any SEC Document has been revised or superseded by a later SEC
Document filed and publicly available prior to the date of this Agreement, each
of the SEC Documents, as of the respective date thereof (or if amended or
superseded by a filing prior to the Closing Date, then on the date of such
filing), did not, and each of the registration statements, reports and proxy
statements filed by the Company with the SEC after the date hereof and prior to
the Closing will not, as of the date thereof (or if amended or superseded by a
filing after the date of this Agreement, then on the date of such filing),
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. Neither the Company
nor any of its subsidiaries is a party to any material contract, agreement or
other arrangement that was required to have been filed as an exhibit to the SEC
Documents that was not so filed.
(ii) FINANCIAL STATEMENTS. The Company has provided the
Investor with copies of its audited financial statements for the fiscal year
ended December 31, 1999 (the "Balance Sheet Date"). Since the Balance Sheet
Date, the Company has duly filed with the SEC all registration statements,
reports and proxy statements required to be filed by it under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the Securities Act.
The audited and unaudited consolidated financial statements of the Company
included in the SEC Documents filed prior to the date hereof fairly present, in
conformity with generally accepted accounting principles ("GAAP") (except, in
the case of the Forms 10-QSB and 8-K, as may otherwise be permitted by Form
10-QSB and Forms 8-K) applied on a consistent basis (except as otherwise may be
stated in the notes thereto), the consolidated financial position of the Company
as at the dates thereof and the consolidated results of its operations and cash
flows for the periods then ended (subject to normal year-end audit adjustments
in the case of unaudited interim financial statements).
(j) ABSENCE OF CERTAIN CHANGES SINCE BALANCE SHEET DATE. Since the
Balance Sheet Date, the businesses and operations of the Company and its
subsidiaries have been conducted in the ordinary course consistent with past
practice, and there has not been:
(i) any declaration, setting aside or payment of any dividend
or other distribution of the assets of the Company or any of its subsidiaries
with respect to any shares of capital stock of the Company or such subsidiary
(except for any such distribution by a wholly-owned subsidiary to the Company)
or any repurchase, redemption or other acquisition by the Company or any of its
subsidiaries of any outstanding shares of the Company's capital stock;
(ii) any damage, destruction or loss, whether or not covered
by insurance, except for such occurrences, individually and collectively, that
are not material to the Company and its subsidiaries, taken as a whole;
(iii) any waiver by the Company or any of its subsidiaries of
a valuable right or of a material debt owed to it, except for such waivers,
individually and collectively, that are not material;
(iv) any material change or amendment to, or any waiver of any
material right under a material contract or arrangement by which the Company or
any of its subsidiaries or any of their
6
respective assets and properties is bound or subject, except for changes,
amendments or waivers that are expressly provided for or disclosed in this
Agreement;
(v) any change by the Company in its accounting principles,
methods or practices or in the manner it keeps its accounting books and records,
except any such change required by a change in GAAP; or
(vi) any other event or condition of any character, except for
such events and conditions that have been described in the SEC Documents or that
have not resulted, and could not reasonably be expected to result, either
individually or in the aggregate, in a Material Adverse Effect on the Company.
(k) INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENTS. Each employee
and consultant or independent contractor of the Company or any of its
subsidiaries whose duties include the development of products or Intellectual
Property (as defined below), and each former employee and consultant or
independent contractor whose duties included the development of products or
Intellectual Property, has entered into and executed an invention assignment and
confidentiality agreement in customary form or an employment or consulting
agreement containing substantially similar terms.
(l) INTELLECTUAL PROPERTY.
(i) OWNERSHIP OR RIGHT TO USE. Each of the Company and its
subsidiaries has sole title to and owns, or is licensed or otherwise possesses
legally enforceable rights to use, all patents or patent applications, software,
know-how, registered or unregistered trademarks and service marks and any
applications therefor, registered or unregistered copyrights, trade names, and
any applications therefor, trade secrets or other confidential or proprietary
information (collectively, "Intellectual Property") necessary to enable it to
carry on its business as currently conducted, except where any deficiency, or
group of deficiencies, would not be reasonably likely to have a Material Adverse
Effect on the Company.
(ii) LICENSES; OTHER AGREEMENTS. Neither the Company nor any
of its subsidiaries is currently the licensee of any material portion of the
Intellectual Property of the Company and its subsidiaries. There are not
outstanding any licenses or agreements of any kind relating to any Intellectual
Property owned by the Company or any of its subsidiaries, except for agreements
with customers entered into in the ordinary course of its business and other
licenses and agreements that, collectively, are not material. Neither the
Company nor any of its subsidiaries is obligated to pay any royalties or other
payments to third parties with respect to the marketing, sale, distribution,
manufacture, license or use of any Intellectual Property, except as the Company
or any such subsidiary may be so obligated in the ordinary course of its
business, as disclosed in the Company's SEC Documents or where the aggregate
amount of such payments could not reasonably be expected to be material.
(iii) NO INFRINGEMENT. Neither the Company nor any of its
subsidiaries has violated or infringed in any material respect, neither the
Company nor any of its Subsidiaries is
7
currently violating or infringing in any material respect, and neither the
Company nor any of its subsidiaries has received any communications alleging
that it (or any of its employees or consultants) has violated or infringed, any
Intellectual Property of any other person or entity, except for any such
violations or infringements that would not be reasonably likely to have a
Material Adverse Effect on the Company.
(iv) EMPLOYEES AND CONSULTANTS. To the best of the Company's
knowledge, no employee of or consultant to the Company or any of its
subsidiaries is in material default under any term of any material employment
contract, agreement or arrangement relating to Intellectual Property of the
Company or any such subsidiary or any material non-competition arrangement,
other contract or restrictive covenant relating to the Intellectual Property of
the Company or any such subsidiary. The Intellectual Property of the Company or
any of its subsidiaries (other than any Intellectual Property duly acquired or
licensed from third parties) was developed entirely by the employees of or
consultants to the Company or one of its subsidiaries during the time they were
employed or retained by it, and to the best knowledge of the Company, at no time
during conception or reduction to practice of such Intellectual Property of the
Company or any of its subsidiaries were any such employees or consultants
operating under any grant from a government entity or agency or subject to any
employment agreement or invention assignment or non-disclosure agreement or any
other obligation with a third party that would materially and adversely affect
the Company's or such subsidiary's rights in its Intellectual Property. Such
Intellectual Property of the Company or any of its subsidiaries does not, to the
best knowledge of the Company, include any invention or other intellectual
property of such employees or consultants made prior to the time such employees
or consultants were employed or retained by the Company or any such subsidiary
nor any intellectual property of any previous employer of such employees or
consultants nor the intellectual property of any other person or entity.
(m) YEAR 2000 COMPLIANCE.
(i) All of the Company's and its subsidiaries' material
products (including products currently under development) will record, store,
process and calculate and present calendar dates falling on and after December
31, 1999, and will calculate any information dependent on or relating to such
dates in the same manner and with the same functionality, data integrity and
performance as the products record, store, process, calculate and present
calendar dates on or before December 31, 1999, or calculate any information
dependent on or relating to such dates (collectively, "Year 2000 Compliant").
All of the Company's and its subsidiaries' material products will lose no
significant functionality with respect to the introduction of records containing
dates falling on or after December 31, 1999. All of the Company's and its
subsidiaries' internal computer systems comprised of software, hardware,
databases or embedded control systems (microprocessor controlled, robotic or
other device) related to the Company's and its subsidiaries' businesses
(collectively, a "Business System"), that constitutes any material part of, or
is used in connection with the use, operation or enjoyment of, any material
tangible or intangible asset or real property of the Company and its
subsidiaries, including its accounting systems, are Year 2000 Compliant. The
current versions of the Company's and its subsidiaries' software and all other
Intellectual Property may be used prior to, during and after December 31, 1999,
such that such software and Intellectual
8
Property will operate prior to, during and after such time period without error
caused by date data that represents or references different centuries or more
than one century.
(ii) To the best knowledge of the Company, all of the
Company's and its subsidiaries' products and the conduct of the Company's and
its subsidiaries' businesses with customers and suppliers will not be materially
adversely affected by the advent of the year 2000, the advent of the
twenty-first century or the transition from the twentieth century through the
year 2000 and into the twenty-first century. To the best knowledge of the
Company, neither the Company nor any of its subsidiaries is reasonably likely to
incur expenses arising from or relating to the failure of any of its Business
Systems or any products (including all products sold on or prior to the date
hereof) as a result of the advent of the year 2000, the advent of the
twenty-first century or the transition from the twentieth century through the
year 2000, except for such expenses that will not have a Material Adverse Effect
on the Company.
(n) SUBSIDIARIES. Section 3(n) of the Disclosure Schedule sets forth
all other persons, entities, or businesses in which the Company presently owns
or controls, directly or indirectly, more than a one percent interest.
(o) ENVIRONMENTAL MATTERS. There have been no disposals, releases or
threatened releases of Hazardous Materials on, from or under such properties or
facilities which, either individually or in the aggregate, would have a Material
Adverse Effect on the Company. Neither the Company, any of its subsidiaries nor,
to the Company's knowledge, any other person or entity, has used, generated,
manufactured or stored on, under or about such properties or facilities or
transported to or from such properties or facilities any Hazardous Materials,
where such use, generation, manufacture or storage, either individually or in
the aggregate, would have a Material Adverse Effect on the Company. The Company
has no knowledge of any presence, disposals, releases or threatened releases of
Hazardous Materials on, from or under any of such properties or facilities,
which may have occurred prior to the Company or any of its subsidiaries having
taken possession of any of such properties or facilities and which, either
individually or in the aggregate, would have a Material Adverse Effect on the
Company. For purposes of this Agreement, the terms "disposal," "release," and
"threatened release" shall have the definitions assigned thereto by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. Section 9601 et seq., as amended ("CERCLA"). For purposes of this
Agreement, "Hazardous Materials" means any hazardous or toxic substance,
material or waste which is regulated under, or defined as a "hazardous
substance," "pollutant," "contaminant," "toxic chemical," "hazardous material,"
"toxic substance" or "hazardous chemical" under (A) CERCLA; (B) the Emergency
Planning and Community Right-to- Know Act, 42 U.S.C. Section 11001 et seq.; (C)
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; (D)
the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; (E) the
Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq.; (F)
regulations promulgated under any of the above statutes; or (G) any applicable
state or local statute, ordinance, rule, or regulation that has a scope or
purpose similar to those statutes identified above.
(p) REGISTRATION RIGHTS. The Company is not currently subject to any
agreement providing any person or entity with any rights (including piggyback
registration rights) to have any
9
securities of the Company registered with the SEC or registered or qualified
with any other governmental authority.
(q) TITLE TO PROPERTY AND ASSETS. The properties and assets of the
Company or any of its subsidiaries are owned by the Company or such subsidiary
free and clear of all mortgages, deeds of trust, liens, charges, encumbrances
and security interests except for statutory liens for the payment of current
taxes that are not yet delinquent and liens, encumbrances and security interests
that arise in the ordinary course of business and do not in any material respect
affect the properties and assets of the Company or such subsidiary. With respect
to the property and assets it leases, each of the Company and its subsidiaries
is in compliance with such leases in all material respects.
(r) TAX MATTERS. Each of the Company and its subsidiaries has filed all
material tax returns required to be filed, which returns are true and correct in
all material respects, and each of the Company and its subsidiaries has paid in
full all taxes that have become due on or prior to the date hereof, including
penalties and interest, assessments, fees and other charges, other than those
being contested in good faith and for which adequate reserves have been provided
or those currently payable without interest that were payable pursuant to said
returns or any assessments with respect thereto.
(s) BROKERS AND FINDERS. None of the Company, its subsidiaries, their
respective directors or officers and their respective agents has incurred any
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement or any of the transactions contemplated hereby. The Company will
indemnify and hold the Investor harmless from any brokerage or finder's fees or
agents' commissions or other similar payment alleged to be due by or through the
Company or any of such other persons and entities as a result of the action of
the Company, its subsidiaries, their respective directors or officers or their
respective agents.
(t) INTERESTED PARTY TRANSACTIONS. To the best knowledge of the
Company, no officer or director of the Company or any of its subsidiaries or any
"affiliate" or "associate" (as those terms are defined in Rule 405 promulgated
under the Securities Act) of any such person or entity has had, either directly
or indirectly, a material interest in: (i) any person or entity which purchases
from or sells, licenses or furnishes to the Company or any of its subsidiaries
any goods, property, technology, intellectual or other property rights or
services; or (ii) any contract or agreement to which the Company or any of its
subsidiaries is a party or by which it or any of its properties and assets may
be bound or affected.
(u) FULL DISCLOSURE. The information contained in this Agreement, the
Disclosure Schedule and the SEC Documents with respect to the business,
operations, assets, results of operations and financial condition of the Company
and its subsidiaries, and the transactions contemplated by this Agreement , are
true and complete in all material respects and do not omit to state any material
fact or facts necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
10
4. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF THE INVESTOR.
The Investor hereby represents and warrants to the Company, and agrees that:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Investor is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all corporate power and authority required to
own or lease its properties and assets and carry on its business as presently
conducted. The Investor is qualified to do business and is in good standing in
each jurisdiction in which the failure to so qualify or be in good standing,
either individually or in the aggregate, would have a Material Adverse Effect on
the Investor.
(b) DUE AUTHORIZATION. The execution of this Agreement has been duly
authorized by all necessary corporate action on the part of the Investor. This
Agreement constitutes the Investor's legal, valid and binding obligation,
enforceable against the Investor in accordance with its terms, except (i) as may
be limited by (A) applicable bankruptcy, insolvency, reorganization or other
laws of general application relating to or affecting the enforcement of
creditors' rights generally and (B) the effect of rules of law governing the
availability of equitable remedies and (ii) as rights to indemnity or
contribution may be limited under federal or state securities laws or by
principles of public policy hereunder.
(c) GOVERNMENTAL CONSENTS. Except for any required filings under the
HSR Act, no consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal, state or
local governmental authority on the part of the Investor is required in
connection with the purchase of the Securities by the Investor pursuant to this
Agreement.
(d) NON-CONTRAVENTION. The execution, delivery and performance of this
Agreement by the Investor, and the consummation by the Investor of the
transactions contemplated hereby, do not (i) contravene or conflict with the
Certificate of Incorporation or Bylaws of the Investor, in each case as amended;
(ii) constitute a violation of any provision of any federal, state, local or
foreign law binding upon or applicable to the Investor; or (iii) constitute a
default or require any consent under, give rise to any right of termination,
cancellation or acceleration of, or to a loss of any benefit to which the
Investor is entitled under, or result in the creation or imposition of any lien,
claim or encumbrance on any assets of the Investor under, any contract to which
the Investor is a party or any permit, license or similar right relating to the
Investor or by which the Investor may be bound or affected.
(e) LITIGATION. There is no Action pending that seeks to prevent,
enjoin, alter or delay the transactions contemplated by this Agreement.
(f) PURCHASE FOR OWN ACCOUNT. The Securities are being acquired for
investment for the Investor's own account, not as a nominee or agent, and not
with a view to the public resale or distribution thereof within the meaning of
the Securities Act, and the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. The Investor
also represents that it has not been formed for the specific purpose of
acquiring the Securities.
11
(g) INVESTMENT EXPERIENCE. The Investor understands that the purchase
of the Securities involves substantial risk. The Investor has experience as an
investor in securities of companies and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment in the Securities and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of this investment in the Securities
and protecting its own interests in connection with this investment.
(h) ACCREDITED INVESTOR STATUS. The Investor is an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act. The Investor's headquarters are located in the State of California.
(i) RESTRICTED SECURITIES. The Investor understands that the Securities
are characterized as "restricted securities" under the Securities Act, inasmuch
as they are being acquired from the Company in a transaction not involving a
public offering and that under the Securities Act and applicable regulations
thereunder such securities may be resold without registration under the
Securities Act only in certain limited circumstances. The Investor is familiar
with Rule 144 of the SEC, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act.
(j) LEGENDS. The Investor agrees that the certificates for the
Securities shall bear the following legend:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or with any state
securities commission, and may not be transferred or disposed of by the
holder in the absence of a registration statement which is effective
under the Securities Act of 1933 and applicable state laws and rules,
or, unless, immediately prior to the time set for transfer, such
transfer may be effected without violation of the Securities Act of
1933 and other applicable state laws and rules."
In addition, the Investor agrees that the Company may place stop
transfer orders with its transfer agents with respect to such certificates. The
appropriate portion of the legend and the stop transfer orders will be removed
promptly upon delivery to the Company of such satisfactory evidence as
reasonably may be required by the Company that such legend or stop orders are
not required to ensure compliance with the Securities Act.
5. CONDITIONS TO THE INVESTOR'S OBLIGATIONS AT CLOSING.
(a) The obligations of the Investor under this Agreement are subject to
the fulfillment or waiver, on or before each of the Closing and the Escrow
Closing, of each of the following conditions:
(i) REPRESENTATIONS AND WARRANTIES TRUE. Each of the
representations and warranties of the Company contained in Section 3 shall be
true and correct in and as of the date of
12
this Agreement, on and as of the Closing Date, except as set forth in the
Disclosure Schedule, with the same effect as though such representations and
warranties had been made as of the Closing Date.
(ii) PERFORMANCE. The Company shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing and shall have obtained all approvals, consents and qualifications
necessary to complete the purchase and sale described herein.
(iii) SECURITIES EXEMPTIONS. The offer and sale of the
Securities to the Investor pursuant to this Agreement shall be exempt from the
registration requirements of the Securities Act and the registration and/or
qualification requirements of all applicable state securities laws.
(b) The obligations of the Investor under this Agreement are subject to
the fulfillment or waiver, on or before the Closing Date, of each of the
following additional conditions:
(i) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor, and the Investor shall have received all such
counterpart originals and certified or other copies of such documents as it may
reasonably request. Such documents shall include but not be limited to the
following:
(A) CERTIFIED CHARTER DOCUMENTS. A copy of (x) the
Certificate of Incorporation certified as of a recent date by the Secretary of
State of Delaware as a complete and correct copy thereof, and (y) the Bylaws of
the Company (as amended through the Closing Date) certified by the Secretary of
the Company as a true and correct copy thereof as of the Closing Date.
(B) BOARD RESOLUTIONS. A copy, certified by the Secretary
of the Company, of the resolutions of the Board providing for the approval of
this Agreement and the issuance of the Securities and the other matters
contemplated hereby.
(ii) OPINION OF COMPANY COUNSEL. The Investor will have
received an opinion on behalf of the Company, dated the Closing Date, from
▇▇▇▇▇, ▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP, counsel to the Company, in the form attached hereto
as Exhibit D.
(iii) NASDAQ REQUIREMENTS. All requirement of Nasdaq in
connection with the transactions contemplated by this Agreement shall have been
complied with by the Company. The Purchased Shares and the Warrant Shares shall
have been approved for quotation on Nasdaq.
(iv) PAYMENT OF EXPENSE REIMBURSEMENT. The Company shall have
paid the Investor the amount of $15,000 as a reimbursement of the Investor's
legal fees and expenses in connection with the transactions contemplated hereby.
(v) ESCROW AGREEMENT. The Company shall have executed and
delivered the Escrow Agreement.
13
(vi) HSR. The waiting period (and any extension hereof)
applicable to the transactions contemplated hereby under the HSR Act shall have
terminated or shall have expired. Any consents, approvals and filings under any
foreign antitrust law, the absence of which would prohibit the consummation of
the transactions contemplated hereby, shall have been obtained or made.
(vii) LITIGATION. There shall be no Action pending that seeks
to prevent, enjoin, alter or delay the transactions contemplated by this
Agreement.
(viii) CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the purchase of the Securities by the Investor
pursuant to this Agreement.
(ix) OTHER ACTIONS. The Company shall have executed such
certificates, agreements, instruments and other documents, and taken such other
actions as shall be customary or reasonably requested by the Investor in
connection with the transactions contemplated hereby.
(c) The obligations of the Investor under this Agreement are subject to
the fulfillment or waiver, on or before the Escrow Closing, of each of the
following additional conditions:
(i) ESCROW AGREEMENT. The Company shall have instructed the
Escrow Holder to release the shares being held pursuant to the Escrow Agreement.
(ii) PROXY. The Company shall have canceled and delivered to
the Investor the Proxy.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING.
(a) The obligations of the Company to the Investor under this Agreement
are subject to the fulfillment or waiver, on or before each of the Closing and
the Escrow Closing, of each of the following conditions:
(i) REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties of the Investor contained in Section 4 shall be true and correct
in all material respects on and as of the date hereof and on and as of the date
of the Closing with the same effect as though such representations and
warranties had been made as of the Closing.
(ii) PERFORMANCE. The Investor shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing and shall have obtained all approvals, consents and qualifications
necessary to complete the purchase and sale described herein.
14
(iii) PAYMENT OF PURCHASE PRICE. The Investor shall have
delivered to the Company the portion of the Purchase Price payable at the
Closing or the Escrow Closing, as applicable, as specified in Section 1(b).
(iv) SECURITIES EXEMPTIONS. The offer and sale of the
Securities to the Investor pursuant to this Agreement shall be exempt from the
registration requirements of the Securities Act and the registration and/or
qualification requirements of all applicable state securities laws.
(b) The obligations of the Company under this Agreement are subject to
the fulfillment or waiver, on or before the Closing, of each of the following
additional conditions:
(i) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto will be reasonably satisfactory in form and
substance to the Company, and the Company will have received all such
counterpart originals and certified or other copies of such documents as it may
reasonably request.
(ii) NASDAQ REQUIREMENTS. All requirements of Nasdaq in
connection with the transactions contemplated by this Agreement shall have been
complied with.
(iii) ESCROW AGREEMENT AND PROXY. The Investor shall have
executed and delivered the Escrow Agreement and the Proxy.
(iv) HSR. The waiting period (and any extension hereof)
applicable to the transactions contemplated hereby under the HSR Act shall have
terminated or shall have expired. Any consents, approvals and filings under any
foreign antitrust law, the absence of which would prohibit the consummation of
the transactions contemplated hereby, shall have been obtained or waived.
(v) LITIGATION. There shall be no Action pending that seeks to
prevent, enjoin, alter or delay the transactions contemplates by this Agreement.
(vi) CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Investor is
required in connection with the purchase of the Securities by the Investor
pursuant to this Agreement.
(vii) OTHER ACTIONS. The Investor shall have executed such
certificates, agreements, instruments and other documents, and taken such other
actions as shall be customary or reasonably requested by the Company in
connection with the transactions contemplated hereby.
7 COVENANTS OF THE PARTIES.
(a) DISCLOSURE SCHEDULE. Simultaneously with the execution of this
Agreement, the Company is delivering to the Investor a disclosure letter, which
sets forth exceptions, if any, to the
15
representations and warranties made by the Company in Article 3. Such disclosure
letter is organized such that any exceptions specifically identify the
representation and warranty, by section, to which they relate, and clearly
identify the nature of the exception, to the Investor's reasonable satisfaction
(the "Disclosure Schedule"). In any determination of whether the Investor is
entitled to indemnification for the breach of any representations or warranties
set forth in this Agreement, only the Disclosure Schedule (i.e., the final
disclosure letter agreed upon by the Company and the Investor) shall be
relevant, and the identification of any matters on any drafts of the Disclosure
Schedule shall not be introduced as evidence or otherwise used in any manner in
connection therewith.
(b) INFORMATION RIGHTS.
(i) FINANCIAL INFORMATION. The Company covenants and agrees
that, commencing on the Closing Date and continuing for so long as the Investor
holds any Purchased Shares, the Company shall:
(A) ANNUAL REPORTS. Furnish to the Investor promptly
following the filing of such report with the SEC a copy of the Company's Annual
Report on Form 10-KSB for each fiscal year, which shall include a consolidated
balance sheet as of the end of such fiscal year, a consolidated statement of
income and a consolidated statement of cash flows of the Company for such year,
setting forth in each case in comparative form the figures from the Company's
previous fiscal year, all prepared in accordance with GAAP and generally
accepted accounting practices, and audited by nationally- recognized independent
certified public accountants. In the event the Company shall no longer be
required to file Annual Reports on Form 10-KSB, the Company shall, within ninety
(90) days following the end of each respective fiscal year, deliver to the
Investor a copy of such balance sheets, statements of income and statements of
cash flows.
(B) QUARTERLY REPORTS. Furnish to the Investor promptly
following the filing of such report with the SEC, a copy of each of the
Company's Quarterly Reports on Form 10-QSB, which shall include a consolidated
balance sheet as of the end of the respective fiscal quarter, consolidated
statements of income and cash flows of the Company for the respective fiscal
quarter and for the year to-date, setting forth in each case in comparative form
the figures from the comparable periods in the Company's immediately preceding
fiscal year, all prepared in accordance with GAAP and generally accepted
accounting practices (except, in the case of any Form 10-QSB, as may otherwise
be permitted by Form 10-Q), but all of which may be unaudited. In the event the
Company shall no longer be required to file Quarterly Reports on Form 10-QSB,
the Company shall, within forty-five (45) days following the end of each of the
first three (3) fiscal quarters of each fiscal year, deliver to the Investor a
copy of such balance sheets, statements of income and statements of cash flows.
(ii) SEC FILINGS. The Company shall deliver to the Investor
copies of each other document filed with the SEC on a non-confidential basis
promptly following the filing of such document with the SEC.
16
(c) REGISTRATION RIGHTS.
(i) DEFINITIONS. For purposes of this Section 7(c):
(A) REGISTRATION. The terms "register," "registered,"
and "registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.
(B) REGISTRABLE SECURITIES. The term "Registrable
Securities" means: (x) the Purchased Shares and the Warrant Shares; (y) any
other shares of Common Stock acquired by the Investor after the date hereof
which are not already freely tradable under the Securities Act (pursuant to Rule
144(k) promulgated under the Securities Act); and (z) any shares of Common Stock
or other securities of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security that is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of,
any of the securities described in the immediately preceding Clause (x) or (y).
Notwithstanding the foregoing, "Registrable Securities" shall exclude (xx) any
Registrable Securities sold by a person or entity in a transaction in which
rights under this Section 7(c) are not assigned in accordance with this
Agreement, (yy) any Registrable Securities sold in a public offering, whether
sold pursuant to Rule 144 promulgated under the Securities Act, or in a
registered offering, or otherwise, and (zz) any Registrable Securities that may
be sold pursuant to Rule 144(k) promulgated under the Securities Act.
(C) REGISTRABLE SECURITIES THEN OUTSTANDING. The
number of shares of "Registrable Securities then outstanding" shall mean the
number of Purchased Shares, Warrant Shares, other shares of Common Stock and
other securities that are Registrable Securities and are then issued and
outstanding.
(D) HOLDER. For purposes of this Section 7(c), the
term "Holder" means the Investor, or any permitted assignee thereof, owning of
record Registrable Securities that have not been sold to the public or pursuant
to Rule 144 promulgated under the Securities Act or any permitted assignee of
record of such Registrable Securities to whom rights under this Section 7(c)
have been duly assigned in accordance with this Agreement.
(E) FORM S-3. The term "Form S-3" means such form
under the Securities Act as is in effect on the date hereof or any successor
registration form under the Securities Act subsequently adopted by the SEC that
permits inclusion or incorporation of substantial information by reference to
other documents filed by the Company with the SEC.
(ii) AUTOMATIC REGISTRATION.
(A) REGISTRATION STATEMENT. The Company shall use
its commercially reasonable best efforts to file a registration statement under
the Securities Act on Form S-3, or any successor form, for the registration of
all of the Registrable Securities so that such registration statement becomes
effective on a date not more than six months following the Closing Date. Unless
it is an underwritten offering, such registration statement shall be filed and
maintained as a "shelf" registration statement until the later of (x) the date
on which all of the Warrants have been exercised
17
or (y) the date that Rule 144 is first available as an exemption for the sale in
a single 90-day period of all of the outstanding Registrable Securities. Such
Form S-3 or successor form shall also contain any information required to be
included on Form S-1 that the Investor may in its sole discretion request.
(B) UNDERWRITING. If the Holders of at least 25
percent of the Registrable Securities ("Initiating Holders") intend to
distribute the Registrable Securities by means of an underwriting, then they
shall so advise the Company and the Company shall thereafter notify all of the
Holders thereof. In such event, the right of any Holder to include his or her
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the initiating Holders and such Holder determined
based on the number of Registrable Securities held by such Holders being
registered). All Holders proposing to distribute their Registrable Securities
through such underwriting shall enter into an underwriting agreement in
customary form with the managing underwriter or underwriters selected for such
underwriting by the Holders of a majority of the Registrable Securities being
registered and reasonably acceptable to the Company (including a market
stand-off agreement of up to 90 days if required by such underwriters but only
if the Company's executive officers, directors and other five percent or greater
stockholders also execute substantially similar agreements).
(C) EXPENSES. All expenses incurred in connection
with any registration pursuant to this Section 7(c)(ii), including all federal
and "blue sky" registration, filing and qualification fees, printer's and
accounting fees, and fees and disbursements of counsel for the Company (but
excluding underwriters' discounts and commissions relating to shares sold by the
Holders), shall be borne by the Company. Each Holder participating in a
registration pursuant to this Section 7(c)(ii) shall bear such Holder's
proportionate share (based on the total number of shares sold in such
registration other than for the account of the Company or any of its directors,
officers, employees, consultants and affiliates) of all discounts, commissions
or other amounts payable to underwriters or brokers in connection with such
offering by the Holders.
(D) MAINTENANCE. Subject to Section 7(c)(vi), the
Company shall use all commercially reasonable efforts to maintain the
effectiveness of any Form S-3 registration statement filed under this Section
7(c)(ii) until the earlier of: (1) the date on which all of the Registrable
Securities have been sold; and (2) the fifth anniversary of the effective date
of such registration statement; provided, however, that unless all of the
Registrable Securities held by the Investor as of such fifth anniversary could
then be sold in a single transaction in accordance with Rule 144 under the
Securities Act without exceeding the volume limitations thereof, if the Company
receives written notice from the Investor that the Investor may be deemed to be
an "affiliate" of the Company for purposes of the Securities Act, the date in
this Clause (2) shall be extended until the Investor advises the Company that it
no longer believes it may be deemed such an "affiliate."
(iii) PIGGYBACK REGISTRATIONS. The Company shall notify all
Holders of Registrable Securities in writing at least 20 days prior to filing
any registration statement under the Securities Act for purposes of effecting a
public offering of common stock of the Company (including registration
statements relating to secondary offerings of common stock of the Company,
18
but excluding registration statements relating to any employee benefit plan or
any merger or other corporate reorganization, and any registration statement
under Rule 462(b) filed with respect to any effective registration statement),
and will afford each such Holder an opportunity to include in such registration
statement all or any part of the Registrable Securities then held by such
Holder. Each Holder desiring to include in any such registration statement all
or any part of the Registrable Securities held by such Holder shall, within ten
business days after receipt of the above-described notice from the Company, so
notify the Company in writing, and in such notice shall inform the Company of
the number of Registrable Securities such Holder wishes to include in such
registration statement. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its common stock, all upon the terms and conditions set forth herein.
Notwithstanding the foregoing, the Holders of Registrable Securities shall not
have the rights set forth in this Section 7(c)(iii) in connection with any
registration statement demanded by ▇▇▇▇▇ ▇▇▇▇▇▇▇ Strategic Growth Fund, L.P. or
▇▇▇▇▇ ▇▇▇▇▇▇▇ Strategic Growth Fund, Ltd. (collectively, the "▇▇▇▇▇ ▇▇▇▇▇▇▇
Entities") pursuant to that certain Registration Rights Agreement dated June 10,
1999 among the Company and the ▇▇▇▇▇ ▇▇▇▇▇▇▇ Entities.
(A) UNDERWRITING. If a registration statement under
which the Company gives notice under this Section 7(c)(iii) is for an
underwritten offering, then the Company shall so advise the Holders of
Registrable Securities. In such event, the right of any such Holder's
Registrable Securities to be included in such a registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
in customary form with the managing underwriter or underwriters selected for
such underwriting (including a market stand-off agreement of up to 90 days if
required by such underwriters, but only if the Company's executive officers,
directors and other five percent or greater stockholders also execute
substantially similar agreements); provided, however, that it shall not be
considered customary to require any of the Holders to provide representations
and warranties regarding the Company or indemnification of the underwriters for
material misstatements or omissions in the registration statement or prospectus
for such offering. Notwithstanding any other provision of this Agreement, if the
managing underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares from the registration and the underwriting;
provided, however, that the securities to be included in the registration and
the underwriting shall be allocated as follows: (1) first to the Company
(provided, however, that a minimum of 15 percent of the number of Registrable
Securities held by each Holder (where any Registrable Securities that are not
shares of Common Stock but are exercisable or exchangeable for, or convertible
into, shares of Common Stock, shall be deemed to have been so exercised,
exchanged or converted for such purpose) must also in any event be included if
requested by any such Holder); (2) second, to the extent the managing
underwriter determines additional securities can be included after compliance
with Clause (1), to each of the Holders and to the ▇▇▇▇▇, ▇▇▇▇▇▇▇ Entities and
Intel Corporation ("Intel") (to the extent not included pursuant to Clause (1))
requesting inclusion of their Registrable Securities in such registration
statement on a pro rata basis based on the total
19
number of Registrable Securities and other securities entitled to registration
then held by each such person; and (3) third, to the extent the managing
underwriter determines additional securities can be included after compliance
with Clauses (1) and (2), any other shares of Common Stock or other securities
of the Company. Any Registrable Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration. For any
Holder that is a partnership, the Holder and the partners and retired partners
of such Holder, or the estates and family members of any such partners and
retired partners and any trusts for the benefit of any of the foregoing persons,
and for any Holder that is a corporation, the Holder and all corporations that
are affiliates of such Holder, shall be deemed to be a single "Holder," and any
pro rata reduction with respect to such "Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "Holder," as defined in this sentence.
(B) EXPENSES. All expenses incurred in connection
with a registration pursuant to this Section 7(c)(iii) (excluding underwriters'
and brokers' discounts and commissions relating to shares sold by the Holders),
including all federal and "blue sky" registration, filing and qualification
fees, printers' and accounting fees, and fees and disbursements of counsel for
the Company and one counsel for the Holders shall be borne by the Company.
(C) NO LIMIT. Except as otherwise provided herein,
there shall be no limit on the number of times the Holders may request
registration of Registrable Securities under this Section 7(c)(iii).
(iv) INTENTIONALLY OMITTED.
(v) OBLIGATIONS OF THE COMPANY. Whenever required
to effect the registration of any Registrable Securities under this Agreement
the Company shall, as expeditiously as reasonably possible:
(A) REGISTRATION STATEMENT. Prepare and file with
the SEC a registration statement with respect to such Registrable Securities and
use all commercially reasonable efforts to cause such registration statement to
become effective; provided, however, that, except as otherwise required by this
Section 7(c), the Company shall not be required to keep any such registration
statement effective for more than 90 days.
(B) AMENDMENTS AND SUPPLEMENTS. Prepare and file with
the SEC such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement.
(C) PROSPECTUSES. Furnish to the Holders such number
of copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Securities Act, and such other documents as they
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration.
20
(D) BLUE SKY. Use all commercially reasonable efforts
to register and qualify the securities covered by such registration statement
under such other securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Holders, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(E) UNDERWRITING. In the event of any underwritten
public offering, enter into and perform its obligations under an underwriting
agreement in usual and customary form (including customary indemnification of
the underwriters by the Company), with the managing underwriter(s) of such
offering. Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(F) NOTIFICATION. Notify each Holder of Registrable
Securities covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, in which event no Holder shall use such prospectus
in connection with any offer or sale of its Registrable Securities until such
prospectus has been appropriately amended (which the Company shall promptly
under the circumstances do and deliver new prospectuses, as requested by the
Holders, promptly thereafter).
(G) OPINION AND COMFORT LETTER. Furnish, at the
request of any Holder requesting registration of Registrable Securities, on the
date that such Registrable Securities are delivered to the underwriters for
sale, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (1) an
opinion, dated as of such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders requesting registration, addressed to the
underwriters, if any, and to the Holders requesting registration of Registrable
Securities and (2) in the event that such securities are being sold through
underwriters, a "comfort" letter dated as of such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering and reasonably satisfactory to a majority in
interest of the Holders requesting registration, addressed to the underwriters
and to the Holders requesting registration of Registrable Securities.
(vi) FURNISH INFORMATION. It shall be a condition precedent
to the obligations of the Company to take any action pursuant to Section
7(c)(ii), (iii), (iv) or (v) that the selling Holders shall furnish to the
Company such information regarding themselves, the Registrable Securities held
by them, and the intended method of disposition of such securities as shall be
required to timely effect the registration of their Registrable Securities.
(vii) INDEMNIFICATION. In the event any Registrable
Securities are included in a registration statement under Section 7(c)(ii),
(iii) or (iv):
21
(A) BY THE COMPANY. To the extent permitted by law,
the Company will indemnify and hold harmless each Holder, the partners,
officers, shareholders, employees, representatives and directors of each Holder,
any underwriter (as determined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Securities Act or the Exchange Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"):
(x) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto;
(y) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading; or
(z) any violation or alleged violation by the
Company of the Securities Act, the Exchange Act, any federal or state securities
law or any rule or regulation promulgated under the Securities Act, the Exchange
Act or any federal or state securities law in connection with the offering
covered by such registration statement;
and the Company will reimburse each such Holder, partner, officer, shareholder,
employee, representative, director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them, as incurred, in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
paragraph shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation that
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Holder, partner,
officer, shareholder, employee, representative, director, underwriter or
controlling person of such Holder.
(B) BY THE SELLING HOLDERS. To the extent permitted
by law, each selling Holder will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed the registration
statement, each person, if any, who controls the Company within the meaning of
the Securities Act, any underwriter and any other Holder selling securities
under such registration statement or any of such other Holder's partners,
officers, shareholders, employees, representatives and directors and any person
who controls such Holder within the meaning of the Securities Act or the
Exchange Act, against any losses, claims, damages or liabilities (joint or
several) to which the Company or any such officer or director, controlling
person, underwriter or other such Holder, partner, officer, shareholder,
employee, representative, director or controlling person of such other Holder
may become subject under the Securities Act, the Exchange Act or other
Exchange Act or other
22
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will reimburse any legal or other expenses reasonably incurred by the
Company or any such officer or director, controlling person, underwriter or
other Holder, partner, officer, shareholder, employee, representative, director
or controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this paragraph shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; and provided further, that the total amounts
payable in indemnity by a Holder under this subsection or otherwise in respect
of any and all Violations shall not exceed in the aggregate the net proceeds
received by such Holder in the registered offering out of which such Violations
arise.
(C) NOTICE. Promptly after receipt by an indemnified
party under of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this section, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, to the extent that representation of such indemnified
party by the counsel retained by the indemnifying party would be inappropriate
due to actual or potential conflict of interests between such indemnified party
and any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
liability except to the extent the indemnifying party is prejudiced as a result
thereof.
(D) DEFECT ELIMINATED IN FINAL PROSPECTUS. The
foregoing indemnity agreements of the Company and Holders are subject to the
condition that, insofar as they relate to any Violation made in a preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement in question becomes effective or the
amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus"), such indemnity agreement shall not inure to the benefit of any
person if a copy of the Final Prospectus was timely furnished to the indemnified
party and was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act.
(E) CONTRIBUTION. In order to provide for just and
equitable contribution to joint liability under the Securities Act in any case
in which either (1) any Holder exercising rights under this Agreement, or any
controlling person of any such Holder, makes a claim for indemnification
pursuant to this section, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the
23
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this section provides for
indemnification in such case, or (2) contribution under the Securities Act may
be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this
section; then, and in each such case, the Company and such Holder will
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such proportion so that such
Holder is responsible for the portion represented by the percentage that the
public offering price of its Registrable Securities offered by and sold under
the registration statement bears to the public offering price of all securities
offered by and sold under such registration statement, and the Company and other
selling Holders are responsible for the remaining portion; provided, however,
that, in any such case: (X) no such Holder will be required to contribute any
amount in excess of the public offering price of all such Registrable Securities
offered and sold by such Holder pursuant to such registration statement; and (Y)
no person or entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person or entity who was not guilty of such fraudulent misrepresentation.
(F) SURVIVAL. The obligations of the Company and
Holders under this Section 7(c)(vii) shall survive until the fifth anniversary
of the completion of any offering of Registrable Securities in a registration
statement, regardless of the expiration of any statutes of limitation or
extensions of such statutes.
(viii) TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company
shall have no obligations pursuant to this Section 7(c) with respect to any
Registrable Securities proposed to be sold by a Holder in a registration
pursuant to Section 7(c)(ii) or (iii) unless in the written opinion of counsel
to the Company, reasonably acceptable to counsel for a Holder, all such
Registrable Securities proposed to be sold by a Holder may then be sold under
Rule 144 in any three month period without exceeding the volume limitations
thereunder.
(ix) NO REGISTRATION RIGHTS TO THIRD PARTIES. Until such time
as the Investor, together with its subsidiaries, no longer hold the equivalent
of at least two percent of the outstanding voting securities of the Company
(including for these purposes any Purchased Shares being held pursuant to the
Escrow Agreement and all Warrant Shares underlying any unexercised Warrants),
without the prior written consent of the Investor, the Company covenants and
agrees that it shall not grant, or cause or permit to be created, for the
benefit of any person or entity any registration rights of any kind (whether
similar to the demand, "piggyback" or Form S-3 registration rights described in
this Section 7, or otherwise) relating to shares of Common Stock or any other
securities of the Company that are pari passu or superior to the rights granted
under this Section 7(c).
(d) PUBLICITY. Without the Investor's prior written consent, the
Company will not issue any press release after the date hereof or publicize the
Investor's name in any public documents except in the ordinary course of its
business or as may be required by applicable securities laws, in which case such
disclosure shall be approved in advance by the Investor, such approval not to be
unreasonably withheld or delayed. The provisions of this Section 7(d) shall be
in addition to, and not in substitution for, the provisions of any separate
nondisclosure agreement executed by any of the parties hereto with respect to
the transactions contemplated hereby. Additional disclosures and
24
exchange of confidential information between the Company and the Investor shall
be governed by the terms of the Non-Disclosure Agreement, dated January 5, 2000,
executed by the Company and the Investor.
(e) RIGHTS OF PARTICIPATION.
(i) GENERAL. Until such time as the Investor, together with
its subsidiaries, no longer hold the equivalent of at least two percent of the
outstanding voting securities of the Company (including for these purposes any
Purchased Shares being held pursuant to the Escrow Agreement but excluding all
Warrant Shares underlying any unexercised Warrants) (such period from the date
hereof through such time being referred to herein as the "Initial Rights
Period"), the Investor and each other person or entity to whom rights under this
Section 7(e) have been duly assigned (each of the Investor and each such
assignee, a "Participation Rights Holder") shall have a right of first refusal
to purchase such Participation Rights Holder's Pro Rata Share (as defined below)
of all New Securities (as defined below) that the Company may from time to time
issue during such period. Such New Securities shall be allocated among the
Participation Rights Holders who elect to exercise their right to purchase such
New Securities on a pro rata basis according to the number of Purchased Shares
held by each such Participation Rights Holder. The rights described in the
preceding sentence, as further described in this subsection (e), are referred to
as the "Right of Participation".
(ii) PRO RATA SHARE. "Pro Rata Share" means, with respect to
each Participation Rights Holder, the ratio of the following numbers calculated
immediately prior to the issuance of the New Securities giving rise to the Right
of Participation: (A) the Participant Share Number (as defined below) for such
Participation Rights Holder, to (B) the difference between (1) the sum of (X)
the total number of shares of Common Stock and other voting capital stock of the
Company then outstanding, plus (Y) the number of shares of voting capital stock
issuable upon the exercise, conversion or exchange of any other security of the
Company then outstanding and (2) the number of Dilutive Securities issued since
the last Notice Date excluding any Maintenance Securities issued pursuant to the
last Maintenance Notice.
(iii) NEW SECURITIES. "New Securities" means any Common Stock,
preferred stock or other voting capital stock or security of the Company,
whether now authorized or not, and rights, options or warrants to purchase such
Common Stock or preferred stock or other voting capital stock or security, and
securities of any type whatsoever that are, or may become, convertible into or
exchangeable or exercisable for Common Stock, preferred stock or other voting
capital stock or security; provided, however, that the term "New Securities"
shall not include:
(A) any shares of Common Stock (or options or warrants
therefor) issued to employees, officers, directors or consultants of the Company
pursuant to any stock purchase or stock option incentive plans approved by the
Board;
(B) any securities issued as payment of fees to brokers,
consultants or financial or other advisors of the Company;
(C) the Purchased Shares and Warrant Shares issued under
this Agreement;
25
(D) any securities issued in connection with any stock
split, stock dividend or other similar event in which all Participation Rights
Holders are entitled to participate on a pro rata basis;
(E) any securities issued upon the exercise, conversion or
exchange of (1) the Debentures, (2) the Warrants, (3) the $3,000,000 in
principal amount of 5% convertible debentures to be issued pursuant to that
certain Securities Purchase Agreement dated June 10, 1999 among the Company,
▇▇▇▇▇ ▇▇▇▇▇▇▇ Strategic Growth Fund, L.P. and ▇▇▇▇▇ ▇▇▇▇▇▇▇ Strategic Growth
Fund, Ltd. (the "▇▇▇▇▇ ▇▇▇▇▇▇▇ Agreement"), (4) warrants to purchase $3,000,000
of Common Stock to be issued pursuant to the ▇▇▇▇▇ ▇▇▇▇▇▇▇ Agreement, (5) shares
issued to Intel Corporation pursuant to the Stock Purchase and Investors Rights
Agreement dated as of November 12, 1999 (the "Intel Agreement") between the
Company and Intel Corporation, (6) any shares of Common Stock issued as payment
of accrued interest on the securities listed in (1), (2), (3) or (4) above, or
(7) any outstanding security if such outstanding security constituted a New
Security; or
(F) any securities issued pursuant to the acquisition of
another person or entity by the Company by consolidation, merger, purchase of
assets, or other reorganization or issued in connection with the Company's
participation in a joint venture or similar form of alliance.
(iv) PARTICIPANT SHARE NUMBER. "Participant Share Number,"
with respect to a Participant Rights Holder, means the sum of (A) the number of
Purchased Shares held by such Participant Rights Holder, (B) the number of
shares of other voting capital stock or securities of the Company held by such
Participant Rights Holder, and (C) the number of shares of Common Stock or other
voting capital stock or securities issuable upon the exercise, conversion or
exchange of any other security of the Company held by such Participant Rights
Holder.
(v) PROCEDURES. If the Company proposes to undertake an
issuance of New Securities (in a single transaction or a series of related
transactions) in circumstances that entitled a Participation Rights Holder to
participate therein in accordance with this subsection (e), the Company shall
give to each Participation Rights Holder written notice of its intention to
issue New Securities (the "Participation Notice"), describing the amount and the
type of New Securities and the price and the general terms upon which the
Company proposes to issue such New Securities. Each Participation Rights Holder
shall have ten business days from the date of receipt of any such Participation
Notice to agree in writing to purchase up to the maximum number of such New
Securities that such Participation Rights Holder is entitled to purchase for the
price and upon the terms and conditions specified in the Participation Notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased (not to exceed such maximum). If any Participation
Rights Holder fails to so agree in writing within such 10 business day period,
then such Participation Rights Holder shall forfeit the right hereunder to
participate in such sale of New Securities; provided, however, that any
Participation Rights Holders that have elected to exercise their Right of
Participation shall be entitled to exercise such right with respect to any New
Securities where such right has been forfeited by such other Participation
Rights Holder(s), and the Company shall repeat the procedures set forth in this
paragraph (e)(v) to ascertain whether
26
the electing Participation Rights Holders desire to purchase such other New
Securities. All sales hereunder shall be consummated concurrently with the
closing of the transaction triggering the Right of Participation.
(vi) FAILURE TO EXERCISE. Upon the expiration of such ten
business day period, the Company shall have 90 days thereafter, subject to
extensions for regulatory compliance, to sell the New Securities described in
the Participation Notice (with respect to which the Participation Rights
Holders' rights of first refusal hereunder were not exercised) at the price (or
a higher price) and upon non-price terms not materially more favorable to the
purchasers thereof than specified in the Participation Notice. If the Company
has not issued and sold such New Securities within such 90-day period, then the
Company shall not thereafter issue or sell any New Securities without again
first offering such New Securities to the Participation Rights Holders pursuant
to this Section 7(e).
(f) RIGHT OF MAINTENANCE.
(i) GENERAL. Each Participation Rights Holder shall, pursuant
to the terms and conditions of this Section 7(f), have the right to purchase
from the Company additional securities of the Company ("Maintenance
Securities"), as a result of issuances by the Company of Dilutive Securities
that from time to time are issued after the Closing Date and before the
expiration of the Initial Rights Period, solely in order to maintain such
Participation Rights Holder's Prior Percentage Interest (as defined below) in
the Company (the "Right of Maintenance"). Each right to purchase Maintenance
Securities pursuant to this Section 7(f) shall be on the same terms (other than
price to the extent provided below) as the issuance of the Dilutive Securities
that gave rise to the right to purchase such Maintenance Securities.
(ii) DILUTIVE SECURITIES. "Dilutive Securities" means any
Common Stock, preferred stock or other voting capital stock or security
(including, without limitation, any Common Stock, voting preferred stock or
other voting capital stock or security issued upon the exercise, conversion or
exchange of any other securities) of the Company, whether now authorized or not;
provided, however, that the term "Dilutive Securities" shall not include:
(A) the Purchased Shares or Warrant Shares issued under this
Agreement;
(B) any securities issued in connection with any stock
split, stock dividend or similar event in which all Participation Rights Holders
are entitled to participate on a pro rata basis;
(C) any securities for which the issuance gave rise to a
Right of Participation (regardless of whether any such right was exercised) or
to a Corporate Event;
(D) any securities issuable upon the exercise, conversion or
exchange of any securities described in Clause (C) above;
27
(E) shares of Common Stock issued as awards, including
pursuant to exercise of options granted, to employees, officers and directors
under any plans approved by the Board; or
(F) shares of Common Stock issued upon conversion of
Debentures or upon exercise of warrants other than the Warrants.
(iii) PURCHASE PRICE. For purposes of this Section 7(f), the
per share "Purchase Price" of the Maintenance Securities shall equal the lower
of (1) the sales price of the Dilutive Securities and (2) the average Market
Price (as defined below) of such Maintenance Securities over the ten trading
days immediately preceding the date on which the Participation Rights Holder
elects to purchase such Maintenance Securities. If the issuance of any Dilutive
Securities occurs upon the exercise, conversion or exchange of other securities
("Exchangeable Securities"), then the per share price at which such Dilutive
Securities shall be deemed to have been issued shall be the sum of (x) the per
share amount paid upon such exercise, conversion or exchange, plus (y) the per
share amount previously paid for the Exchangeable Securities (adjusted for any
stock splits, stock dividends or other similar events). For purposes of this
Section 7(f)(iii), "Market Price" means, as to any Maintenance Security on a
given day, the average of the closing prices of such security's sales on the
principal domestic securities exchanges on which such security may at the time
be listed, or, if there have been no sales on any such exchange on such day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if on any day such security is not so listed, the average
of the representative bid and asked prices quoted on Nasdaq as of 4:00 P.M., New
York time, on such day, or, if on any day such security is not quoted on Nasdaq,
the average of the highest bid and lowest asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization. If at any time a
Maintenance Security are not listed on any domestic securities exchange or
quoted on Nasdaq or the domestic over-the-counter market ("Unlisted
Securities"), the "Market Price" shall be the fair value thereof determined
jointly by the Company and the Holder.
(iv) ALTERNATIVE PURCHASE PRICE. If a Participation Rights
Holder does not elect to purchase its Maintenance Amount (as defined below) at
the time of issuance of any Dilutive Securities specified in a Maintenance
Notice (as defined below), and in the written opinion of the Company's
independent auditors, made available to each Participation Rights Holder upon
request, the effect of determining the Purchase Price after such issuance
pursuant to paragraph (iii) above would require the Company to take a charge
against earnings in accordance with GAAP, then for purposes of this Section
7(f), "Purchase Price" shall mean the Market Price on the date the Participation
Rights Holder elects to purchase its Maintenance Amount.
(v) CONSIDERATION OTHER THAN CASH. If Dilutive Securities or
Exchangeable Securities were issued for consideration other than cash, the per
share amounts paid for such Dilutive Securities or Exchangeable Securities shall
be determined jointly in good faith by the Company and the Participation Rights
Holder.
(vi) APPRAISER. If the Company and the Participation Rights
Holder are unable to reach agreement within a reasonable period of time with
respect to (A) the Market Price of Unlisted Securities or (B) the per share
amounts paid for Dilutive Securities or Exchangeable
28
Securities issued for consideration other than cash, such Market Price or per
share amounts paid, as the case may be, shall be determined by an appraiser
jointly selected by the Company and the Participation Rights Holder. The
determination of such appraiser shall be final and binding on the Company and
the Participation Rights Holder. The fees and expenses of such appraiser shall
be paid by the Company.
(vii) PRIOR PERCENTAGE INTEREST. A Participation Rights
Holder's "Prior Percentage Interest" for purposes of the Right of Maintenance is
the ratio of (A) the Participant Share Number for such Participation Rights
Holder as of the date of such Maintenance Notice (the "Notice Date"), to (B) the
difference between (1) the sum of (X) the total number of shares of Common Stock
and other voting capital stock and securities of the Company outstanding on the
Notice Date, plus (Y) the number of shares of voting capital stock or securities
issuable upon the exercise, conversion or exchange of any other security of the
Company outstanding as of such date (assuming, for purposes of the immediately
preceding Clauses (X) and (Y), the Common Stock or other securities described in
such Maintenance Notice are deemed not issued), and (2) the total number of
Dilutive Securities issued since the later of the Closing Date and the last
Notice Date (but excluding any Maintenance Securities issued pursuant to the
last Maintenance Notice).
(viii) MAINTENANCE AMOUNT. A Participation Rights Holder's
"Maintenance Amount" with respect to any Maintenance Notice shall equal such
number of Maintenance Securities as shall (upon purchase thereof in full by the
Participation Rights Holder) enable such Participation Rights Holder to maintain
its Prior Percentage Interest on a fully-diluted basis. As an example, assume
that the Company had 10,000 shares outstanding and the Participation Rights
Holder holds 20 percent of such shares (or 2,000 shares). The Company first
issues 400 shares to a third party ("Issuance 1"), an amount insufficient to
trigger a Notice of Issuance pursuant to Section 7(f)(ix). The Company then
proposes to issue 4,600 shares to a third party ("Issuance 2"), an amount that
triggers a Maintenance Notice. The Participation Rights Holder shall have the
right to maintain its 20 percent interest after considering Issuances 1 and 2
and the new shares issued to the Participation Rights Holder. In this example,
the Participation Rights Holder shall have the right to purchase an additional
1,250 shares, thereby resulting in the Participation Rights Holder holding 20
percent of the securities outstanding (3,250 shares out of 16,250 shares).
(ix) MAINTENANCE NOTICE. Within ten business days after each
anniversary of the Closing Date, and at least ten business days before each
issuance of Dilutive Securities that when cumulated with all prior issuances of
Dilutive Securities since the later of (i) the Closing Date and (ii) the date of
the last Notice Date (which, as a result of which, the Participation Rights
Holder had an opportunity to purchase Maintenance Securities), would result in a
five percent or greater reduction in a Participation Rights Holders' Prior
Percentage Interest, the Company shall give to each Participation Rights Holder
written notice (the "Maintenance Notice") describing the number of Dilutive
Securities issued since such prior Notice Date and the price and non-price terms
upon which the Company issued such Dilutive Securities, and the Maintenance
Amount that such Participation Rights Holder is entitled to purchase as a result
of such issuances.
(x) PURCHASE OF MAINTENANCE SECURITIES. If a Participation
Rights Holder exercises its right to purchase Dilutive Securities, such
Participation Rights Holder shall have sixty
29
(60) days after the issuance of the Dilutive Securities specified in the
applicable Maintenance Notice to purchase its Maintenance Amount at the Purchase
Price (as determined in accordance with this Section 7(f)) and upon the other
terms and conditions specified in the Maintenance Notice. The closing of such
purchase shall occur within ten days after such election to purchase. If any
Participation Rights Holder fails to elect to purchase such Participation Rights
Holder's full Maintenance Amount of Maintenance Securities within such 60-day
period, then such Participation Rights Holder shall forfeit the right hereunder
to purchase that part of its Maintenance Amount that it did not so elect to
purchase.
(xi) TERMINATION. The Company's obligations under this Section
7(f) shall terminate upon the earlier to occur of (A) the expiration of the
Initial Rights Period, and (B) the fifth anniversary of the Closing Date..
(g) RIGHTS RELATING TO A CORPORATE EVENT.
(i) CORPORATE EVENTS. A "Corporate Event" shall mean any of the
following, whether accomplished through one or a series of related transactions:
(A) any transaction, other than an issuance of securities in connection with the
acquisition of an unaffiliated third party in an arms length transaction, that
results in a greater than 30 percent change in the total outstanding number of
voting securities (which, for purposes of this Agreement, shall mean all
securities of the Company that presently are, or would be upon conversion,
exchange or exercise, entitled to vote in the election of directors) of the
Company immediately prior to such issuance (other than any such change solely as
a result of a stock split, stock dividend or other recapitalization affecting
holders of Common Stock and other classes of voting securities of the Company on
a pro rata basis); (B) an acquisition of the Company or any of its "significant
subsidiaries" (as defined in the SEC's Rule 1-02(w) of Regulation S-X)
("Significant Subsidiaries") by consolidation, merger (regardless of whether the
Company is the survivor of such merger or not), share purchase or exchange or
other reorganization or transaction in which the holders of the Company's or
such Significant Subsidiary's outstanding voting securities immediately prior to
such transaction own, immediately after such transaction, securities
representing less than 50 percent of the voting power of the Company, any such
Significant Subsidiary or the Person issuing such securities or surviving such
transaction, as the case may be; (C) the acquisition of all or substantially all
the assets of the Company or any Significant Subsidiary; (D) the grant by the
Company or any of its Significant Subsidiaries of an exclusive license for any
material portion of the Company's or such Significant Subsidiary's Intellectual
Property to a Person other than the Investor or any of its subsidiaries; and (E)
any transaction or series of related transactions that results in the failure of
the majority of the members of the Board immediately prior to the closing of
such transaction or series of related transactions failing to constitute a
majority of the Board (or its successor) immediately following such transaction
or series of related transactions.
(ii) NOTICE OF CORPORATE EVENTS. Until expiration of the
Notification Period (as defined below), the Company shall provide the Investor
with detailed written notice of terms of any offer (written or oral) from any
person or entity for a proposed Corporate Event. Any notice shall be delivered
to the Investor as soon as practicable but no later than two business days after
the date the Company first becomes aware of such offer or proposed Corporate
Event. Without limiting the
30
generality of the foregoing, such notice shall set forth the identity(ies) of
the person(s) or entity(ies) involved, the consideration to be paid and all
other material terms and conditions. If such offer is in writing (whether in the
form of a letter of intent, term sheet or otherwise), the Company shall deliver
a copy thereof to the Investor.
(iii) RIGHT OF FIRST REFUSAL. During the ROFR Period, the
Company shall, prior to effecting or entering into any agreement for any
Corporate Event (other than a Corporate Event with Intel), present to the
Investor in writing the final terms and conditions of the proposed Corporate
Event, including the name of the other party or parties to the Corporate Event
and a copy of the definitive agreements into which the Company is prepared to
enter. The Investor acknowledges and agrees that the Company will also be
obligated to give a similar notice to Intel (a copy of which shall also be given
to the Investor at the same time such notice is given to Intel), and that Intel
shall have ten business days after the receipt thereof to deliver written notice
to the Company agreeing to enter into a written agreement with the Company on
substantially the same terms and conditions specified in such notice, which
agreement must provide for consummation of the transaction within 120 days after
the date of delivery of such notice (such 120-day period subject to extensions
for regulatory compliance). If the Company does not receive such notice from
Intel within such 10-day period, it shall promptly notify the Investor thereof
(the "Final Notice"). The Investor shall then have ten business days after the
date of receipt of the Final Notice to deliver written notice to the Company
agreeing to enter into a written agreement with the Company on substantially the
same terms and conditions specified in the Final Notice, which agreement shall
nevertheless provide for consummation of the transaction within 120 days after
the date of delivery of the Final Notice (such 120-day period subject to
extensions for regulatory compliance). During such ten business day period, the
Investor shall be entitled to conduct due diligence with the reasonable
cooperation of the Company. If the Investor fails to enter into a definitive
agreement within such 10 business day period, for a period of 90 days
thereafter, the Company shall have the right to enter into an agreement
regarding such Corporate Event with the party or parties specified in the
applicable Final Notice; provided, however, that such definitive agreement is
entered into within 90 days following termination of such ten business day
period; provided further, that if during such ten business day period, the
Investor shall have made a written offer for the acquisition of the Company, the
Corporate Event with such a third party shall be for at least 95 percent of the
price offered by the Investor and on other terms no less favorable to
shareholders of the Company than the terms of the offer proposed by the Investor
with respect to shareholders other than the Investor. "ROFR Period" means (A)
with respect to a Corporate Event involving a personal computer original
equipment manufacturer (a "PC/OEM"), the Initial Rights Period and (B)
otherwise, the period commencing on the Closing Date and ending on the date that
is six months thereafter.
(iv) RIGHT OF RESALE. If the Investor shall fail to exercise
its right of first refusal as to a Corporate Event pursuant to Section 7(g)(3),
the Investor shall, upon the Company's entering into an agreement to consummate
a Corporate Event, have the right to sell to the Company any or all shares of
Purchased Shares, Warrant Shares and all New Securities and Maintenance
Securities then owned by the Investor. Such sale shall be made on the following
terms and conditions:
(A) The price per share at which such shares are to be sold
to Company shall be equal to the greater of: (1) 25 percent of the Per Share
Purchase Price (as such may be
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adjusted for any stock split or dividend or other event of a similar nature) and
(2) either the highest price per share of capital stock (or equivalent) paid in
connection with the Corporate Event or, if the transaction involves the sale of
a Significant Subsidiary or assets or the licensing of Intellectual Property,
the Investor's pro rata share of the consideration received, directly or
indirectly, by the Company in such transaction based on its then fully-diluted
ownership of the Company's capital stock.
(B) The Company shall reimburse the Investor for any and all
fees and expenses, including legal fees and expenses, incurred in connection
with this Section 7(g)(4).
(C) Within 15 days prior to the consummation of the
Corporate Event, the Investor shall deliver to the Company the certificate or
certificates representing shares to be sold, each certificate to be properly
endorsed for transfer.
(D) The Company shall, concurrent with the closing of the
Corporate Event, pay the aggregate purchase price therefor and the amount of
reimbursable fees and expenses as specified in Section 7(g)(4)(B) in cash.
(v) RIGHT OF NOTIFICATION AND FIRST NEGOTIATION. For a period
(X) commencing upon expiration of the ROFR Period and (Y) ending on the day that
is 900 days after such last day (the "Notification Period"), the Company shall,
prior to the Board's approving or disapproving a Corporate Event or the
Company's or any of its subsidiaries' entering into a definitive agreement with
respect to a Corporate Event (in each case, other than a Corporate Event with
Intel), notify the Investor of all terms and conditions of such Corporate Event.
The Investor acknowledges and agrees that the Company is obligated to negotiate
in good faith with Intel Corporation for a period of not less than ten business
days for Intel Corporation to acquire the Company (or a significant subsidiary,
assets or license, as the case may be) or enter into another Corporate Event
with the Company, and the Company agrees to provide the Investor with a copy any
notice relating to a proposed Corporate Event provided by the Company to Intel
at the same time such notice is given to Intel. If the Company and Intel
Corporation shall not come to an agreement within such 10-day period, the
Company shall then promptly notify the Investor of such failure and shall then
attempt to negotiate in good faith with the Investor for a period of not less
than ten business days (beginning on the date of such notice) for the Investor
to acquire the Company (or a Significant Subsidiary, assets or license, as the
case may be) or enter into another Corporate Event with the Company. During such
ten business day period, the Investor shall be entitled to conduct due diligence
with the reasonable cooperation of the Company. During such ten business day
period, any alternative proposal made by the Investor shall be submitted by the
Company to the Board and the Board shall, in good faith, either approve or
disapprove the Investor's alternative proposal. To the extent that the Company
and the Investor do not enter into an agreement with respect to such an
acquisition or other Corporate Event with the Investor during such ten business
day period, the Board shall be free to approve or disapprove such Corporate
Event and the Company shall be free to enter into a definitive agreement with
respect to a Corporate Event with a third party and subsequently consummate such
Corporate Event.
32
(vi) NOTICE OF TEN PERCENT ACQUISITIONS. Until expiration of
the Initial Rights Period, the Company shall provide the Investor with detailed
written notice of the earlier of the following events: (X) the Company's first
becoming aware of any person or entity acquiring after the date hereof any
outstanding voting securities of the Company such that following such
acquisition such person or entity owns ten percent or more of the Company's
outstanding voting securities, or (Y) the terms of any offer or proposal
(written or oral) after the date hereof from any person or entity such that
following the consummation of any such offer or proposal such person or entity
would own ten percent or more of the Company's outstanding voting securities.
Any notice shall be delivered to the Investor within three business days after
the date the Company first becomes aware of such acquisition, offer or proposal.
Such notice shall set forth, to the extent known by Company, the identity(ies)
of the person(s) or entity(ies) involved, the consideration paid or to be paid
and all other material terms and conditions. If such offer or proposal is in
writing (whether in the form of a letter of intent, term sheet or otherwise),
the Company shall deliver a copy thereof to the Investor.
(h) RIGHTS RELATING TO COMPETITORS. Without the Investor's consent,
during the Initial Rights Period, the Company will not issue any securities to
another PC/OEM or provider of internet access services unless such issuance is
associated with a Strategic Relationship (as defined below) and the strategic
partner acquires an aggregate number of securities in the Company that are no
more than 50 percent of the aggregate number of securities of the Company then
held by the Investor (including as outstanding any shares held in escrow
pursuant to the Escrow Agreement and all rights of the Investor to acquire
securities of the Company pursuant to this Section 7). A "Strategic
Relationship" is any agreement or series of agreements that involve (A) at least
a marketing/OEM relationship, (B) a joint collaboration on any product
development and/or engineering, and (C) an equity investment made at the time
the agreement or agreements are entered into.
(i) TECHNOLOGY RIGHTS. During the Initial Rights Period, the Investor
shall have an exclusive six-month period to license or market any products or
services developed or acquired by the Company in any collaboration with the
Investor or in any way using the Investor's proprietary technology, during which
period such products or services may not be sold or licensed to or marketed or
distributed by any other PC/OEMs or providers of Internet access services.
Following the Investor's exclusive six-month period referred to above, the
Company may license or market to any other party the products or services
developed or acquired by the Company in any collaboration with the Investor,
other than products or services using the Investor's proprietary technology,
including but not limited to any PC/OEM or providers of Internet access service.
During the Initial Rights Period (i) the Investor shall have a right of first
refusal with respect to any grant by the Company of an exclusive license of any
material portion of the Company's intellectual property, and (ii) the Company
shall not grant to any other party any right that is superior to the Investor's
with respect to the acquisition or license of the Company's or any of its
Significant Subsidiaries' Intellectual Property; provided that the foregoing
rights shall be subject to any superior rights of Intel under any agreement
outstanding on the date hereof. The right of first refusal referred to in clause
(i) shall be governed by the procedures set forth in Section 7(g) governing
Corporate Events. In addition, the Company shall form a technology advisory
board, of which a representative designated by the Investor shall have a right
to be a member.
33
(j) BOARD VISITATION RIGHTS. During the Initial Rights Period, the
Company shall allow a representative designated by the Investor to attend all
meetings of the Company's board of directors in a nonvoting capacity and to
provide verbal input at such meetings, and shall provide the representative with
copies of all materials which the Company provides to its board of directors.
The Investor's representative may be excluded from any portion of a meeting of
the board of directors if the Company's counsel advises that the
representative's attendance thereat would jeopardize the Company's
attorney-client privilege with respect to the matters being discussed.
(k) LOCK-UPS. The Investor shall not publicly sell any of the
Securities in a non-underwritten public market transactions during the six-month
period after the Closing; provided, however, that such restriction shall
terminate upon a change in control or an offer or a transaction which would
result in a change of control (as defined in the Company's equity incentive plan
as in existence on the date hereof). In addition, the Investor shall execute the
form of lock-up agreement required by any underwriter of the Common Stock to be
sold by the Company in a public offering conducted within nine months of the
Closing Date, provided that the Company's executive officers, directors and
other five percent or greater stockholders also execute substantially similar
lock-up agreements.
(l) BEST EFFORTS. Each of the Investor and the Company shall, and the
Company shall cause each of its Subsidiaries to, cooperate and use their
respective commercially reasonable best efforts to take, or cause to be taken,
all appropriate action, and to make, or cause to be made, all filings necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated hereby, including, without limitation,
their respective commercially reasonable best efforts to obtain, prior to the
Closing Date, all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities as are necessary for
consummation of the transactions contemplated hereby and to fulfill the
conditions to the transactions contemplated hereby.
8. INDEMNIFICATION.
(a) AGREEMENT TO INDEMNIFY.
(i) COMPANY INDEMNITY. The Investor, its Affiliates and
Associates, and each officer, director, shareholder, employer, representative
and agent of any of the foregoing (collectively, the "Investor Indemnitees")
shall each be indemnified and held harmless to the extent set forth in this
Section 8 by the Company with respect to any and all Damages (as defined below)
incurred by any Investor Indemnitee as a proximate result of any inaccuracy or
misrepresentation in, or breach of, any representation, warranty, covenant or
agreement made by the Company in this Agreement (including any exhibits and
schedules hereto). Indemnification claims arising from the registration of
Securities under Federal and state securities laws are covered by Section 7(c)
and not this Section 8.
(ii) INVESTOR INDEMNITY. The Company, its respective Affiliates
and Associates, and each officer, director, shareholder, employer,
representative and agent of any of the foregoing (collectively, the "Company
Indemnitees") shall each be indemnified and held harmless to the extent
34
set forth in this Section 8, by the Investor, in respect of any and all Damages
incurred by any Company Indemnitee as a proximate result of any inaccuracy or
misrepresentation in, or breach of, any representation, warranty, covenant or
agreement made by the Investor in this Agreement. Indemnification claims arising
from the registration of Securities under Federal and state securities laws are
covered by Section 7(c) and not this Section 8.
(iii) EQUITABLE RELIEF. Nothing set forth in this Section 8
shall be deemed to prohibit or limit any Investor Indemnitee's or Company
Indemnitee's right at any time before, on or after the Closing, to seek
injunctive or other equitable relief for the failure of any Indemnifying Party
to perform or comply with any covenant or agreement contained herein.
(b) SURVIVAL. All representations and warranties of the Investor and
the Company contained herein and all claims of any Investor Indemnitee or
Company Indemnitee in respect of any inaccuracy or misrepresentation in or
breach hereof, shall survive the Closing until the second anniversary of the
date of this Agreement, regardless of whether the applicable statute of
limitations, including extensions thereof, may expire. All covenants and
agreements of the Investor and the Company contained in this Agreement shall
survive the Closing in perpetuity (except to the extent any such covenant or
agreement shall expire by its terms). All claims of any Investor Indemnitee or
Company Indemnitee in respect of any breach of such covenants or agreements
shall survive the Closing until the expiration of one year following the
non-breaching party's obtaining actual knowledge of such breach.
(c) CLAIMS FOR INDEMNIFICATION. If any Investor Indemnitee or Company
Indemnitee (an "Indemnitee") shall believe that such Indemnitee is entitled to
indemnification pursuant to this Section 8 in respect of any Damages, such
Indemnitee shall give the appropriate Indemnifying Party (which for purposes
hereof, in the case of an Investor Indemnitee, means the Company, and in the
case of a Company Indemnitee, means the Investor) prompt written notice thereof.
Any such notice shall set forth in reasonable detail and to the extent then
known the basis for such claim for indemnification. The failure of such
Indemnitee to give notice of any claim for indemnification promptly shall not
adversely affect such Indemnitee's right to indemnity hereunder except to the
extent that such failure adversely affects the right of the Indemnifying Party
to assert any reasonable defense to such claim. Each such claim for indemnity
shall expressly state that the Indemnifying Party shall have only the 20
business day period referred to in the next sentence to dispute or deny such
claim. The Indemnifying Party shall have 20 business days following its receipt
of such notice either (i) to acquiesce in such claim by giving such Indemnitee
written notice of such acquiescence or (ii) to object to the claim by giving
such Indemnitee written notice of the objection. If the Indemnifying Party does
not object thereto within such 20 business day period, such Indemnitee shall be
entitled to be indemnified for all Damages reasonably and proximately incurred
by such Indemnitee in respect of such claim. If the Indemnifying Party objects
to such claim in a timely manner, the senior management of the Company and the
Investor shall meet to attempt to resolve such dispute. If the dispute cannot be
resolved by the senior management, either party may make a written demand for
formal dispute resolution and specify therein the scope of the dispute. Within
30 days after such written notification, the parties agree to meet for one day
with an impartial mediator and consider dispute resolution alternatives other
than litigation. If an alternative method of dispute
35
resolution is not agreed upon within thirty days after the one day mediation,
either party may begin litigation proceedings. Nothing in this section shall be
deemed to require arbitration.
(d) DEFENSE OF CLAIMS. In connection with any claim that may give rise
to indemnity under this Section 8 resulting from or arising out of any claim or
Proceeding against an Indemnitee by a person or entity that is not a party
hereto, the Indemnifying Party may (unless such Indemnitee elects not to seek
indemnity hereunder for such claim) but shall not be obligated to, upon written
notice to the relevant Indemnitee, assume the defense of any such claim or
Proceeding if the Indemnifying Party with respect to such claim or Proceeding
acknowledges to the Indemnitee the Indemnitee's right to indemnity pursuant
hereto to the extent provided herein (as such claim may have been modified
through written agreement of the parties) and provides assurances, reasonably
satisfactory to such Indemnitee, that the Indemnifying Party will be financially
able to satisfy such claim to the extent provided herein if such claim or
Proceeding is decided adversely; provided, however, that nothing set forth
herein shall be deemed to require the Indemnifying Party to waive any
crossclaims or counterclaims the Indemnifying Party may have against the
Indemnified Party for damages. The Indemnified Party shall be entitled to retain
separate counsel, reasonably acceptable to the Indemnifying Party, if the
Indemnified Party shall determine, upon the written advice of counsel, that an
actual or potential conflict of interest exists between the Indemnifying Party
and the Indemnified Party in connection with such Proceeding. The Indemnifying
Party shall be obligated to pay the reasonable fees and expenses of such
separate counsel to the extent the Indemnified Party is entitled to
indemnification by the Indemnifying Party with respect to such claim or
Proceeding under this Section 8(d). If the Indemnifying Party assumes the
defense of any such claim or Proceeding, the Indemnifying Party shall select
counsel reasonably acceptable to such Indemnitee to conduct the defense of such
claim or Proceeding, shall take all steps necessary in the defense or settlement
thereof and shall at all times diligently and promptly pursue the resolution
thereof. If the Indemnifying Party shall have assumed the defense of any claim
or Proceeding in accordance with this Section 8(d), the Indemnifying Party shall
be authorized to consent to a settlement of, or the entry of any judgment
arising from, any such claim or Proceeding, with the prior written consent of
such Indemnitee, not to be unreasonably withheld; provided, however, that the
Indemnifying Party shall pay or cause to be paid all amounts arising out of such
settlement or judgment concurrently with the effectiveness thereof; provided
further, that the Indemnifying Party shall not be authorized to encumber any of
the assets of any Indemnitee or to agree to any restriction that would apply to
any Indemnitee or to its conduct of business; and provided further, that a
condition to any such settlement shall be a complete release of such Indemnitee
and its Affiliates, directors, officers, employees and agents with respect to
such claim, including any reasonably foreseeable collateral consequences
thereof. Such Indemnitee shall be entitled to participate in (but not control)
the defense of any such action, with its own counsel and at its own expense.
Each Indemnitee shall, and shall cause each of its Affiliates, directors,
officers, employees and agents to, cooperate fully with the Indemnifying Party
in the defense of any claim or Proceeding being defended by the Indemnifying
Party pursuant to this Section 8(d). If the Indemnifying Party does not assume
the defense of any claim or Proceeding resulting therefrom in accordance with
the terms of this Section 8(d), such Indemnitee may defend against such claim or
Proceeding in such manner as it may deem appropriate, including settling such
claim or Proceeding after giving notice of the same to the Indemnifying Party,
on such terms as such Indemnitee may deem appropriate. If any Indemnifying Party
seeks to question the manner in which such Indemnitee defended such claim or
36
Proceeding or the amount of or nature of any such settlement, such Indemnifying
Party shall have the burden to prove by a preponderance of the evidence that
such Indemnitee did not defend such claim or Proceeding in a reasonably prudent
manner.
(e) CERTAIN DEFINITIONS. As used in this Section 8, (a) "Affiliate"
means, with respect to any person or entity, any person or entity directly or
indirectly controlling, controlled by or under direct or indirect common control
with such other person or entity; (b) "Associate" means, when used to indicate a
relationship with any person or entity, (1) any other person or entity of which
such first person or entity is an officer, director or partner or is, directly
or indirectly, the beneficial owner of ten percent or more of any class of
equity securities, membership interests or other comparable ownership interests
issued by such other person or entity, (2) any trust or other estate in which
such first person or entity has a ten percent or more beneficial interest or as
to which such first person or entity serves as trustee or in a similar fiduciary
capacity, and (3) any relative or spouse of such first person or entity who has
the same home as such first person or entity or who is a director or officer of
such first person or entity; (c) "Damages" means all demands, claims, actions or
causes of action, assessments, losses, damages, costs, expenses, liabilities,
judgments, awards, fines, response costs, sanctions, taxes, penalties, charges
and amounts paid in settlement, including (1) interest on cash disbursements in
respect of any of the foregoing at the prime rate of Chase Manhattan Bank, as in
effect from time to time, compounded quarterly, from the date each such cash
disbursement is made until the date the party incurring such cash disbursement
shall have been indemnified in respect thereof, and (2) reasonable out-of-pocket
costs, fees and expenses (including reasonable costs, fees and expenses of
attorneys, accountants and other agents of, or other parties retained by, such
party), and (d) "Proceeding" means any action, suit, hearing, arbitration,
audit, proceeding (public or private) or investigation that is brought or
initiated by or against any federal, state, local or foreign governmental
authority or any other person or entity.
9. ASSIGNMENT. The rights of the Investor under Sections 7(b), (c), (e)
and (f) are transferable only to a person or entity who acquires at least 20
percent of the Purchased Shares issued on the Closing Date (subject to
appropriate adjustment for all stock splits, dividends, combinations,
recapitalizations and the like where all holders of Common Stock participate on
a pro rata basis); provided, however, that no person or entity may be assigned
any of the foregoing rights unless the Company is given written notice by the
assigning party at the time of such assignment stating the name and address of
the assignee and identifying the securities of the Company as to which the
rights in question are being assigned; and provided further, that any such
assignee shall receive such assigned rights subject to all the terms and
conditions of this Agreement (including all terms and conditions governing the
duration and termination of rights of the Investor). The rights of the Investor
under Section 7(g) may be assigned only to one of its subsidiaries; provided,
however, that no such assignment of such rights under Section 7(g) shall be
effective until the Company is given written notice by the Investor stating the
name and address of the assignee; and provided further, that any such assignee
shall receive such assigned rights subject to all the terms and conditions of
this Agreement.
10. DEFAULT. In the event that either the Closing, the Escrow Closing or
the consummation of any of the other transactions contemplated hereby does not
occur because of any default hereunder or breach hereof by either the Company or
the Investor (the "Defaulting Party") or any other reason other than the failure
of a condition precedent, the Defaulting Party shall pay the other party to this
37
Agreement (the "Non-Defaulting Party") the amount of $2,500,000. The foregoing
shall not preclude any party from seeking additional remedies, including
injunctive and other equitable relief.
11. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement will inure to the benefit of and be binding upon the respective
successors and assigns of the parties.
(b) GOVERNING LAW. This Agreement will be governed by and construed
under the internal laws of the State of Delaware.
(c) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(d) HEADINGS. The headings and captions used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.
(e) NOTICES. Any notice required or permitted under this Agreement
shall be given in writing, shall be effective when received, and shall in any
event be deemed received and effectively given upon personal delivery to the
party to be notified or three business days after deposit with the United States
Post Office, by registered or certified mail, postage prepaid, or one (1)
business day after deposit with a nationally recognized courier service such as
FedEx for next business day delivery under circumstances in which such service
guarantees next business day delivery, or one (1) business day after facsimile
with copy delivered by registered or certified mail, in any case, postage
prepaid and addressed to the party to be notified at the address indicated for
such party on the signature page hereof or at such other address as the Investor
or the Company may designate by giving at least ten days advance written notice
pursuant to this Section 10(e).
(f) AMENDMENTS AND WAIVERS. This Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of Purchased Shares (together
with all New Securities purchased pursuant to Section 7(e) and all Maintenance
Shares) representing at least a majority of the total aggregate number of
Purchased Shares (together with all New Securities purchased pursuant to Section
7(e) and all Maintenance Shares) then outstanding (excluding any of such shares
that have been sold in a transaction in which rights under Section 7(c) are not
assigned in accordance with this Agreement or sold to the public pursuant to SEC
Rule 144 or otherwise). Any amendment or waiver effected in accordance with this
Section 10(g) will be binding upon the Investor, the Company and their
respective successors and assigns. Notwithstanding the foregoing, the provisions
of subsections (c), (d), (e), (f) and (g) of Section 7, and all of Section 8,
may not be amended without the written consent of the Company and the Investor,
which may be withheld in either of their sole and absolute discretions.
(g) SEVERABILITY. If any provision of this Agreement is held to be
unenforceable under applicable law, such provision will be excluded from this
Agreement and the balance of the
38
Agreement will be interpreted as if such provision were so excluded and will be
enforceable in accordance with its terms.
(h) ENTIRE AGREEMENT. This Agreement, and all exhibits and schedules
hereto (including the Disclosure Schedule), which are hereby incorporated by
reference into and made an integral part of this Agreement, constitutes the
entire agreement and understanding of the parties with respect to the subject
matter hereof and supersedes any and all prior negotiations, correspondence,
agreements, understandings duties or obligations between the parties with
respect to the subject matter hereof.
(i) FURTHER ASSURANCES. From and after the date of this Agreement upon
the request of the Company or the Investor, the Company and the Investor will
execute and deliver such instruments, documents or other writings, and take such
other actions, as may be reasonably necessary or desirable to confirm and carry
out and to effectuate fully the intent and purposes of this Agreement.
(j) MEANING OF INCLUDE AND INCLUDING; ARTICLE AND SECTION REFERENCES.
Whenever in this Agreement the word "include" or "including" is used, it shall
be deemed to mean "include, without limitation" or "including, without
limitation," as the case may be, and the language following "include" or
"including" shall not be deemed to set forth an exhaustive list. All "Article",
"Section", "subsection", "paragraph" and "Clause" references herein are
references to Articles, Sections, subsections, paragraphs and clauses,
respectively, of this Agreement unless otherwise specified.
(k) FEES, COSTS AND EXPENSES. Except as contemplated otherwise by
Section 5(h), all fees, costs and expenses (including attorney's' fees and
expenses) incurred by either part hereto in connection with the preparation,
negotiation and execution of this Agreement and the consummation of the
transactions contemplated hereby and thereby (including the costs associated
with any filings with, or compliance with any of the requirements of, any
governmental authorities), shall be the sole and exclusive responsibility of
such party.
(l) COMPETITION. Nothing set forth herein shall be deemed to
preclude, limit or restrict the Company's or the Investor's ability to compete
with the other.
(m) STOCK SPLITS, DIVIDENDS AND OTHER SIMILAR EVENTS. The provisions of
this Agreement (including the number of shares of Common Stock (including the
Purchased Shares and the Warrant Shares) and other securities described herein)
shall be appropriately adjusted to reflect any stock split, stock dividend,
reorganization or other similar event that may occur with respect to the Company
after the date hereof.
39
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first written above.
ESOFT, INC. GATEWAY COMPANIES, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇ By: /s/ ▇▇▇▇ ▇▇▇▇
------------------------- -----------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇▇ Name: ▇▇▇▇ ▇▇▇▇
------------------- ------------------------
Title: CEO Title: CFO
------------------ -----------------------
Address: Address:
▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇., #▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone No: (▇▇▇) ▇▇▇-▇▇▇▇ Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile No: (▇▇▇) ▇▇▇-▇▇▇▇ Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: Chief Financial Officer Attn: General Counsel
with copies to: and
▇▇▇▇▇, ▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP ▇▇▇▇, Scholer, Fierman, ▇▇▇▇ &
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇ Handler, LLP
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ 1999 Avenue of the Stars
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ Suite 1600
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇ Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇ Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
40
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR WITH ANY STATE SECURITIES COMMISSION, AND MAY NOT
BE TRANSFERRED OR DISPOSED OF BY THE HOLDER IN THE ABSENCE OF A REGISTRATION
STATEMENT WHICH IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE
STATE LAWS AND RULES, OR, UNLESS, IMMEDIATELY PRIOR TO THE TIME SET FOR
TRANSFER, SUCH TRANSFER MAY BE EFFECTED WITHOUT VIOLATION OF THE SECURITIES ACT
OF 1933 AND OTHER APPLICABLE STATE LAWS AND RULES.
ESOFT, INC.
WARRANT TO PURCHASE COMMON STOCK
DATED APRIL 26, 2000
ESOFT, INC., a Delaware corporation (the "Company"), certifies that,
for valuable consideration, receipt of which is hereby acknowledged, the Holder
is entitled to purchase from the Company that number of shares of the Company's
Common Stock set forth in Section 1 hereof (the "Shares") at the purchase price
set forth in Section 1 hereof.
This Warrant and the Common Stock issuable upon exercise hereof are
subject to the terms and conditions hereinafter set forth:
1. DEFINITIONS. As used in this Warrant, the following terms shall
have the following meanings:
"Agreement" - The Stock and Warrant Purchase and Investors Rights
Agreement dated as of April 26, 2000 between the Company and the
Holder.
"Common Stock" - Common Stock, par value $0.01 per share, of
the Company.
"Company" - ESOFT, Inc. a Delaware corporation.
"Company Time" - local time in Broomfield, Colorado.
"Effective Date" - April 26, 2000
"Expiration Date" - April 26, 2005.
"Holder" - Gateway Companies, Inc., a Delaware corporation.
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"Purchase Price" - $ 19.507 per share; provided that if the
Per Share Purchase Price, as defined in Section 1 of the Agreement, is
adjusted pursuant to Section 1(b)(ii) of the Agreement, then the
Purchase Price shall be adjusted to equal such adjusted Per Share
Purchase Price.
"Subscription Form" - The form attached to this Warrant as Exhibit
"I."
"Warrant" - This Warrant and any warrants delivered in
substitution or exchange therefor as provided herein.
"Shares" - up to 600,000 shares of Common Stock (subject to
adjustment as set forth in Section 5 hereof).
2. EXERCISE.
(a) Time of Exercise. This Warrant may be exercised in whole or
in part (but not as to fractional shares) at the office of the Company, at any
time or from time to time; provided, however, that this Warrant may only be
exercised after the dates and in the amounts set forth in Section 2(b) hereof;
and provided, further, that this Warrant shall expire and be null and void if
not exercised in the manner herein provided, by 5:00 p.m., Company Time, on the
Expiration Date.
(b) Vesting. The Warrants shall vest and become exercisable
based upon performance milestones as follows: (i) 100,000 warrants shall become
exercisable if at any time the total number of subscribers (the "Number of
Subscribers") for a bundled ISP/server program, or in the aggregate for all
bundled ISP/server programs, implementing the Company's software on the
Investor's hardware (such as the "Basic Package" referred to in Section 4.1.1 of
the Statement of Work executed by the Company and the Investor on April 11, 2000
(the "Statement of Work"), or any modifications, enhancements or alterations
thereof) equals or exceeds 10,000; an additional 100,000 Warrants shall become
exercisable if at any time the Number of Subscribers equals or exceeds 25,000;
an additional 100,000 Warrants shall become exercisable if at any time the
Number of Subscribers equals or exceeds 50,000; (ii) 100,000 Warrants shall
become exercisable if at any time the Investor and the Company have 1,000
customers for virtual private networking ("VPN") and firewall services
incorporating the Company's VPN and firewall software (such as the "Enhanced
Firewall Package" referred to in Section 4.1.2 of the Statement of Work and the
VPN Package IPSec and VPN Package PPTP referred to in Sections 4.1.3 and 4.1.4
of the Statement of Work, or any modifications, enhancements or alterations of
any of the foregoing), (iii) 100,000 Warrants shall become exercisable if at any
time the Investor and the Company have 1,000 customers for application service
provider ("ASP") services, including but not limited to payroll, human resources
or office productivity software (which may be provided by third-party ASP
providers), and (iv) 100,000 Warrants shall become exercisable if at any time
the Investor and the Company have agreements with at least five ASP providers to
offer ASP service to the Investor's and the Company's customers. The Warrants
shall immediately vest and become exercisable immediately prior to the
occurrence of a Change in Control of the Company (as defined in the Company's
current equity incentive plan).
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(c) Manner of Exercise. This Warrant is exercisable at the
Purchase Price, payable in cash or by certified check, payable to the order of
the Company, subject to adjustment as provided in Section 3 hereof; provided,
however, that at the Holder's election the exercise price may be deducted from
the number of Shares to be delivered to the Holder upon exercise, in which case
such Shares shall be valued at the Closing Price on Nasdaq of the Common Stock
or the date preceding the date of exercise. Upon surrender of this Warrant with
the annexed Subscription form duly executed, together with payment of the
Purchase Price for the Shares purchased (and any applicable transfer taxes) at
the Company's principal executive offices, the Holder shall be entitled to
receive a certificate or certificates for the Shares so purchased.
3. DELIVERY OF STOCK CERTIFICATES. As soon as practicable, but not
exceeding 10 days, after complete or partial exercise of this Warrant, the
Company, at its expense, shall cause to be issued in the name of the Holder (or
upon payment by the Holder of any applicable transfer taxes, the Holder's
assigns) a certificate or certificates for the number of fully paid and
non-assessable Shares to which the Holder shall be entitled upon such exercise,
together with such other stock or securities or property or combination thereof
to which the Holder shall be entitled upon such exercise, determined in
accordance with Section 5 hereof.
4. RECORD DATE OF TRANSFER OF SHARES. Irrespective of the date of
issuance and delivery of certificates for any stock or securities issuable upon
the exercise of this Warrant, each person (including a corporation or
partnership) in whose name any such certificate is to be issued shall for all
purposes be deemed to have become the holder of record of the stock or other
securities represented thereby immediately prior to the close of business on the
date on which (i) a duly executed Subscription Form containing notice of
exercise of this Warrant, (ii) payment of the Purchase Price and (iii) the
opinion or certificate required by Section 6(a)(iii) of this Warrant is received
by the Company.
5. ADJUSTMENTS. After each adjustment of the Purchase Price pursuant
to this Section 5, the number of shares of Common Stock purchasable on the
exercise of the Warrant shall be the number derived by dividing such adjusted
pertinent Purchase Price by the original pertinent Purchase Price. The pertinent
Purchase Price shall be subject to adjustment as follows:
(a) In the event, prior to the expiration of the warrant by
exercise or by its terms, the Company shall issue any shares of its Common Stock
as a share dividend or shall subdivide the number of outstanding shares of
Common Stock into a greater number of shares, then, in either of such events,
the Purchase Price per share of Common Stock purchasable pursuant to the warrant
in effect at the time of such action shall be reduced proportionately and the
number of shares purchasable pursuant to the Warrant shall be increased
proportionately. Conversely, in the event the Company shall reduce the number of
shares of its outstanding Common Stock by combining such shares into a smaller
number of shares, then, in such event, the Purchase Price per share purchasable
pursuant to the Warrant in effect at the time of such action shall be increased
proportionately and the number of shares of Common Stock at that time
purchasable pursuant to the Warrant shall be decreased proportionately. Any
dividend paid or distributed on the Common Stock in shares of any other class of
the Company or securities convertible in to shares of Common Stock shall be
treated
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as a dividend paid in Common Stock to the extent that shares of Common Stock are
issuable on the conversion thereof.
(b) In the event the Company, at any time while the Warrant shall
remain unexpired and unexercised, shall sell all or substantially all of its
property, or dissolves, liquidates or winds up its affairs, prompt,
proportionate, equitable, lawful and adequate provision shall be made as part of
the terms of any such sale, dissolution, liquidation or winding up such that the
holder of a Warrant may thereafter receive, on exercise thereof, in lieu of each
share of Common Stock of the Company which he would have been entitled to
receive, the same kind and amount of any share, securities, or assets as may be
issuable, distributable or payable on any such sale, dissolution, liquidation or
winding up with respect to each share of Common Stock of the Company; provided,
however, that in the event of any such sale, dissolution, liquidation or winding
up, the right to exercise this Warrant shall terminate on a date fixed by the
Company, such date to be not earlier than 5:00 p.m., Company Time, on the 30th
day next succeeding the date on which notice of such termination of the right to
exercise the Warrant has been given by mail to the holders thereof at such
addresses as may appear on the books of the Company.
(c) (1) If, at any time, the Company shall issue any Additional
Stock (as defined below) without consideration or for a consideration per share
less than the Purchase Price in effect immediately prior to the issuance of such
Additional Stock, the Purchase Price in effect immediately prior to each such
issuance shall forthwith (except as otherwise provided in this Section 5) be
adjusted to a price per share determined by multiplying such Purchase Price then
in effect by a fraction (x) the numerator of which shall be the number of shares
of the Company Common Stock outstanding (or deemed to be outstanding)
immediately prior to such issuance or sale plus the number of shares of Common
Stock that the aggregate consideration received by the Company for the total
number of shares of Additional Stock so issued or sold (or deemed issued or
sold) would purchase at the Purchase Price immediately prior to such issuance or
sale, and (y) the denominator of which shall be the number of shares of Common
Stock outstanding (or deemed to be outstanding) immediately prior to such
issuance or sale plus the number of shares of such Additional Stock so issued or
sold (or deemed issued or sold).
(2) In the case of the issuance of Additional Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Company for any underwriting or otherwise in connection with
the issuance and sale thereof.
(3) In the case of the issuance of Additional Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined in good faith by
the Board of Directors of the Company irrespective of any accounting treatment.
(4) In the case of the issuance of options or warrants to
purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options or warrants to
purchase or rights to subscribe for such convertible or exchangeable securities,
the following provisions shall apply for all purposes of this Section 5:
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(i) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (assuming the satisfaction of any conditions
to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of
such options or warrants to purchase or rights to subscribe for Common
Stock shall be deemed to have been issued at the time such options,
warrants or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in Section 5(c)(2) and
(3)), if any, received by the Company upon the issuance of such
options, warrants or rights plus the minimum exercise price provided in
such options, warrants or rights (without taking into account potential
antidilution adjustments) for the Common Stock covered thereby.
(ii) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability,
including, without limitation, the passage of time, but without taking
into account potential antidilution adjustments) for any such
convertible or exchangeable securities or upon the exercise of options
or warrants to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof
shall be deemed to have been issued at the time such securities were
issued or such options, warrants or rights were issued and for a
consideration equal to the consideration, if any, received by the
Company for any such securities and related options, warrants or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any, to be
received by the Company (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such
securities or the exercise of any related options, warrants or rights
(the consideration in each case to be determined in the manner provided
in Section 5(c)(2) and (3)).
(iii) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to the Company
upon exercise of such options, warrants or rights or upon conversion of
or in exchange for such convertible or exchangeable securities,
including, but not limited to, a change resulting from the antidilution
provisions thereof, the Purchase Price, to the extent in any way
affected by or computed using such options, warrants, rights or
securities, shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Common Stock or any
payment of such consideration upon the exercise of any such options,
warrants or rights or the conversion or exchange of such securities.
(iv) Upon the expiration of any such options, warrants or
rights, the termination of any such rights to convert or exchange or
the expiration of any options, warrants or rights related to such
convertible or exchangeable securities, the Purchase Price, to the
extent in any way affected by or computed using such options, warrants,
rights or securities or options, warrants or rights related to such
securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable
securities which remain in effect) actually issued upon the exercise of
such options, warrants or rights,
A-5
upon the Target or exchange of such securities or upon the exercise
of the options, warrants or rights related to such securities.
(5) "Additional Stock" shall mean any shares of Common Stock issued (or
deemed to have been issued pursuant to Section 5(c)(4)) by the Company other
than shares excluded from the definition of "New Securities" under Section
7(e)(iii) of the Agreement.
(d) Notwithstanding the provisions of this Section 3, no
adjustment of the Purchase Price shall be made whereby such Price is adjusted in
an amount less than $.0001 or until the aggregate of such adjustments shall
equal or exceed $.0001.
(e) In the event, prior to the expiration of the Warrant by
exercise or by its terms, the Company shall determine to take a record of the
holders of its Common Stock for the purpose of determining shareholders entitled
to receive any share dividend or other right which will cause any change or
adjustment in the number, amount, price or nature of the shares of Common Stock
or other securities or assets deliverable on exercise of the Warrant pursuant to
the foregoing provisions, the Company shall give to the Registered Holder of the
Warrant at the address as may appear on the books of the Company at least 15
days' prior written notice to the effect that it intends to take such a record.
Such notice shall specify the date as of which such record is to be taken; the
purpose for which such record is to be taken; and the number, amount, price and
nature of the Common Shares or other shares, securities or assets which will be
deliverable on exercise of the Warrant after the action for which such record
will be taken has been completed. Without limiting the obligation of the Company
to provide notice to the Registered Holder of the Warrant of any corporate
action hereunder, the failure of the Company to give notice shall not invalidate
such corporate action of the Company.
(f) Before taking any action which would cause an adjustment
reducing the Purchase Price below the then par value of the shares of Common
Stock issuable upon exercise of the Warrant, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
such Common Stock at such adjusted Purchase Price.
(g) Upon any adjustment of the Purchase Price required to be made
pursuant to this Section 3, the Company within 30 days thereafter shall cause to
be mailed to each of the Registered Holder of the Warrant written notice of such
adjustment setting forth the pertinent Purchase Price after such adjustment and
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(h) The Company's Board of Directors may, at their sole
discretion, reduce the Purchase Price of the Warrant in effect at any time
either for the life of the Warrant or any shorter period of time determined by
the Company's Board of Directors. The Company shall promptly notify the
Registered Holders of any such reductions in the Purchase Price.
5A. ADJUSTMENTS IN PER SHARE PURCHASE PRICE SUBSEQUENT TO EXERCISE. If
the Per Share Purchase Price is adjusted pursuant to Section 1(b)(ii) of the
Agreement at any time after the full or
A-6
partial exercise of the Warrant, then the Company shall thereupon issue to the
Holder a number of additional shares of Common Stock deemed to have a value
(based on the Per Share Purchase Price as adjusted pursuant to Section 1(b)(ii)
of the Agreement) equal to the aggregate reduction in the Purchase Price of the
portion of the Warrant that had been exercised had the Purchase Price been so
adjusted immediately prior to such exercise.
6. RESTRICTION ON TRANSFER.
(a) The Holder, by its acceptance hereof, represents, warrants,
covenants and agrees that:
(i) the Holder has knowledge of the business and affairs of
the Company;
(ii) this Warrant and the Shares issuable upon the exercise
of this Warrant are being acquired for investment and not with a view
to the distribution hereof and that absent an effective registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), covering the disposition of this Warrant or the Shares issued or
issuable upon exercise of this Warrant, they will not be sold,
transferred, assigned, hypothecated or otherwise disposed of without
first providing the Company with an opinion of counsel which may be
counsel for the Company) or other evidence, reasonably acceptable to
the Company, to the effect that such sale, transfer, assignment,
hypothecation or other disposal will be exempt from the registration
and prospectus delivery requirements of the Securities Act and the
registration or qualification requirements of any applicable state or
foreign securities laws; and
(iii) the Holder consents to the making of a notation in the
Company's records or giving to any transfer agent of the Warrant or the
Shares an order to implement such restrictions on transferability
described in subparagraph (ii) above.
(iv) This Warrant (and any successor or replacement warrant)
shall bear the certificate shown on the front page hereof and the
Shares issuable upon the exercise of this Warrant shall bear the
following legend or a legend of similar import, provided, however, that
such legend shall be removed, or not placed upon the Warrant or the
certificate or other instrument representing the Shares, as the case
may be, if such legend is no longer necessary to assure compliance with
the Securities Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR WITH ANY STATE SECURITIES COMMISSION, AND MAY NOT
BE TRANSFERRED OR DISPOSED OF BY THE HOLDER IN THE ABSENCE OF A REGISTRATION
STATEMENT WHICH IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE
STATE LAWS AND RULES, OR, UNLESS, IMMEDIATELY PRIOR TO THE TIME SET FOR
TRANSFER, SUCH TRANSFER MAY BE EFFECTED WITHOUT VIOLATION OF THE SECURITIES ACT
OF 1933 AND OTHER APPLICABLE STATE LAWS AND RULES.
A-7
7. PAYMENT OF TAXES. All Shares issued upon the exercise of this
Warrant shall be validly issued, fully paid and non-assessable and the Company
shall pay all taxes and other governmental charges (other than income tax) that
may be imposed in respect of the issue or delivery thereof. The Company shall
not be required however, to pay any tax or other charge imposed in connection
with any transfer involved in the issue of any certificate for Shares in any
name other than that of the Holder surrendered in connection with the purchase
of such Shares, and in such case the Company shall not be required to issue or
deliver any stock certificate until such tax or other charge has been paid or it
has been established to the Company's satisfaction that no tax or other charge
is due.
8. RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of issuance upon the exercise of this Warrant, such
number of shares of Common Stock as shall be issuable upon the exercise hereof.
The Company covenants and agrees that, upon exercise of this Warrant and payment
of the Purchase Price thereof, all Shares of Common Stock issuable upon such
exercise shall be duly and validly issued, fully paid and non-assessable.
9. NOTICES. Nothing contained in this Warrant shall be construed as
conferring upon the Holder hereof the right to vote or to consent or to receive
notice as a shareholder in respect of any meetings of shareholders for the
election of directors or any other matter or as having any rights whatsoever as
a shareholder of the Company. All notices, requests, consents and other
communication hereunder shall be in writing and shall be deemed to have been
duly made when delivered or mailed by registered or certified mail, postage
prepaid, return receipt requested:
(a) If to the Holder, to the address of such Holder as shown on
the books of the Company; or
(b) If to the Company, to its principal executive officers.
10. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the ownership of and the loss, theft, destruction
or mutilation of this Warrant and (in case of loss, theft or destruction) upon
delivery of an indemnity agreement in an amount reasonably satisfactory to the
Company, or (in the case of mutilation) upon surrender and cancellation of the
mutilated Warrant, the Company will execute and deliver in lieu thereof, a new
Warrant of like tenor.
11. SUCCESSORS. All the covenants, agreements, representations and
warranties contained in this Warrant shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns.
12. CHANGE; WAIVER. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
A-8
13. HEADINGS. The section headings in this Warrant are inserted for
purposes of convenience only and shall have no substantive effect.
14. LAW GOVERNING. This Warrant shall for all purposes be construed and
enforced in accordance with, and governed by, the internal laws of the State of
California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer and this Warrant to be dated as of the date first
written above.
ESOFT, INC.
By: _____________________________________
Title:
A-9
EXHIBIT I TO WARRANT
SUBSCRIPTION FORM
(To be Executed by the Registered Holder
if it Desires to Exercise the Warrant)
To ESOFT, INC.:
The undersigned hereby irrevocably elects to exercise the right to
purchase _____________ of the Shares covered by this warrant according to the
conditions hereof and herewith makes payment of the Purchase Price in full.
The undersigned hereby represents that the undersigned is an accredited
investor, as defined in Regulation D under the Securities Act of 1933.
The undersigned requests that certificates for such shares be issued in
the name of:
-----------------------------------
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
_____________________________________
_____________________________________
Dated:__________ Signature:__________
EXHIBIT B
FORM OF ESCROW AGREEMENT
This ESCROW AGREEMENT (this "Agreement") is made and entered into as of
April 26, 2000 by and between ESOFT, INC., a Delaware corporation (the
"Company"), GATEWAY COMPANIES, INC., a Delaware corporation (the "Investor"),
and Norwest Bank Colorado, National Association (the "Escrow Holder"), and is
made with reference to the following facts:
A. The Company and the Investor are parties to a Stock and Warrant
Purchase and Investor Rights Agreement dated as of April 26, 2000 (the "Purchase
Agreement").
B. Pursuant to Section 2 of the Agreement, one-half of the Purchased
Shares (as defined in the Purchase Agreement) are to be held in escrow until the
Escrow Closing (as defined in the Purchase Agreement).
C. The parties wish to provide for such escrow to be established with
Escrow Holder.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Capitalized terms not otherwise defined herein have the meaning set
forth in the Purchase Agreement.
2. On the Closing Date, the Company shall deliver to the Escrow Holder
one or more stock certificates evidencing one-half of the Purchased Shares (the
"Certificates"). The Certificates shall be registered in the name of the
Investor.
3. Upon notification from the Company that the Escrow Closing has
occurred, the Escrow Holder shall deliver the Certificates to the Investor,
together with any additional securities or property that the Escrow Holder may
have received on account of the Purchased Shares in respect of dividends, stock
splits or otherwise.
4. Each of the Investor and the Company shall pay one-half of the
Escrow Holder's costs and expenses under this Agreement.
5. The Company and Investor shall execute and deliver to Escrow Holder
any additional or supplementary instructions as may be necessary or convenient
to implement the terms of this Agreement and close the transaction contemplated
hereby, provided that they are not inconsistent with the terms of this
Agreement.
6. If this Agreement or any matter relating hereto shall become the
subject of any litigation or controversy, the Investor and the Company agree,
jointly and severally, to hold Escrow Holder free and harmless from any loss or
expense, including attorneys' fees, that may be
B-1
suffered by it by reason thereof except for acts of negligence, wilful
misconduct or bad faith by Escrow Holder. In the event conflicting demands are
made or notices served upon Escrow Holder with respect to this Agreement, the
Investor and the Company expressly agree that Escrow Holder shall be entitled to
file a suit in interpleader and obtain an order from the court requiring the
Investor and the Company to interplead and litigate their several claims and
rights among themselves. Upon the filing of the action in interpleader, Escrow
Holder shall be fully released and discharged from any obligations imposed upon
it by this Agreement.
7. Escrow Holder shall not be liable for the sufficiency or correctness
as to form, manner, execution or validity of any instrument deposited with it,
nor as to the identity, authority or failure by the Investor or the Company to
comply with any of the provisions of any agreement, contract or other instrument
filed with Escrow Holder or referred to herein. Escrow Holder's duties hereunder
shall be limited to the safekeeping of such money, instruments or other
documents received by it as Escrow Holder, and for their disposition in
accordance with the terms of this Agreement.
8. All notices hereunder shall be given in accordance with Section
11(e) of the Purchase Agreement. Notices to the Escrow Holder shall be sent to
the following address:
Norwest Bank Colorado, National Association
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Corporate Trust and Escrow
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9. This Agreement shall be governed by and construed in accordance with
Delaware law.
10. This Agreement may be signed in several counterparts, each of which
shall constitute an original hereof, but all of which together shall constitute
a single instrument.
11. This Agreement may not be amended or waived except in a writing
signed by each party hereto.
12. In the event the Escrow Holder becomes unavailable or unwilling to
continue in its capacity herewith, the Escrow Holder may resign and be
discharged from its duties or obligations hereunder by giving its resignation to
the parties to this Escrow Agreement, specifying not less than 30 days' prior
written notice of the date when such resignation shall take effect. In such
event, the Investor and the Company shall agree upon and appoint a successor
Escrow Holder. If, within such notice period or at any time in the Investor's
and the Company's discretion, the Investor and the Company provide to the Escrow
Holder written instructions with respect to the appointment of a successor
Escrow Holder and directions for the transfer of the Certificates then held by
the Escrow Holder to such successor, the Escrow Holder shall act in accordance
with such instructions and promptly transfer the Certificates to such designated
successor.
B-2
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ESOFT, INC. GATEWAY COMPANIES, INC.
By:____________________________________ By:________________________________
Name: Name:
Title: Title:
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
By:____________________________________
Name:
Title:
B-3
EXHIBIT C
FORM OF PROXY
The undersigned stockholder of ESOFT, INC., a Delaware corporation (the
"Corporation"), hereby appoints ▇▇▇▇▇▇▇ ▇▇▇▇ as proxy and attorney-in-fact, with
full power of substitution, to represent the undersigned at any annual or
special meeting of shareholders to be held on or before the termination of that
certain Escrow Agreement, dated April 26, 2000, between the Corporation, Gateway
Companies, Inc. and Norwest Bank (the "Termination Date"), and at any
adjournment thereof, but only with respect to the 640,795 shares of Common Stock
represented by Common Stock Share Certificate No.__________ (the "Certificate"),
and to vote all shares of Common Stock represented by the Certificate to the
extent the undersigned would be entitled to vote if personally present. This
Proxy is irrevocable before the Termination Date, and is coupled with an
interest. This Proxy shall expire and be of no further effect on the Termination
Date.
Dated: April 26, 2000 GATEWAY COMPANIES, INC.
By:________________________________
Name:
Title:
C-1