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VITECH AMERICA, INC.
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CONVERTIBLE LOAN AGREEMENT
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Dated as of September 16, 1999
with
GATEWAY COMPANIES, INC.
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CONVERTIBLE LOAN AGREEMENT
This CONVERTIBLE LOAN AGREEMENT (this "Agreement") is dated as of
September 16, 1999 between VITECH AMERICA, INC., a Florida corporation (the
"Borrower"), and GATEWAY COMPANIES, INC. (the "Lender").
Recitals
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WHEREAS, the Borrower desires to borrow a total principal amount of $31,000,000
from the Lender to be used for the purposes set forth herein, and the Lender is
prepared to lend such amount upon the terms and conditions hereof;
NOW, THEREFORE, for the consideration described above and for other good and
valuable consideration, the parties hereto agree as follows:
Section 1. Definitions.
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"Bankruptcy Code" shall mean 11 U.S.C. Section 101 et seq.
"Borrower Shareholders' Meeting" shall have the meaning set forth in
Section 9.03 hereof.
"Business Day" shall mean any day on which commercial banks are not
authorized or required to close in the State of Florida.
"Closing Date" shall mean the date of this Agreement.
"Common Stock" shall mean shares of the Borrower's Common Stock, no par
value.
"Default" shall mean any Event of Default or any event or condition
specified in Section 8 hereof, which with the giving of notice or lapse of time
or both would constitute an Event of Default.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Form S-3" means such form under the Securities Act as in effect on the
date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Borrower
with the SEC.
"Guarantors" shall mean ▇▇▇▇▇▇▇ ▇. St. Laurent and ▇▇▇▇▇▇▇ ▇. St.
Laurent, III.
"Guaranty" shall mean a guaranty executed by the Guarantors, on a joint
and several basis, in substantially the form of Exhibit E hereto.
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"Holder" means any person owning of record Registrable Securities that
have not been sold to the public or any assignee of record of such Registrable
Securities in accordance with Section 9.02(h) hereof.
"Initial Promissory Note" shall mean the Promissory Note issued by the
Borrower to the Lender dated April 2, 1999 as extended on July 1, 1999 with an
aggregate principal amount of $11,000,000.
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, and the
filing of or agreement to give any financing statement or other similar form of
public notice under the laws of any jurisdiction).
"Loan" shall mean the loan made to the Borrower by the Lender pursuant
to Section 2 hereof.
"Loan Documents" shall mean, as in effect at any time, this Agreement,
the Guaranty and the Note.
"Material Adverse Effect" shall have the meaning set forth in Section
4.01 hereof.
"Maturity Date" shall mean the date that is eighteen months from the
Closing Date or, if such date shall not be a Business Day, the Maturity Date
shall be the next Business Day after such date.
"Note" shall mean the promissory note provided for in Section 2 hereof
and in substantially the form of Exhibit A hereto, and any note or notes issued
in exchange or substitution therefor.
"Pledge Agreement" shall mean the Pledge Agreement, dated as of the
Closing Date, from the Guarantors in favor of the Lender in substantially the
form attached hereto as Exhibit F.
"Post-Default Rate" shall mean, in respect of any principal of or
interest on the Loan or any other amount payable by the Borrower under this
Agreement or the Note that is not paid when due (whether at stated maturity, by
acceleration or otherwise), a rate per annum during the period from and
including the due date to but excluding the date such amount is paid in full,
equal to eighteen percent (18%).
"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 or document.
"Registrable Securities" means (a) Common Stock of the Borrower issued
or issuable upon conversion of the Note; (b) Common Stock of the Borrower issued
pursuant hereto for the Territorial Rights Arrangement, and (c) any Common Stock
of the Borrower issued as (or issuable upon the conversion or exercise of any
warrant, right or other security
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which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, such above-described securities.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities sold by a person to the public either pursuant to a registration
statement or Rule 144 under the Securities Act or sold in a private transaction
in which the transferor's rights under Section 9.02 of this Agreement are not
assigned.
"Registrable Securities then outstanding" shall be the number of shares
determined by calculating the total number of shares of the Borrower's Common
Stock that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.
"Registration Expenses" shall mean all expenses incurred by the
Borrower in complying with Sections 9.02(a), (b) and (c) hereof, including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for the Borrower, reasonable fees and disbursements
of a single special counsel for the Holders, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Borrower which shall
be paid in any event by the Borrower).
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities" shall mean the Note and the shares of Common Stock
issuable upon conversion of the Note.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Territorial Rights Arrangement" shall have the meaning set forth in
Section 2.07 herein.
Section 2. The Loan.
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2.01 Loan. On the terms and conditions hereof, the Lender hereby
agrees to make the Loan in the principal amount of $31,000,000, in the form of a
single $31,000,000 advance made on the Closing Date . The $31 million advance of
the Loan shall be reduced pursuant to Section 7.04 in an amount equal to the
Borrower's principal and accrued interest under the Initial Promissory Note and
the amount of currently due trade payables from the Borrower to the Lender.
2.02 Note. The Loan shall be evidenced by a promissory note of the
Borrower in the form of Exhibit A hereto, dated the Closing Date, payable to the
order of the Lender in the principal amount set forth thereon and otherwise duly
completed.
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2.03 Interest. The Borrower hereby promises to pay to the Lender
interest on the unpaid principal amount of each Note, on a quarterly basis on
the 25th day of each quarter, from and including the Closing Date to but
excluding the Maturity Date, at a rate per annum equal to ten percent (10.0%).
2.04 Principal. The Borrower hereby promises to pay the entire
principal amount of the Loan on the Maturity Date (unless the Lender elects to
convert any or all of the principal amount of the Loan to Common Stock on or
prior to the Maturity Date pursuant to the terms of the Note).
2.05 Conversion to Common Stock. The Loan shall be convertible at
the Lender's option into shares of the Borrower's Common Stock at any time as
set forth in the Note; provided, however, that until such time as the Borrower's
shareholders approve the issuance of the Excess Shares (as defined below) at a
Borrower Shareholders' Meeting (in accordance with Section 9.03 hereof), the
Borrower shall not be obligated to issue upon conversion of the Note and for the
Territorial Rights Arrangement, in the aggregate, more than that number of
shares of Common Stock equal to 19.99% of the number of shares of Common Stock
of the Borrower outstanding on the date of issuance of the Note (such amount to
be proportionately and equitably adjusted from time to time in the event of
stock splits, stock dividends, combinations, reverse stock splits,
reclassifications, capital reorganization and similar events relating to the
Common Stock) (the "Maximum Share Amount") if the issuance of shares of Common
Stock in excess of the Maximum Share Amount (such number of excess shares
referred to in the aggregate as the "Excess Shares") would constitute a breach
or violation of the Borrower's obligations under the rules or regulations of the
Nasdaq National Market or any other principal securities exchange or market upon
which the Common Stock is or becomes traded.
2.06 Prepayments. The Borrower may prepay all or any part of the
principal amount of the Note before maturity with 30 days prior written notice
to the Lender. The notice shall represent a bona-fide prepayment commitment
under the Note, with the prepayment amount set forth therein deemed due and
payable by the Borrower on the prepayment date set forth in the notice. At any
time during the 30-day notice period, the Lender may elect to convert the
portion of the principal amount of the Loan intended to be prepaid as described
in the notice.
2.07 Territorial Rights Arrangement. The Lender will grant the
Borrower the right (the "Territorial Rights Arrangement"), exerciseable at the
Borrower's election within 180 days following the Closing Date (the "Election
Period"), to acquire certain territorial rights in Brazil from the Lender. At
the Closing, the Borrower shall pay the Lender an application fee of 538,284
shares of the Borrower's Common Stock in exchange for the providing by the
Lender of the Borrower's right to enter into the Territorial Rights Arrangement.
Upon the Borrower's election to enter into the Territorial Rights Arrangement,
the Borrower and the Lender will negotiate in good faith to enter into
agreements on substantially the terms set forth on the term sheet attached
hereto as Exhibit G (with other typical and customary provisions for agreements
of this type),
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which agreements would also include a covenant by the Lender that the Borrower
will be the Lender's exclusive reseller of the Lender's products in Brazil for a
defined time period, subject to pre-existing arrangements between the Lender and
any third-parties that may exist at such time. During the Election Period, the
Lender agrees not to undertake a similar territorial rights arrangement in
Brazil with any party other than the Borrower and the Borrower's affiliates.
2.08. ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Filing. Promptly upon request by the
Lender, the Borrower and the Lender shall use all reasonable efforts to make all
necessary filings, and thereafter make any other required submissions, with
respect to this Agreement, the Note and the Additional Transactions required
under the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of 1976, as amended, and
the rules and regulations thereunder; provided, however, that neither the
Borrower, the Lender nor any of their respective subsidiaries or affiliates
shall be under any obligation to make proposals, take any actions, execute or
carry out agreements or submit to orders providing for the sale or other
disposition or holding separate (through the establishment of a trust or
otherwise) of any material (in nature or amount) assets or categories of
material (in nature or amount) assets of the Borrower, the Lender, or any of
their respective subsidiaries or the holding separate of the shares of the
Borrower's or the Lender's Common Stock or imposing or seeking to impose any
material limitation on the ability of the Borrower, the Lender or any of their
respective subsidiaries or affiliates to conduct their business or own such
assets or to acquire, hold or exercise full rights of ownership of the shares of
the Borrower's or the Lender's Common Stock. The parties hereto shall cooperate
with each other in connection with the making of all such filings, including by
providing copies of all such documents to the nonfiling party and its advisors
prior to filing and, if requested, by accepting all reasonable additions,
deletions or changes suggested in connection therewith, and by furnishing all
information required for any application or other filing to be made pursuant to
any applicable governmental or regulatory law, rule or regulation.
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Section 3. Payments; Computations; Etc.
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3.01 Payments. All payments of principal, interest and other
amounts to be made by the Borrower under this Agreement or the Note shall be
made, in immediately available funds, to the Lender no later than 1:00 p.m. New
York time on the date on which such payment shall become due (each such payment
made after such time on such due date to be deemed to have been made on the next
succeeding Business Day). If a Default has occurred and is continuing, the
Lender may apply any such payment to interest and principal, and then fees and
expenses. If the due date of any payment under this Agreement or the Note would
otherwise fall on a day that is not a Business Day, such date shall be extended
to the next succeeding Business Day and interest shall be payable for any
principal so extended for the period of such extension. Any amount of principal
not paid when due hereunder shall accrue interest at the Post-Default Rate.
3.02 Computations. Interest shall be computed on the basis of the
actual days elapsed (including the first day but excluding the last day)
occurring in the period for which payable, relative to a year of 365 or 366
days, as the case may be.
Section 4. Representations and Warranties of the Borrower. Except as set forth
on the Borrower Disclosure Schedule attached hereto as Exhibit B, (the "Borrower
Disclosure Schedule"), the Borrower represents and warrants to the Lender, as of
the Closing Date and at any time reaffirmed pursuant to the terms hereof, that:
4.01 Organization, Good Standing and Qualification. The Borrower
and each of its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of their respective states of incorporation.
The Borrower has all requisite corporate power and authority to own and operate
its properties and assets, to execute and deliver each of the Loan Documents, to
issue the Note and the shares of Common Stock issuable upon conversion of the
Note and to carry out the provisions of each of the Loan Documents and to carry
on its business as presently conducted and as presently proposed to be
conducted. Each of the Borrower's subsidiaries has all requisite corporate power
and authority to own and operate its properties and assets and to carry on its
business as presently conducted and as presently proposed to be conducted. The
Borrower and each of its subsidiaries is duly qualified and is authorized to do
business and is in good standing as a foreign corporation in all jurisdictions
in which the nature of its activities and of its properties (both owned and
leased) makes such qualification necessary, except for those jurisdictions in
which failure to do so could not have, individually or in the aggregate, a
material adverse effect on the business, properties, assets, condition
(financial or otherwise), or operations of the Borrower (a "Material Adverse
Effect").
4.02 Subsidiaries. The Borrower Disclosure Schedule contains a
list of each other corporation, limited partnership or similar entity in which
the Borrower owns equity
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securities of any kind, with a brief description of the nature of each such
equity interest. The Borrower is not a participant in any joint venture,
partnership or similar arrangement.
4.03 Capitalization; Voting Rights. The authorized capital stock
of the Borrower consists of 30,000,000 shares of Common Stock, 14,657,655 shares
of which are issued and outstanding, and 3,000,000 shares of Preferred Stock, no
par value, none of which are issued and outstanding. All issued and outstanding
shares of the Borrower's Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable. The rights, preferences, privileges
and restrictions of the Borrower's Common Stock are as stated in the Borrower's
articles of incorporation. The shares of Borrower's Common Stock issuable upon
conversion of the Note have been duly and validly reserved for issuance. Other
than as set forth on the Borrower Disclosure Schedule or in the SEC Documents,
there are no outstanding securities, options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
shareholder agreements, or agreements of any kind for the purchase or
acquisition from the Borrower of any of its securities or which are convertible
into or exercisable for securities of the Borrower. When issued in compliance
with the provisions of this Agreement and the Note, the shares of Borrower's
Common Stock issuable upon conversion of the Note will be duly authorized,
validly issued, fully paid and nonassessable, and will be free of any
restrictions, limits, claims, Liens or other encumbrances (except those imposed
in the ordinary course by applicable securities laws). Except as set forth on
the Borrower Disclosure Schedule or in the SEC Documents, no stock plan, stock
purchase, stock option or other agreement or understanding between the Borrower
and any holder of any equity securities or rights to purchase equity securities
provides for acceleration or other changes in the vesting provisions or other
terms of such agreement or understanding as the result of any merger,
consolidated sale of stock or assets, change in control or other similar
transaction by the Borrower.
4.04 Authorization; Binding Obligations. All actions on the part
of the Borrower, its officers, directors and shareholders necessary for the
authorization, execution and delivery of each of the Loan Documents, the
performance of all obligations of the Borrower hereunder and thereunder at the
Closing and after the Closing and the authorization, sale, issuance and delivery
of the shares of Common Stock issuable upon conversion of the Note has been
taken or will be taken prior to the Closing, except for the approval of the
Borrower's shareholders with respect to the Excess Shares and the Additional
Transactions which will take place at the Borrower Shareholders Meeting. Each of
the Loan Documents, when executed and delivered, will be valid and binding
obligations of the Borrower enforceable in accordance with their respective
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; and (b) general principles of equity that
restrict the availability of equitable remedies. The issuance of the Note and
the subsequent conversion of the Note into shares of Borrower's Common Stock are
not and will not be subject to any preemptive or similar rights or rights of
first refusal that have not been properly waived or complied with.
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4.05 Financial Condition. The balance sheets and financial
statements of the Borrower as at December 31, 1998 and as at June 30, 1999 (the
"Statement Date") heretofore furnished to the Lender or made available to the
Lender (collectively, the "Financial Statements") are complete and correct in
all material respects and fairly present the financial condition of the Borrower
at such date. Since the dates of said balance sheet and financial statements,
there has been no material adverse change in the financial condition of the
Borrower or in the operations, or the business taken as a whole, of the Borrower
from that set forth therein, except disclosed on the Borrower Disclosure
Schedule.
4.06 Liabilities. The Borrower has no material liabilities and, to
the best of its knowledge, knows of no material contingent liabilities not
disclosed in the Financial Statements, except current liabilities incurred in
the ordinary course of business subsequent to the Statement Date which have not
been, either in any individual case or in the aggregate, materially adverse.
4.07 Agreements; Action.
(a) Except for agreements explicitly contemplated hereby or
disclosed in the SEC Documents or in the Borrower Disclosure Schedule, and
agreements between the Borrower and its employees with respect to the sale of
the Borrower's Common Stock, there are no agreements, understandings or proposed
transactions between the Borrower and any of its officers, directors, affiliates
or any affiliate thereof.
(b) There are no written, and to the best of the Borrower's
knowledge no other, agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Borrower is a
party or to its knowledge by which it is bound which may involve (i) obligations
(contingent or otherwise) of, or payments to, the Borrower in excess of $100,000
(other than obligations of, or payments to, the Borrower arising from agreements
entered into in the ordinary course of business), or (ii) the license or
transfer of any patent, copyright, trade secret or other proprietary right to or
from the Borrower (other than licenses arising from the purchase of "off the
shelf" or other standard products), or (iii) provisions restricting or affecting
the development, manufacture or distribution of the Borrower's products or
services, or (iv) indemnification by the Borrower with respect to infringements
of proprietary rights (other than indemnification obligations arising from
purchase or sale agreements entered into in the ordinary course of business).
(c) Except as disclosed in the SEC Documents, the Borrower has
not (i) declared or paid any dividends, or authorized or made any distribution
upon or with respect to any class or series of its capital stock, (ii) incurred
any indebtedness for money borrowed or any other liabilities (other than with
respect to dividend obligations, distributions, indebtedness and other
obligations as disclosed in the Financial Statements) individually in excess of
$500,000 or, in the case of indebtedness and/or liabilities individually less
than $500,000, in excess of $250,000 in the aggregate, (iii) made any
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loans or advances to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Borrower has reason to believe are affiliated therewith) shall
be aggregated for the purpose of meeting the individual minimum dollar amounts
of such subsections.
(e) All material debt instruments, joint venture and corporate
partnering agreements and all other material agreements of the Borrower are set
forth in the Borrower Disclosure Schedule or the SEC Documents. The Borrower is
in compliance with all of the agreements listed in the Borrower Disclosure
Schedule, in all material respects.
4.08 Obligations to Related Parties. Except as set forth in the
SEC Documents, there are no obligations of the Borrower to officers, directors,
shareholders, or employees of the Borrower other than (a) for payment of salary
for services rendered, (b) reimbursement for reasonable expenses incurred on
behalf of the Borrower, (c) for other reasonable and customary employee benefits
(including stock option agreements outstanding under any stock option plan
approved by the Board of Directors of the Borrower), and (d) reasonable and
customary directors fees. Except as may be disclosed in the Financial
Statements, the Borrower is not a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation.
4.09 Changes. Since the Statement Date, there has not been to the
Borrower's knowledge:
(a) Any change in the assets, liabilities, financial condition
or operations of the Borrower from that reflected in the Financial Statements,
other than changes in the ordinary course of business, none of which
individually or in the aggregate has had or is expected to have a Material
Adverse Effect;
(b) Any resignation or termination of any key officers of the
Borrower; and the Borrower, to the best of its knowledge after due inquiry, does
not know of the impending resignation or termination of employment of any such
officer;
(c) Any material change in the contingent obligations of the
Borrower by way of guaranty, endorsement, indemnity or warranty;
(d) Any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, business or
financial condition of the Borrower;
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(e) Any waiver by the Borrower of a valuable right or of a
material debt owed to it;
(f) Any direct or indirect loans made by the Borrower to any
shareholder, employee, officer or director of the Borrower;
(g) Any material change in any compensation arrangement or
agreement with any employee, officer, director or shareholder;
(h) Any declaration or payment of any dividend or other
distribution of the assets of the Borrower;
(i) Any labor organization activity;
(j) Any debt, obligation or liability incurred, assumed or
guaranteed by the Borrower, except those for immaterial amounts and for
liabilities incurred in the ordinary course of business;
(k) Any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(l) Any change in any material agreement to which the Borrower
is a party or by which it is bound which has resulted in a Material Adverse
Effect; or
(m) Any other event or condition of any character that, either
individually or cumulatively, has resulted in a Material Adverse Effect.
4.10 Title to Properties and Assets; Liens, Etc. The Borrower has
good and marketable title to its properties and assets, including the properties
and assets reflected in the most recent balance sheet included in the Financial
Statements, and good title to its leasehold estates, in each case subject to no
Liens, other than (a) those resulting from taxes which have not yet become due
and payable, and (b) minor Liens and encumbrances which do not materially
detract from the value of the property subject thereto or materially impair the
use thereof or the operations of the Borrower. All facilities, machinery,
equipment, fixtures, vehicles and other properties owned, leased or used by the
Borrower are in good operating condition and repair and are reasonably fit and
usable for the purposes for which they are being used, normal wear and tear
excepted. The Borrower is in compliance with all material terms of each material
lease to which it is a party or is otherwise bound.
4.11 Patents and Trademarks. To the best of its knowledge, the
Borrower owns or possesses sufficient legal rights to all patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information and
other proprietary rights and processes necessary for its business as now
conducted and as presently proposed to be conducted, without any known
infringement of the rights of others. There are no outstanding options, licenses
or agreements of any kind relating to the foregoing,
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nor is the Borrower bound by or a party to any options, licenses or agreements
of any kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary rights
and processes of any other person or entity other than such licenses or
agreements arising from the purchase of "off the shelf" or standard products.
The Borrower has not received any written, or to the best of its knowledge
other, communications alleging that the Borrower has violated or, by conducting
its business as presently proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. To the best of its knowledge,
the Borrower is not aware that any of its employees is obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with their duties to the Borrower or
that would materially conflict with the Borrower's business as presently
proposed to be conducted. Neither the execution nor delivery of any of the Loan
Documents, nor the carrying on of the Borrower's business by the employees of
the Borrower, nor the conduct of the Borrower's business as presently proposed,
will, to the Borrower's knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Borrower
does not believe that it is necessary to utilize any inventions, trade secrets
or proprietary information of any of its employees made prior to their
employment by the Borrower, except for inventions, trade secrets or proprietary
information that have been assigned to the Borrower.
4.12 Compliance with Other Instruments. The Borrower is not in
violation or default of any term of its articles of incorporation or bylaws, and
the Borrower is not in violation or default of any term or provision of any
mortgage, indenture, contract, agreement, instrument or contract to which it is
party or by which it is bound or its assets or properties are subject, or of any
judgment, decree, order, writ or any statute, rule, regulation, order or
restriction applicable to the Borrower or either of the Guarantors or its assets
or properties which could have a Material Adverse Effect. The execution,
delivery, and performance of and compliance with each of the Loan Documents, and
the issuance and delivery of the Note pursuant hereto and of the shares of the
Borrower's Common Stock issuable upon conversion of the Note, will not, with or
without the passage of time or giving of notice or both, result in any such
violation, or be in conflict with or constitute a default under any such term or
provision, or result in the creation of any Lien upon any of the properties or
assets of the Borrower or either of the Guarantors or the suspension,
revocation, impairment, forfeiture or non-renewal of any material permit,
license, right, authorization or approval applicable to the Borrower, its
business or operations or any of its assets or properties.
4.13 Litigation. Except as disclosed in the SEC Documents, there
is no action, suit, proceeding or investigation pending or, to the Borrower's or
either Guarantor's knowledge, threatened against the Borrower or either
Guarantor that questions the validity of any of the Loan Documents or the right
of the Borrower or either Guarantor to enter into any of such agreements, or to
consummate the transactions
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contemplated hereby or thereby, or which could have a Material Adverse Effect or
cause any change in the capitalization or equity ownership of the Borrower. The
foregoing includes, without limitation, actions pending or threatened involving
the prior employment of any of the Borrower's employees, their use in connection
with the Borrower's business of any information or techniques allegedly
proprietary to any of their former employers, or their obligations under any
agreements with prior employers. Neither the Borrower nor either Guarantor is a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality.
4.14 Tax Returns and Payments. The Borrower has timely filed all
tax returns (federal, state and local) required to be filed by it. All taxes
shown to be due and payable on such returns, any assessments imposed, and to the
Borrower's knowledge all other taxes due and payable by the Borrower on or
before the Closing have been paid or will be paid prior to the time they become
delinquent. The Borrower has no knowledge of any liability of any tax to be
imposed upon its properties or assets as of the date of this Agreement that is
not adequately provided for.
4.15 Employees. The Borrower has no collective bargaining
agreements with any of its employees. There is no labor union organizing
activity pending or, to the Borrower's knowledge, threatened with respect to the
Borrower. No employee has any agreement or contract, written or verbal,
regarding his employment other than as disclosed in the SEC Documents. To the
Borrower's knowledge, no employee of the Borrower, nor any consultant with whom
the Borrower has contracted, is in material violation of any term of any
employment contract, proprietary information agreement or any other agreement
relating to the right of any such individual to be employed by, or to contract
with, the Borrower because of the nature of the business to be conducted by the
Borrower; and to the Borrower's knowledge the continued employment by the
Borrower of its present employees, and the performance of the Borrower's
contracts with its independent contractors, will not result in any such
violation. The Borrower has not received any notice alleging that any such
violation has occurred. The Borrower is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Borrower, nor does the Borrower have a present intention to
terminate the employment of any officer, key employee or group of key employees.
The Borrower does not maintain any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, other than as set forth on the Borrower
Disclosure Schedule or in the SEC Documents.
4.16 Registration Rights. Except set forth on the Borrower
Disclosure Schedule, the Borrower is presently not under any obligation, and has
not granted any rights, to register any of the Borrower's presently outstanding
securities or any of its securities that may hereafter be issued.
4.17 Compliance with Laws; Permits. To the best of its knowledge,
the Borrower is not in violation of any applicable statute, rule, regulation,
order or restriction
12
of any domestic or foreign government or any instrumentality or agency thereof
in respect of the conduct of its business or the ownership of its assets or
properties which violation could have a Material Adverse Effect. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of each of the Loan Documents and the
issuance of the Note or the shares of Common Stock issuable upon conversion of
the Note, except such as has been duly and validly obtained or filed (and which
are listed on the Borrower Disclosure Schedule), or with respect to any filings
that must be made after the Closing, as will be filed in a timely manner. The
Borrower has all franchises, permits, licenses, rights and any similar authority
and approvals necessary for the conduct of its business as now being conducted
and as proposed to be conducted by it, the lack of which could have a Material
Adverse Effect.
4.18 Environmental and Safety Laws. To its knowledge, the Borrower
is not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, the violation of which could have
a Material Adverse Effect, and to its knowledge, no material expenditures are or
will be required in order to comply with any such existing statute, law or
regulation.
4.19 SEC Reports and Filings. The Borrower has delivered to the
Lender (or made available to the Lender through publicly available sources) a
complete and accurate copy of each Annual Report on Form 10-K, Quarterly Report
on Form 10-Q, Form 8-K, definitive proxy statement, registration statement and
annual report filed by the Borrower with the SEC on or after January 1, 1998
(collectively, the "SEC Documents"), and all amendments and supplements to each
of the foregoing. The SEC Documents, including the financial statements
contained therein, (i) complied with the requirements of the Securities Act or
the Exchange Act, as the case may be, at and as of the times they were filed
(or, if amended, supplemented or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) in all material respects and
(ii) did not at and as of the time they were filed (or, if amended, supplemented
or superseded by a filing prior to 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 required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Borrower has made all filings with the SEC since January 1,
1998 required under the Securities Act, the Exchange Act and all regulations
promulgated thereunder.
4.20 Full Disclosure. Each of the Loan Documents, the Exhibits
hereto and thereto (including the Borrower Disclosure Schedule), and all other
documents delivered by the Borrower to the Lender or the Lender's attorneys or
agents in connection herewith or therewith or with the transactions contemplated
hereby or thereby, do not contain any untrue statement of a material fact nor
omit to state a material fact necessary in order to make the statements
contained herein or therein not misleading.
13
Section 5. Representations and Warranties of the Lender. The Lender represents
and warrants to the Borrower, as of the Closing Date and at any time reaffirmed
pursuant to the terms hereof, that:
5.01 Organization, Good Standing and Corporate Power. The Lender
is a corporation duly organized, validly existing and in good standing under the
laws of the state of Delaware. The Borrower has all requisite corporate power
and authority to execute and deliver this Agreement, to own and hold the Note
and the shares of Common Stock issuable upon conversion of the Note and to carry
out the provisions of this Agreement and the Note.
5.02 Investment Representations. The Lender understands that the
Securities have not been registered under the Securities Act. The Lender also
understands that the Securities are being offered and sold pursuant to an
exemption from registration contained in the Securities Act based in part upon
the Lender's representations contained in this Agreement. The Lender hereby
represents and warrants as follows:
(a) The Lender Bears Economic Risk. The Lender has
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Borrower so that it is
capable of evaluating the merits and risks of its investment in the Borrower and
has the capacity to protect its own interests. The Lender must bear the economic
risk of this investment indefinitely unless the Securities are registered
pursuant to the Securities Act, or an exemption from registration is available.
The Lender understands that, unless the Securities are registered under the
Securities Act, there is no assurance that any exemption from registration under
the Securities Act will be available and that, even if available, such exemption
may not allow the Lender to transfer all or any portion of the Securities under
the circumstances, in the amounts or at the times the Lender might propose.
(b) Acquisition for Own Account. The Lender is acquiring the
Securities for the Lender's own account for investment only, and not with a view
towards their distribution within the meaning of the Securities Act.
(c) Accredited Investor. The Lender represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
Section 6. Conditions Precedent.
---------------------
6.01 Conditions to the Loan. The obligation of the Lender to make
the Loan hereunder is subject to the receipt by the Lender of the following
documents on the Closing Date, each of which shall be satisfactory in form and
substance to the Lender:
(a) The Note, duly completed and executed.
(b) The Guaranty, duly completed and executed.
14
(a) The Pledge Agreement, duly completed and executed.
(b) A stock certificate, duly completed and executed,
representing the shares of Common Stock issued to the Borrower in exchange for
the granting of the Territorial Rights Arrangement.
(c) An opinion addressed to the Lender, from legal counsel to the
Borrower reasonably acceptable to the Lender, dated as of the Closing Date, in
substantially the form attached hereto as Exhibit C.
(d) An opinion addressed to the Lender, from legal counsel to the
Guarantors reasonably acceptable to the Lender, dated as of the Closing Date, in
a form acceptable to the Lender.
(e) Certified copies of the articles of incorporation and bylaws
of the Borrower.
(f) A Certificate of Good Standing of the Borrower certified by
the appropriate governmental officer.
(g) The Shareholder Voting Agreements and Irrevocable Proxies
described in Sections 9.03 and 9.04 of this Agreement, in the form attached
hereto as Exhibit D.
(h) Evidence that the agent referred to in Section 11(b) of the
Guaranty has been duly appointed and holds such appointment without reservation
until six months after the Maturity Date.
(i) Evidence that the agent referred to in Section 22(b) of the
Pledge Agreement has been duly appointed and holds such appointment without
reservation until six months after the Maturity Date.
(j) Such other documents or information as the Lender reasonably
may request.
6.02 General Conditions. The obligation of the Lender to make the
Loan is further subject to all of the following additional conditions precedent:
(a) No Event of Default shall have occurred and be continuing
either immediately prior to the making of the Loan or immediately after the
making of the Loan.
(b) The representations and warranties made by the Borrower in
Section 4 hereof shall be true and correct in all material respects as of the
Closing Date (without regard to any materiality qualifiers contained in the
representations and warranties themselves) with the same force and effect as if
they had been made pursuant to this Agreement as of the Closing Date (except for
those representations and warranties
15
which refer to dates other than the Closing Date, which representations and
warranties relate only to the referred dates).
(c) On the Closing Date, the issuance of the Note and the
proposed issuance of the Common Stock upon conversion of the Note shall be
legally permitted by all laws and regulations to which the Borrower and the
Lender are subject (subject to shareholder approval for the Excess Shares).
(d) The Borrower shall have obtained any and all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by each of the Loan Documents (except for such as may
be properly obtained subsequent to the Closing).
(e) The shares of Borrower's Common Stock issuable upon
conversion of the Note shall have been duly authorized and reserved for issuance
upon such conversion (subject to shareholder approval for the Excess Shares).
(f) The Borrower shall have delivered to the Lender a
compliance certificate, executed by the President of the Borrower, dated the
Closing Date, to the effect that the conditions specified in subsections (a),
(b), (d) and (e) in this Section 6.02 have been satisfied.
(g) The Lender shall have received a certificate dated the
Closing Date and executed by the Guarantors, to the effect that the
representations and warranties made by the Guarantors in the Guaranty and the
Pledge Agreement shall be true and correct on the Closing Date.
(h) All corporate and other proceedings in connection with the
transactions contemplated at the Closing hereby and all documents and
instruments incident to such transactions shall be reasonably satisfactory in
substance and form to the Lender, and the Lender shall have received all such
counterpart originals or certified or other copies of such documents as it may
reasonably request.
Section 7. Covenants of the Borrower. The Borrower agrees that from the date
hereof, until payment in full of the Loan, all interest thereon and all other
amounts payable by the Borrower under the Loan Documents:
7.01 Information. The Borrower shall deliver to the Lender:
(a) Promptly after the Borrower knows that any Event of
Default has occurred, a notice of such Event of Default, describing the same in
detail;
(b) Promptly after the Borrower knows that a material adverse
change in the financial condition of the Borrower or either Guarantor has
occurred, a notice of such material adverse change, describing the same in
detail; and
16
(c) From time to time such other information regarding the
business, affairs or financial condition of the Borrower and/or the Guarantors
as the Lender may reasonably request.
7.02 Basic Financial Information and Reporting.
-----------------------------------------------
(a) The Borrower will maintain true books and records of
account in which full and correct entries will be made of all its business
transactions pursuant to a system of accounting established and administered in
accordance with generally accepted accounting principles consistently applied,
and will set aside on its books all such proper accruals and reserves as shall
be required under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal year
of the Borrower, and in any event within ninety (90) days thereafter, the
Borrower will furnish the Lender with a consolidated balance sheet of the
Borrower, as at the end of such fiscal year, and a consolidated statement of
income and a consolidated statement of cash flows of the Borrower, for such
year, all prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail. Such financial
statements shall be accompanied by a report and opinion thereon by independent
public accountants of national standing selected by the Borrower's Board of
Directors.
(c) The Borrower will furnish the Lender, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within forty-five
(45) days thereafter, a consolidated balance sheet of the Borrower as of the end
of each such quarterly period, and a consolidated statement of income and a
consolidated statement of cash flows of the Borrower for such period and for the
current fiscal year to date, prepared in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements and normal year-end audit adjustments may not have been made.
(d) The Borrower will furnish the Lender (i) at least thirty
(30) days prior to the beginning of each fiscal year an annual budget and
operating plans for such fiscal year, prepared on a monthly basis, including
balance sheets, a statement of cash flows for such months, and, as soon as
available, any subsequent revisions thereto; and (ii) as soon as practicable
after the end of each month, and in any event within twenty (20) days
thereafter, a consolidated balance sheet of the Borrower as of the end of each
such month, and a consolidated statement of income and a consolidated statement
of cash flows of the Borrower for such month and for the current fiscal year to
date, prepared in accordance with generally accepted accounting principles
consistently applied, with the exception that no notes need be attached to such
statements.
7.03 SEC Filings. The Borrower shall deliver to the Lender (or
make available to the Lender through publicly available sources) a complete and
accurate copy of each report, schedule, registration statement and definitive
proxy statement filed by the
17
Borrower with the SEC on or after the Closing Date and all amendments and
supplements to each of the foregoing (collectively, the "Borrower SEC Reports").
The Borrower SEC Reports (i) will constitute all the forms, reports and
documents required to be filed by the Borrower with the SEC under the Securities
Act and the Exchange Act, as applicable, and the rules and regulations
promulgated thereunder from and after the Closing Date, (ii) will comply with
the requirements of the Securities Act the Exchange Act, as the case may be, at
and as of the times they are filed, and (iii) will not at and as of the time
they are filed contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
7.04 Use of the Loan. The Borrower shall use the proceeds of the
Loan for the purpose of fully retiring all of the Borrower's outstanding debt to
Lender under the Initial Promissory Note (including accrued interest) and to
fully retire the Borrower's currently owing trade account balance to the Lender
of $475,270. All amounts owed by the Borrower to the Lender described in the
preceding sentence will be netted from the amount of the $31,000,000 advance
under the Loan. The balance of the proceeds of the Loan shall be used by the
Borrower for working capital purposes and for expansion projects. Any use of
proceeds for expansion projects shall require mutual written approval of the
Borrower and the Lender.
7.05 Visitation Rights to Board of Directors. The Borrower shall
allow one representative designated by the Lender to attend all meetings of the
Borrower's board of directors in a nonvoting capacity, and in connection
therewith, the Borrower shall give such representative copies of all notices,
minutes, consents and other materials, financial or otherwise, which the
Borrower provides to its board of directors.
7.06 No Solicitation. Neither the Borrower nor any of its
subsidiaries shall, directly or indirectly, through any directors, officers,
employees, agents, affiliates, representatives or otherwise, solicit or initiate
any inquiries or the submission of any proposal or offer from any person with
respect to any tender offer, merger, consolidation, liquidation,
recapitalization, business combination, sale of significant assets, sales of
significant shares of capital stock (other than financing transactions in the
ordinary course of the Borrower's business) or similar transactions involving
the Borrower or any of its subsidiaries or any division of the Borrower or any
of its subsidiaries (an "Acquisition Transaction") or participate in any
negotiations regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way with, or assist or participate in
or facilitate, any effort or attempt by any other person with respect to any
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate any of
the transactions contemplated by this Agreement or any of the agreements
contemplated in exhibits attached to this Agreement; provided that the Borrower
may, in response to an unsolicited proposal with respect to an Acquisition
Transaction (an "Alternative Proposal") from a third party, furnish information
to, and negotiate, explore or otherwise engage in substantive discussions with
such third party, in each case only if the Borrower's Board
18
of Directors, in good faith, determines that such proposal is one superior to
the transactions contemplated by this Agreement or in any exhibits to this
Agreement and the Board of Directors deems it necessary to do so in the exercise
of its fiduciary obligations after consultation with outside counsel and an
independent nationally recognized investment banking firm. The Borrower
immediately shall cease and cause to be terminated all existing discussions or
negotiations with any parties conducted heretofore with respect to any
Acquisition Transaction. The Borrower shall notify the Lender promptly (but in
any event within 3 days) in writing if any such proposal or offer, or any
inquiry or contact with any person with respect thereto, is made or if any party
makes any Alternative Proposal and shall, in any such written notice to the
Lender, indicate in reasonable detail the identity of the person making such
proposal, offer, inquiry, contact or Alternative Proposal and the terms and
conditions of such proposal, offer, inquiry, contact or Alternative Proposal and
any subsequent developments with respect thereto. The Borrower also agrees to
afford the Lender an opportunity to revise its own proposal within ten days
after the Lender's receipt from the Borrower of the final terms of the
Alternative Proposal made by a party prior to any determination by the Borrower
to approve any Alternative Proposal.
7.07 Reservation of Common Stock. The Borrower will at all times
reserve and keep available, solely for issuance and delivery upon the conversion
of the Note, all Common Stock (or other securities into which the Note is then
convertible) issuable from time to time upon such conversion.
7.08 Compliance with Laws. The Borrower shall preserve and
maintain its existence and all of its material rights and privileges; comply
with the requirements of all applicable laws, rules, regulations and orders of
governmental or regulatory authorities if failure to comply with such
requirements could result in a Material Adverse Effect; and pay and discharge
all taxes, assessments and governmental charges or levies imposed on it or on
its income or profits or on any of its property prior to the date on which
penalties attach thereto, except for any such tax, assessment, charge or levy
the payment of which is being contested in good faith and by proper proceedings.
7.09 Inspection. The Borrower shall permit any authorized
representative designated by the Lender upon reasonable notice to visit and
inspect any properties of the Borrower or either Guarantor, and to examine its
or their books and records (and to make extracts and copies therefrom) and to
discuss the Borrower's affairs, finances and accounts with its officers and its
independent auditors (and the Borrower hereby authorizes such auditors to
release any information about it to the Lender and undertakes to cause the
Guarantors to authorize their respective auditors to release any information
about them to the Lender), all at such times and as often as may be requested.
7.10 Pledged Shares. On the Closing Date, the Borrower shall
deliver to the Lender certificates evidencing all of the Pledged Shares (as
defined in the Pledge Agreement), together with undated stock transfer powers
endorsed in blank.
19
7.11 Other Documents. The Borrower shall furnish to the Lender
such other documents relating to the Borrower as the Lender shall reasonably
request.
7.12 Negative Covenants. The Borrower shall not, and shall not
permit any of its subsidiaries to, directly or indirectly:
(a) Limitation on Indebtedness. Create, incur, assume or
suffer to exist any Indebtedness, except:
(i) Indebtedness of the Borrower under this Agreement and
the Note;
(ii) Indebtedness to finance the acquisition of fixed or
capital assets (whether pursuant to a loan, a financing lease or otherwise) in
an aggregate principal amount not exceeding $500,000;
(iii) Indebtedness of the Borrower outstanding on the
Closing Date; and
(iv) Indebtedness outstanding pursuant to a commercial
working capital credit facility not to exceed $5,000,000.
(b) Limitation on Liens. Create, incur, assume or suffer to
exist any Lien upon any of its property, assets or revenues, whether now owned
or hereafter acquired, except for:
(i) Liens for taxes not yet due or which are being
contested in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of the Borrower in
conformity with GAAP;
(ii) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
are not overdue for a period of more than 60 days or which are being contested
in good faith by appropriate proceedings, and contractual and statutory
landlords' Liens;
(iii) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security legislation and
deposits securing liability to insurance carriers under insurance or
self-insurance arrangements;
(iv) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(v) easements, rights-of-way, restrictions and other
similar encumbrances incurred in the ordinary course of business which, in the
20
aggregate, are not substantial in amount and which do not in any case materially
detract from the value of the property subject thereto or materially interfere
with the ordinary course of business of the Borrower;
(vi) Liens securing Indebtedness of the Borrower permitted
by Section 7.12(a)(ii) incurred to finance the acquisition of fixed or capital
assets, provided that (A) such Liens shall be created simultaneously with the
acquisition of such fixed or capital assets, (ii) such Liens do not at any time
encumber any property other than the property financed by such Indebtedness, (C)
the amount of Indebtedness secured thereby is not increased and (D) the
principal amount of Indebtedness secured by any such Lien shall at no time
exceed 100% of the original purchase price of such property at the time it was
acquired; and
(vii) Liens securing Indebtedness of the Borrower
permitted by Section 7.12(a)(i), (iii) or (iv)).
(c) Limitation on Fundamental Changes. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets, or make any material change in its present method of conducting business
or enter into any transaction or series of transactions in which in excess of
fifty percent (50%) of the Borrower's voting power is transferred.
(d) Limitation on Sale of Assets. Convey, sell, lease,
assign, transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, receivables and leasehold interests), whether
now owned or hereafter acquired, except:
(i) the sale or other disposition of obsolete or worn out
property in the ordinary course of business;
(ii) the sale of inventory in the ordinary course of
business; and
(iii) the sale or discount with or without recourse of
accounts receivable arising in the ordinary course of business in connection
with the compromise or collection thereof.
(e) Limitation on Dividends. Declare or pay any dividend
(other than dividends solely payable in Common Stock of the Borrower) on, or
make any payment on account of, or set apart assets for a sinking or other
analogous fund for, the purchase, redemption, defeasance, retirement or other
acquisition of, any shares of any class of capital stock of the Borrower or any
warrants or options to purchase any such stock, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of the Borrower.
(f) Limitation on Capital Expenditures. Make or commit to
make (by way of the acquisition of securities or otherwise), without unanimous
approval of the
21
Board of Directors of the Borrower, any expenditure in respect of the purchase
or other acquisition of fixed or capital assets (excluding any such asset
acquired in connection with normal replacement and maintenance programs properly
charged to current operations) except for expenditures in the ordinary course of
business not exceeding in the aggregate during each period of six months during
the term of this Agreement the sum of $5,000,000, or $1,000,000 on any one
expenditure.
(g) Limitations on Investments, Loans and Advances. Make any
advance, loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment in, any person or
entity, except extensions of trade credit in the ordinary course of business and
investments in cash equivalents.
(h) Limitation on Optional Payments and Modifications of Debt
Instruments. Make any optional payment or prepayment on or redemption or
purchase of any Indebtedness or amend, modify or change, or consent or agree to
any amendment, modification or change to any of the terms of any Indebtedness.
Notwithstanding the foregoing, however, the Borrower may make payments or
otherwise perform pursuant to the terms of agreements in effect as of the date
of this Agreement.
(i) Limitation on Transactions With Affiliates. Enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any affiliate of the
Borrower unless such transaction is (i) otherwise permitted under this
Agreement, (ii) in the ordinary course of Borrower's business, and (iii) upon
fair and reasonable terms no less favorable to the Borrower than it would obtain
in a comparable arm's length transaction with a party which is not an affiliate
of the Borrower.
(j) Limitation on Sales and Leasebacks. Enter into any
arrangement with any party providing for the leasing by the Borrower of real or
personal property which has been or is to be sold or transferred by the Borrower
to such party or to any other party to whom funds have been or are to be advance
by such party on the security of such property or rental obligations of the
Borrower.
(k) Limitation on Negative Pledge Clauses. Enter into any
agreement, other than (i) this Agreement, (ii) any industrial revenue bonds,
purchase money mortgages, financing leases and operating leases permitted by
this Agreement (in which cases, any prohibition or limitation shall only be
effective against the assets financed thereby), and (iii) customary restrictions
contained in asset sale agreements for asset dispositions permitted under this
Agreement and relating only to the assets subject to such disposition, which
prohibits or limits the ability of the Borrower to create, incur, assume or
suffer to exist any Lien upon any of its property, assets or revenues, whether
now owned or hereafter acquired.
(l) Limitation on Lines of Business. Enter into any type of
business, either directly or indirectly through any subsidiary, except for those
businesses which the Borrower is engaged on the date of this Agreement.
22
(m) Governing Documents. Without the prior written consent of
the Lender, amend the Borrower's articles of incorporation or other governing or
charter documents in a manner that would materially and adversely affect the
Lender's rights pursuant to any of the Loan Documents.
Section 8. Events of Default. If one or more of the following events or
conditions (an "Event of Default") shall occur and be continuing:
(a) The Borrower or either Guarantor shall default for more
than five (5) days in the payment when due of any principal of or interest on
the Loan, any other amount payable by it hereunder or under the Note, or any
amount of securities and/or cash payable upon conversion of the Note;
(b) The Borrower or either Guarantor shall default in the
payment of any debt or other obligation in excess of $500,000 when due and
payable pursuant to any other agreement;
(c) Any representation, warranty or certification made in any
of the Loan Documents or in any document furnished in connection herewith or
therewith by the Borrower or either Guarantor shall prove to have been false or
misleading as of the time made or furnished in any material respect (without
regard to any materiality provisions contained in the representations,
warranties or certifications themselves);
(d) The Borrower shall default in the performance of any of
its obligations under Section 7 hereof;
(e) Either Pledgor (as defined in the Pledge Agreement) shall
default in the performance of any of its respective obligations under the Pledge
Agreement;
(f) The Borrower shall default in the performance of any of
its material obligations (other than those described or covered by another
clause of this Section 8) and such default (if remediable) shall continue
unremedied for a period of 30 days;
(g) The Lender shall determine that a material adverse change
has occurred in the financial condition of the Borrower from the conditions set
forth in its June 30, 1999 financial statements;
(h) The Borrower or either Guarantor shall (i) apply for or
consent to the appointment of, or the taking of a position by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property; (ii) make a general assignment for the benefit of its creditors;
(iii) commence a voluntary case under the Bankruptcy Code (as now or hereafter
in effect); (iv) file a petition seeking to take advantage of any other law
relating to bankruptcy, insolvency, reorganization, winding-up,
23
or composition or readjustment of debts; (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it in
any involuntary case under the Bankruptcy Code; or (vi) take any action for the
purpose of effecting any of the foregoing;
(i) A proceeding or case shall be commenced, without the
application or consent of the Borrower or either Guarantor in any court of
competent jurisdiction, seeking (i) liquidation, reorganization, dissolution or
winding-up, or the composition or readjustment of debts of the Borrower or
either Guarantor; (ii) the appointment of a trustee, receiver, custodian,
liquidator or the like of the Borrower or either Guarantor or of all or any
substantial part of any of the Borrower's or either Guarantor's assets; or (iii)
similar relief in respect of the Borrower or either Guarantor under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, and such proceeding or case shall continue undismissed,
or an order, judgment or decree approving or ordering any of the foregoing shall
be entered or an order for relief against the Borrower or either Guarantor shall
be entered in an involuntary case under the Bankruptcy Code;
(j) The Guaranty shall be revoked, cancelled or terminated;
(k) A final judgment or judgments for the payment of money
shall be rendered against the Borrower or either Guarantor in excess of
$1,000,000;
THEREUPON (i) in the case of an Event of Default, other than one referred to in
clause (h) or (i) of this Section 8, the Lender may, by notice to the Borrower,
declare the principal amount then outstanding of, and the accrued interest on
all amounts payable by the Borrower under, this Agreement and the Note and all
other amounts payable by the Borrower hereunder and thereunder to be forthwith
due and payable, whereupon such amounts shall be immediately due and payable
without presentment, demand, protest or other formalities of any kind, all of
which are hereby waived by the Borrower, and (ii) in the case of the occurrence
of an Event of Default referred to in clause (h) or (i) of this Section 8, the
principal amount then outstanding of, and the accrued interest on all amounts
payable by the Borrower under, this Agreement and the Note and all other amounts
payable by the Borrower hereunder and thereunder shall be immediately due and
payable without presentment, demand, protest or other formalities of any kind,
all of which are hereby waived by the Borrower.
Section 9. Additional Rights of Lender.
----------------------------
9.01 Right of Lender to Purchase Additional Securities. The
Borrower hereby grants to the Lender the following rights with respect to any
and all proposed issuances of Additional Securities (as defined below) by the
Borrower:
24
(a) The Borrower shall give the Lender written notice of the
Borrower's intention to issue Additional Securities (the "Issuance Notice")
describing the type of Additional Securities, the price at which the Additional
Securities will be issued and the general terms upon which the Borrower proposes
to issue the Additional Securities, including the anticipated date of such
issuance.
(b) The Lender shall have fifteen business days from the date
it receives the Issuance Notice to agree to purchase all or any portion of such
Additional Securities as is equal to the Lender's Proportionate Amount (as
defined below) by giving written notice to the Borrower of its desire to
purchase Additional Securities (the "Response Notice") and stating therein the
quantity of Additional Securities to be purchased. Such Response Notice shall
constitute the irrevocable agreement of the Lender to purchase the quantity of
Additional Securities indicated in the Response Notice at the price and upon the
terms stated in the Issuance Notice; provided, however, that if the Borrower is
proposing to issue Additional Securities for consideration other than all cash,
the Borrower shall accept from the Lender either non-cash consideration which is
reasonably comparable to the non-cash consideration proposed by the Borrower or
the cash value of such non-cash consideration. Any purchase by the Lender of
Additional Securities shall be consummated on or prior to the later of the date
on which all other Additional Securities described in the applicable Issuance
Notice are issued or the twentieth business day following delivery of the
Response Notice by the Lender.
(c) The Borrower shall have 90 days from the date of the
Issuance Notice to consummate the proposed issuance of the Additional Securities
which the Lender has not elected to purchase pursuant to subsection (b). In the
event the Borrower proposes to issue Additional Securities after such 90-day
period or Additional Securities in addition to those specified in the Issuance
Notice, it must again comply with the procedures set forth in this Section 9.01.
(d) For the purposes of this Section 9.01, the following terms
shall have the following respective meanings:
"Additional Securities" shall mean all capital stock of the
Borrower and any other securities of any type whatsoever
(collectively, "Interests") which are issued by the Borrower
after the Closing Date other than (i) any Interests issued or
issuable to any employees, officers, directors or consultants
of the Borrower pursuant to any benefit or incentive
compensation plan approved by the Borrower's Board of
Directors as being reasonable and appropriate as to the level
granted and at a price that is not less than the fair market
value of the Interest on the date of grant; and (ii) any
Interests reissued by the Borrower to employees, officers,
directors and consultants following the repurchase, redemption
or other acquisition of such Interests by the Borrower from
any employee, officer, director or consultant; (iii) Common
Stock issued as a stock dividend to holders of Common Stock or
upon any subdivision or combination of
25
shares of Common Stock; and (iv) the issuance of any shares of
Common Stock upon conversion of the Note or upon the exercise
or conversion of any other convertible securities outstanding
on the date of this Agreement.
"Proportionate Amount" shall mean (i) prior to the expiration
or termination of the Lender Option Period (as defined in
Section 9.04 below), all of the Additional Securities, and
(ii) from and after the expiration or termination of the
Lender Option Period, the Lender's pro rata portion of the
Additional Securities determined by dividing the aggregate
number of shares of Common Stock issued or issuable to the
Lender upon conversion of the Note and for the granting of the
Territorial Rights Arrangement (after giving effect to stock
splits, stock dividends, recapitalizations and the like) by
the total number of shares of Common Stock outstanding
(including shares of Common Stock then issuable upon
conversion of the Note) as of the date of the Issuance Notice.
9.02 Registration Rights.
--------------------
(a) Demand Registration.
--------------------
(i) On and after the date that is six months
after the Closing Date, the Holders of at least 50% of the Registrable
Securities (the "Initiating Holders") may request in a written notice that the
Borrower file a registration statement under the Securities Act (or a similar
document pursuant to any other statute then in effect corresponding to the
Securities Act) covering the registration of any or all Registrable Securities
held by such Initiating Holders in the manner specified in the notice; provided,
however, that there must be included in such registration at least 50% of the
Registrable Securities. Following receipt of any notice under this Section
9.02(a), the Borrower shall (X) within 20 days notify all other Holders of such
request in writing and (Y) use its best efforts to cause to be registered under
the Securities Act all Registrable Securities that the Initiating Holders and
such other Holders have, within ten (10) days after the Borrower has given such
notice, requested be registered in accordance with the manner of disposition
specified in such notice by the Initiating Holders
(ii) If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, the Borrower shall include such information in the written notice
referred to in clause (X) of Section 9.02(a)(i) above. In such event, the right
of any Holder to include its 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) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders (which underwriter or
26
underwriters shall be reasonably acceptable to the Borrower), provided that (X)
all of the representations and warranties by, and the other agreements on the
part of, the Borrower to and for the benefit of such underwriters shall also be
made to and for the benefit of such Holders of Registrable Securities, (Y) any
or all of the conditions precedent to the obligations of such underwriters under
such underwriting agreement shall be conditions precedent to the obligations of
such Holders of Registrable Securities, and (iii) no Holder shall be required to
make any representations or warranties to or agreements with the Borrower or the
underwriters other than representations, warranties or agreements regarding such
holder, the Registrable Securities of such Holder and such holder's intended
method of distribution and any other representations required by law or
reasonably required by the underwriter or the SEC in order to have such
registration statement declared effective. If any holder of Registrable
Securities disapproves of the terms of the underwriting, such holder may elect
to withdraw all its Registrable Securities by written notice to the Borrower,
the managing underwriter and the Initiating Holders. The securities so withdrawn
shall also be withdrawn from registration.
(iii) The Borrower shall not be required to
effect a registration pursuant to this Section 9.02(a) if the Borrower shall
furnish to such Holders a certificate signed by the Chairman of the Board
stating that in the good faith judgment of the Board of Directors of the
Borrower, it would be seriously detrimental to the Borrower and its shareholders
for such registration statement to be effected at such time, in which event the
Borrower shall have the right to defer such filing for a period of not more than
ninety (90) days after receipt of the request of the Initiating Holders;
provided that such right to delay a request shall be exercised by the Borrower
not more than once in any twelve (12) month period.
(b) Incidental Registration.
------------------------
(i) The Borrower shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Borrower (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Borrower, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within twenty (20) days after the above-described notice from the
Borrower, so notify the Borrower in writing, and the Borrower shall use its best
efforts to cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has so requested to be Registered.
Such notice shall state the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Borrower, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
27
registration statements as may be filed by the Borrower with respect to
offerings of its securities, all upon the terms and conditions set forth herein.
(ii) If the registration statement under which
the Borrower gives notice under this Section 9.02(b) is for an underwritten
offering, the Borrower shall so advise the Holders of Registrable Securities and
shall use its best efforts to cause the managing underwriters to include such
Registrable Securities requested by the Holders in such offering on the same
terms and conditions as any similar securities of the Borrower included therein.
Notwithstanding any other provision of the Agreement, if (in the written opinion
of the underwriter) the total amount of such securities to be so registered,
including such Registrable Securities, will exceed the maximum amount of the
Borrower's securities which can be marketed (X) at a price reasonably related to
the then current market value of the securities, or (Y) without otherwise
materially and adversely affecting the entire offering, then the Borrower shall
be entitled to reduce pro rata with respect to each holder the number of shares
of Registrable Securities to not less than one-third of the total number of
shares in such offering. Such reduction shall be allocated among all such
Holders in proportion (as nearly as practicable) to the amount of Registrable
Securities owned by each holder at the time of filing of the registration
statement. If securities are being offered for the account of other
securityholders of the Borrower, then with respect to the Registrable Securities
intended to be offered by the Holders, the proportion by which the amount of
such class of Registrable Securities intended to be offered by such Holders is
reduced shall not exceed the proportion by which the amount of such class of
securities intended to be offered by such other securityholders is reduced.
There shall be no limitation on the number of registrations on Form S-3 which
may be requested and obtained under this section 9.02(b).
(c) Registration on Form S-3. In case the Borrower shall
receive from any Holder or Holders of Registrable Securities a written request
or requests that the Borrower effect a registration on Form S-3 (or any
successor to Form S-3) or any similar short-form registration statement and any
related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Borrower will
promptly give written notice of the proposed registration, and any related
qualification or compliance, to all other Holders of Registrable Securities. The
Borrower will use its best efforts to expeditiously effect such registration and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within ten (10) days after receipt of such written notice from the
Borrower; provided, however, that the Borrower shall not be obligated to effect
any such registration, qualification or compliance pursuant to this Section
9.02(c):
(i) if Form S-3 (or any successor or similar form) is
not available for such offering by the Holders, or
28
(ii) if the Holders, together with the holders of any
other securities of the Borrower entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than $500,000, or
(iii) if the Borrower shall furnish to such Holders a
certificate signed by the Chairman of the Board stating that in the good faith
judgment of the Board of Directors of the Borrower, it would be seriously
detrimental to the Borrower and its shareholders for such registration statement
to be effected at such time, in which event the Borrower shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the Initiating Holders; provided that such right to delay a
request shall be exercised by the Borrower not more than once in any twelve (12)
month period, or
(iv) if the Borrower has already effected four (4)
registrations on Form S-3 for the Holders pursuant to this Section 9.02(c).
(d) Registration Expenses. Except as specifically provided
herein, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 9.02(a), (b) or (c) herein shall
be borne by the Borrower. All Selling Expenses incurred in connection with any
registrations hereunder, shall be borne by the holders of the securities so
registered pro rata on the basis of the number of shares so registered. The
Borrower shall not, however, be required to pay for expenses of any registration
proceeding begun pursuant to Section 9.02(a) or (c), the request of which has
been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal
is based upon material adverse information concerning the Borrower of which the
Initiating Holders were not aware at the time of such request or (b) the Holders
of a majority of Registrable Securities agree to forfeit their right to one
requested registration pursuant to Section 9.02(a) or (c), as applicable, in
which event such right shall be forfeited by all Holders. If the Holders are
required to pay the Registration Expenses, such expenses shall be borne by the
holders of securities (including Registrable Securities) requesting such
registration in proportion to the number of shares for which registration was
requested. If the Borrower is required to pay the Registration Expenses of a
withdrawn offering pursuant to clause (a) above, then the Holders shall not
forfeit their rights pursuant to Section 9.02(a) or (c) to a demand
registration.
(e) Obligations of the Borrower. Whenever required to effect
the registration of any Registrable Securities, the Borrower shall, as
expeditiously as reasonably possible:
(i) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use all reasonable
efforts to cause such registration statement to become effective, and, upon the
request of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration
29
statement effective until the Holder or Holders have completed the distribution
related thereto.
(ii) 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 for the period set forth in
paragraph (i) above.
(iii) 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 Registrable
Securities owned by them.
(iv) Use its reasonable best 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 Borrower 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, and to list and to allow the trading of such securities on the
principal national securities exchange or market upon which the Common Stock is
then listed or traded.
(v) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, 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.
(vi) 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, and use its best efforts to prepare a supplement or amendment to
the registration statement to correct such untrue statement or omission, and
deliver such number of copies of such supplement or amendment to each Holder as
such Holder may reasonably request.
(vii) Furnish, at the request of a majority of the
Holders participating in the registration, 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, (i) an opinion, dated as of such date, of
the counsel representing the Borrower 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 (ii) a letter
dated as of such date, from the independent certified public accountants of the
Borrower, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public
30
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and if permitted
by applicable accounting standards, to the Holders requesting registration of
Registrable Securities.
(viii) Use its reasonable best efforts to prevent the
issuance of stop orders or any other suspensions in trading of the Borrower's
Common Stock by the SEC or any applicable exchange or market, and use its best
efforts to have removed or reversed any such stop order or suspension in trading
that occurs.
(f) Furnishing Information. It shall be a condition precedent
to the obligations of the Borrower to take any action pursuant to Section
9.02(a), (b) or (c) that the selling Holders shall furnish to the Borrower such
information regarding themselves, the Registrable Securities held by them and
the intended method of disposition of the Registrable Securities held by them as
shall be reasonably required to effect the registration of their Registrable
Securities.
(g) Indemnification In the event any Registrable Securities
are included in a registration statement under this Section 9.02:
(i) To the extent permitted by law, the Borrower will
indemnify and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as defined 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") by the Borrower: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Borrower of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law in
connection with the offering covered by such registration statement; and the
Borrower will pay as incurred to each such Holder, partner, officer, director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or
31
action; provided however, that the indemnity agreement contained in this Section
9.02(g) 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 Borrower, which consent shall not be unreasonably withheld or delayed,
nor shall the Borrower 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 which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
such Holder, partner, officer, director, underwriter or controlling person of
such Holder.
(ii) To the extent permitted by law, each Holder will,
if Registrable Securities held by such Holder are included in the securities as
to which such registration, qualifications or compliance is being effected,
indemnify and hold harmless the Borrower, each of its directors and its officers
and each person, if any, who controls the Borrower 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, directors or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Borrower or any such
director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of such other Holder 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 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 under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will pay as incurred any
legal or other expenses reasonably incurred by the Borrower or any such
director, officer, controlling person, underwriter or other Holder, or partner,
officer, director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 9.02(g) 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; provided further, that in no event
shall any indemnity under this Section 9.02(g) exceed the net proceeds from the
offering received by such Holder.
(iii) Promptly after receipt by an indemnified party
under this Section 9.02(g) 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
9.02(g), 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 after the receipt by the indemnified party
or parties of written notice of such assumption; provided, however, that
32
an indemnified party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying party may be
inappropriate due to actual or potential differing 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, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
9.02(g) (but only to the extent of such material prejudice), but the omission so
to deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 9.02(g).
(iv) If the indemnification provided for in this
Section 9.02(g) is held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any losses, claims, damages or
liabilities referred to herein, the indemnifying party, in lieu of indemnifying
such indemnified party thereunder, shall except to the extent prohibited by
applicable law contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
Violation(s) that resulted in such loss, claim, damage or liability, as well as
any other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by a court
of law by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission; provided, that in no event
shall any contribution by a Holder hereunder exceed the net proceeds from the
offering received by such Holder.
(v) The obligations of the Borrower and Holders under
this Section 9.02(g) shall survive completion of any offering of Registrable
Securities in a registration statement and the termination of this Agreement. No
indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation.
(h) Assignment of Registration Rights. The rights to cause the
Borrower to register Registrable Securities pursuant to this Section 9.02 may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(a) is a subsidiary, parent, general partner, limited partner, retired partner,
member or retired member of a Holder, (b) is a Holder's family member or trust
for the benefit of an individual Holder, or (c) acquires at least twenty-five
thousand (25,000) shares of Registrable Securities (as adjusted for stock splits
and combinations); provided, however, (i) the transferor shall,
33
within twenty (20) days after such transfer, furnish to the Borrower written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned and (ii) such
transferee shall agree to be subject to all restrictions set forth in this
Section 9.02.
(i) Amendment of Registration Rights. Any provision of this
Section 9.02 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Borrower and the Holders of
at least two-thirds of the Registrable Securities then outstanding. Any
amendment or waiver effected in accordance with this Section 9.02 shall be
binding upon each Holder and the Borrower. By acceptance of any benefits under
this Section 9, Holders of Registrable Securities hereby agree to be bound by
the provisions hereunder.
(j) Limitation on Subsequent Registration Rights. After the
Closing Date, the Borrower shall not, without the prior written consent of the
Holders of at least a two-thirds of the Registrable Securities then outstanding,
enter into any agreement with any holder or prospective holder of any securities
of the Borrower that would grant such holder registration rights senior to those
granted to the Holders hereunder.
(k) Rule 144 Reporting. With a view to making available to the
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Borrower agrees to use its best efforts to:
(i) Make and keep public information available, as
those terms are understood and defined in SEC Rule 144 or any similar or
analogous rule promulgated under the Securities Act, at all times after the
effective date of the first registration filed by the Borrower for an offering
of its securities to the general public;
(ii) File with the SEC, in a timely manner, all reports
and other documents required of the Borrower under the Exchange Act;
(iii) So long as a Holder owns any Registrable
Securities, furnish to such Holder forthwith upon request: a written statement
by the Borrower as to its compliance with the reporting requirements of said
Rule 144 of the Securities Act, and of the Exchange Act (at any time after it
has become subject to such reporting requirements); a copy of the most recent
annual or quarterly report of the Borrower; and such other reports and documents
as a Holder may reasonably request in availing itself of any rule or regulation
of the SEC allowing it to sell any such securities without registration.
9.03 Borrower Shareholders Matters.
(a) Borrower Shareholders' Meeting. Within one year following the
Closing Date (or earlier as requested in writing by the Lender), the Borrower
shall, in
34
accordance with its articles of incorporation and bylaws and the applicable
requirements of the Florida Business Corporation Act, the rules of the NASDAQ
Stock Market (including, but not limited to, Rule 4460(i)(1) of the National
Association of Securities Dealers, Inc.), and the SEC, call and hold an annual
or special meeting of its shareholders for the purpose of permitting them to
consider and to vote upon and approve the Loan, this Agreement, the Note and the
terms of conversion of the Note into Common Stock of the Borrower (the "Borrower
Shareholders' Meeting"). At a Borrower Shareholders' Meeting, the Lender agrees
not to vote any of its shares of Common Stock issued upon conversion of the Note
and issued for the Territorial Rights Arrangement if such matter presented at
the meeting relates to the rules and regulations imposed by the NASDAQ Stock
Market. The directors of the Borrower shall, subject to their fiduciary duties,
recommend approval by the Borrower's shareholders of the Loan, this Agreement,
the Note and the terms of conversion of the Note into Common Stock of the
Borrower. In connection with such meeting, the Borrower (i) will promptly
prepare and file with the SEC, will use all reasonable efforts to have cleared
by the SEC and will thereafter mail to its shareholders as promptly as
practicable a proxy statement and all other proxy materials for such meeting,
(ii) will, subject to the fiduciary duties of its Board of Directors, use all
reasonable efforts to obtain the necessary approvals by its shareholders of the
Loan, this Agreement, the Note and the terms of conversion of the Note into
Common Stock of the Borrower, and (iii) will otherwise comply with all legal
requirements applicable to such meeting.
(b) Proxies. Concurrently with the execution and delivery of
this Agreement and as a condition and inducement to the Lender's willingness to
enter into this Agreement, the Guarantors are each executing a voting agreement
and granting to the Lender an irrevocable proxy in the form attached hereto as
Exhibit D ("Company Stock Proxy") to vote their respective shares of the
Borrower's stock in favor of the matters set forth in Section 9.03(a) above.
9.04 Lender's Right to Engage In Additional Transactions.
(a) Additional Transaction Option. The Borrower agrees that
the Lender has the option (the "Additional Transaction Option"), exerciseable at
the Lender's election within two years following the Closing Date (the "Lender
Option Period"), to engage in the following transactions with the Borrower (the
"Additional Transactions"): (i) extend an additional $40 million convertible
loan to the Borrower on the same terms and conditions as the Loan, with a
conversion price equal to the lower of (X) $11.02 per share or (Y) a 20% premium
over the then-market value of the Borrower's Common Stock as reported on the
NASDAQ stock market (or the principal market or exchange on which the Borrower's
Common Stock is then traded) determined by taking the arithmetic average of the
closing price of the Borrower's Common Stock for a period of twenty (20) trading
days preceding the date on which the Lender gives notice of its intent to
exercise the Additional Transaction Option and/or (ii) enter into agreements
with the Borrower on the terms set forth on the term sheet attached hereto as
Exhibit H (with other typical and customary provisions for agreements of this
type). The Lender may elect to engage in either, both or none of the additional
transactions pursuant to the Additional Transaction
35
Option, and the Lender's election as to each additional transaction may be made
at different times within the Lender Option Period.
(b) Borrower Shareholders' Meeting. To the extent that the
Lender exercises the Additional Transaction Option and the consummation or
performance of the Additional Transaction requires approval of the Borrower's
shareholders, the Borrower shall, in accordance with its articles of
incorporation and bylaws and the applicable requirements of the Florida Business
Corporation Act, the rules of the NASDAQ Stock Market (including, but not
limited to, Rule 4460(i)(1) of the National Association of Securities Dealers,
Inc.), and the SEC, call and hold an annual or special meeting of its
shareholders for the purpose of permitting them to consider and to vote upon and
approve the Additional Transaction (the "Additional Transaction Shareholders'
Meeting"). Notwithstanding the preceding sentence, without the Lender's prior
written consent not to be unreasonably withheld, the Borrower shall not call an
Additional Transaction Shareholders Meeting or otherwise hold a meeting of its
shareholders or solicit the written consent of its shareholders for the purpose
of permitting them to consider and to vote upon and approve the Additional
Transaction. The directors of the Borrower shall, subject to their fiduciary
duties, recommend approval by the Borrower's shareholders of the Additional
Transaction. In connection with such meeting, the Borrower (i) will promptly
prepare and file with the SEC, will use all reasonable efforts to have cleared
by the SEC and will thereafter mail to its shareholders as promptly as
practicable a proxy statement and all other proxy materials for such meeting,
(ii) will, subject to the fiduciary duties of its Board of Directors, use all
reasonable efforts to obtain the necessary approvals by its shareholders of the
Additional Transaction, and (iii) will otherwise comply with all legal
requirements applicable to such meeting.
(c) Proxies. Concurrently with the execution and delivery of
this Agreement and as a condition and inducement to the Lender's willingness to
enter into this Agreement, the Guarantors are each executing a voting agreement
and granting to the Lender an irrevocable proxy in the form attached hereto as
Exhibit D to vote their respective shares of the Borrower's stock in favor of
the Additional Transaction.
Section 10. Miscellaneous.
--------------
10.01 Waiver. No failure on the part of the Lender to exercise
and no delay in exercising, and no course of dealing with respect to any right,
power or privilege under any of the Loan Documents shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
10.02 Notices. All notices and other communications provided for
herein shall be in writing and shall be delivered to the intended recipient at
the "Address for Notices" specified below or at such other address as shall be
designated by a party in a notice to each other party. All notices and other
communications hereunder shall be
36
deemed to have been duly given, in the case of hand delivery, when received, or
in the case of mail, three Business Days after the date deposited in the mail,
addressed as aforesaid.
Addresses for Notices:
If to the Borrower:
Vitech America, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Phone: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
Atlas ▇▇▇▇▇▇▇▇ Trop & Borkson, P.A.'
▇▇▇ ▇. ▇▇▇ ▇▇▇▇ ▇▇▇▇.
▇▇▇▇▇ ▇▇▇▇
▇▇. ▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Tele: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Lender:
Gateway Companies, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: General Counsel
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Tele: (▇▇▇) ▇▇▇-▇▇▇▇
10.03 Expenses, Etc. Except as set forth in this Section 10.03,
all costs and expenses incurred in connection with the Loan Documents shall be
paid by the party incurring such costs and expenses. The Borrower agrees to
promptly pay on demand (a) all costs and expenses of the Lender, including
counsels' fees, in connection with the enforcement of the Loan Documents; (b)
all expenses of the Lender, including counsels' fees, in connection with any
actual or proposed waiver or amendment requested by the Borrower to any of the
foregoing, whether or not such waiver or amendment shall become effective; and
(c) all transfer, stamp, documentary or other similar taxes,
37
assessments or charges levied by any governmental or revenue authority in
respect of any of the foregoing or any other document referred to herein.
10.04. Amendments, Etc. Any provision of this Agreement may be
modified or waived by an instrument or instruments in writing signed by the
Borrower and the Lender.
10.05. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns except that the Borrower may not assign its rights or
delegate its obligations hereunder or under the Note without the prior written
consent of Lender.
10.06. Survival of Representations and Warranties. The
representations, warranties, covenants and agreements made herein shall survive
any investigation made by the Lender and the closing of the transactions
contemplated hereby.
10.07. Confidentiality. Other than as required by law (and then,
only upon advance notice with a reasonably opportunity for the other party to
comment), without the prior written consent of the other party, no party to this
Agreement shall make, or cause to be made, any press release or public
announcement in respect of this Agreement, the transactions contemplated hereby
or any other discussions or negotiations between the parties, or otherwise
communicate with any news media regarding this Agreement or the transactions
contemplated hereby or any other discussions or negotiations between the
parties. The parties shall cooperate as to the timing and contents of any such
press release, public announcement or other communication. Other than as
required by law (and then, only upon advance notice with a reasonably
opportunity for the Lender to comment), without the prior written consent of the
Lender, the Borrower agrees not to use the name "Gateway" in any press release,
public announcement or other public document, or to make any other disclosure of
the name "Gateway" to any third party, in relation to this transaction or any
other discussions or negotiations between the parties hereto.
10.08. Counterparts. This Agreement may be executed in
counterparts.
10.09. GOVERNING LAW; WAIVER OF JURY TRIAL.
(a) THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
(b) THE PARTIES EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE ARISING OUT OF, OR IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP BETWEEN THEM ESTABLISHED BY THIS AGREEMENT, THE NOTE AND ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT
38
ENTERED INTO IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
THEREBY.
10.10 Jurisdiction and Consent to Suit. Any proceeding to enforce
any of the Loan Documents may be brought in any state or federal court of
competent jurisdiction in the State of New York. The Borrower hereby irrevocably
waives any present and future objection to any such venue, and irrevocably
consents and submits unconditionally to the non-exclusive jurisdiction for
itself and in respect of any of its property in such court. The Borrower further
agrees that final judgment against it in any such action or proceeding arising
out of or relating to any of the Loan Documents shall be conclusive and may be
enforced in any other jurisdiction within or outside the United States of
America by suit on the judgment, a certified or exemplified copy of which shall
be conclusive evidence of the fact and of the amount of the obligation.
10.11 Severability. If any terms or provisions of this Agreement
or application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Agreement, or the application of
such terms or provisions to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
10.12 Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof.
39
IN WITNESS WHEREOF, the parties hereto have caused this
Convertible Loan Agreement to be duly executed as of the day and year first
above written.
VITECH AMERICA, INC.
By: __________________________
Name:
Title:
GATEWAY COMPANIES, INC.
By: __________________________
Name:
Title:
40
Exhibit A
---------
Convertible Promissory Note
41
Exhibit B
---------
Borrower Disclosure Schedule
42
Exhibit C
---------
Form of Legal Opinion
43
Exhibit D
---------
Forms of Voting Agreement and Irrevocable Proxy
44
Exhibit E
---------
Form of Guaranty
45
Exhibit F
---------
Form of Pledge Agreement
46
Exhibit G
Summary of Terms
Territorial Rights Arrangement
Brand License and Related Charger will grant Carnival a license to brand
Arrangements: specifically identified products manufactured
by Carnival in Brazil with Charger trademarks
and trade names. The license will establish
specific quality controls, component
requirements, branding rules, manufacturing
standards, and engineering standards.
Carnival and Charger will coordinate their
sales and marketing efforts to use Carnival's
distribution channels in Brazil to sell
Charger-branded products not competitive with
Carnival. The parties will investigate
co-branding of products and/or the phasing in
of Charger-branded products, consistent with
market conditions. The territory of the
trademark license shall be Brazil initially
and thereafter extend to other parts of South
America, as may be mutually agreed by the
parties.
Charger will also grant Carnival a technology
and know-how license to use the
state-of-the-art manufacturing and assembly
techniques used by Charger in its own
manufacturing operations. Charger will provide
expert technical assistance, in the form of
experienced manufacturing and quality control
personnel, who will advise and assist
Carnival. All Carnival employees and agents
exposed to any of Charger's confidential
information, materials or data or any of
Charger's proprietary interests or rights
shall be required to execute confidentiality
agreements with terms that are consistent with
the confidentiality agreements executed by
Charger's own employees.
Charger will provide Carnival design and
engineering blueprints and technical
assistance to permit Carnival to manufacture
computer products equivalent or identical to
Charger designs.
Charger will undertake to provide procurement
assistance to Carnival in connection with the
purchase of product parts and components, so
as to permit Carnival to benefit from the
favorable pricing, quality and other terms and
conditions that Charger can obtain from
suppliers and vendors.
In consideration for the above agreements
(which shall be embodied in multiple
agreements that may, but will not necessarily,
include a territorial rights agreement, a
trademark/brand license agreement, a
technology and manufacturing license
agreement, a component purchase or supply
agreement, a marketing assistance agreement
and/or a transportation/logistics agreement,
etc.), Carnival will pay to Charger, subject
to the limitations set forth below, aggregate
fees on total revenue as follows:
Months 1 -12 3.5%
Months 13-24 5.0%
Thereafter 6.5%
The first $200 million of annual fees
generated by Carnival in Brazil will be
excluded from this fee structure. Fees on
revenues generated in other countries will
begin the scale again and not be subject to a
revenue threshold.
Charger will have the right to terminate the
foregoing licenses / arrangements under
certain circumstances common in such
arrangements (e.g. change of control, breach
in quality standards, etc.).
Exhibit H
Summary of Terms
Structure: A convertible note will be issued by Carnival
in exchange for the agreed upon investment
amount. This note will be in a principal
amount of $70 million (which includes amounts
already outstanding to Charger of $31 million
pursuant to the Convertible Loan Agreement)
and be convertible into shares of Carnival's
common stock at $13.00 per share. The proceeds
will be used to first fully retire Carnival's
outstanding financial debt and the balance
will be used for working capital purposes and
expansion projects to be agreed upon between
Charger and Carnival. Accordingly, Carnival's
current indebtedness to Charger will be netted
from the above amount.
To the extent that the shares of common stock
issued upon conversion would result in the
Company issuing more than 20% of its
outstanding common stock, approval of the
Company's shareholders and a proxy statement
would be required by virtue of the Nasdaq NMS
Rules. Accordingly, immediately following the
investment Carnival would prepare a proxy and
file the same with the SEC. The proxy would
include the terms of the investment and the
conversion features. Conversion up to the 20%
limitation would be permitted pending
shareholder approval.
The proxy would also contain the description
of the Merger for Newco and request, if
required, shareholder approval for such
transaction. Since the principals of Carnival
control a majority of Carnival's common stock,
such transaction would not be subject to the
risk of approval. The principal shareholders
of Carnival would agree to grant irrevocable
proxies to vote for such transactions and
enter a form of voting agreement for the
matters which are the subject of the proxy.
Non-Affiliate Carnival shareholders shall have
the option to exchange their Carnival common
shares for $14.00 per share in cash or one
share of a new callable putable common stock
("New Stock"). [New Stock will be registered
with the SEC and publicly listed.] Charger
will fund the 'Cash Option' election and
receive one share of New Stock for each
Carnival share tendered. Carnival's founders
and executive management (specifically ▇▇▇▇▇▇
St. Laurent and ▇▇▇▇▇▇▇ St. Laurent) will
elect to receive New Stock ("Affiliate
Shares").
Call Provision Upon the third anniversary date of closing and
through the fourth anniversary of the closing,
Charger will have the right to call 100% (and
not less than 100%) of the New Stock,
including all vested options and warrants,
which it does not already own.
Summary of Terms
Call Option Strike Price: The Call Option that Charger has on New Stock
will have a variable Strike Price which will
be determined subsequent to the third
anniversary of Closing, i.e. when the Call
Option first becomes exercisable. The Strike
Price of the Call Option shall be a per share,
US dollar amount calculated as follows:
1) Calculate the compound annual growth rate
("CAGR") of the trailing twelve calendar
quarters ending Q4 2001 of Carnival's
tax-effected EBIT ("Adjusted EBIT") (see
definition below) over the Adjusted EBIT
of calendar year 1998 ("Base Year").
Round to the nearest whole percent.
2) Determine the corresponding Adjusted EBIT
Multiple from Annex A.
3) Multiply the Adjusted EBIT Multiple
derived in Step 2 times the prior
trailing twelve months' Adjusted EBIT to
determine Carnival's Firm Value, then
subtract Net Debt on Carnival's balance
sheet and the Liability Adjustment to
determine the fully-diluted Equity Value.
Net Debt is defined as debt (other than
the $70 million convertible debt from
Charger) less cash on the balance sheet.
4) Calculate the Per Share Strike Price as
Carnival's fully diluted Equity Value
divided by all outstanding shares
including all vested, dilutive options
and warrants, taking into consideration
the proceeds from such options and
warrants (based on the treasury method of
accounting).
5) The Call Option shall be exercisable for
100% (and not less than 100%) of the New
Stock, including all vested dilutive
options and warrants, which Charger does
not already own.
** If the Adjusted EBIT CAGR calculated at the
third anniversary of the Closing is less than
13%, then the Call Option will terminate and
become void.
Liability Adjustment: The Liability Adjustment shall be defined as
the cumulative dollar amount of all claims or
liabilities paid or owed by Carnival
attributable to activities and operations
prior to Closing against which Carnival is not
currently adequately reserved. The Liability
Adjustment shall include all such amounts paid
or deemed payable through the exercise of the
Put or Call Option.
Page 2
Summary of Terms
Put Provision: Between the third and fourth anniversary after
the date of Closing, New Stock holders will
have the right to put annually to Charger 100%
(and not less than 100%) of their New Stock,
including all vested dilutive options and
warrants. The put provisions may be
restructured in a manner not materially
adverse to Carnival shareholders to facilitate
compliance with the ▇▇▇▇▇▇▇▇ Act and
Regulation M.
Put Option Strike Price: The Put Option that New Stock owners have will
have a variable Strike Price which will be
determined pursuant to the same methodology as
the Call Option Strike Price, except that the
Strike Price of the Put Option shall be a per
share, US dollar amount calculated as 60% of
the Call Option Strike Price as determined
above. In the event that Carnival is
successfully able to renew its existing
package of state-level tax incentives to
Charger's satisfaction for additional periods
of at least three years, then Carnival shall
receive a premium on the Put Option Strike
Price to make it equivalent to 100% of the
applicable Call Option Strike Price.
** If the Call Option is void per the above
calculation, the Put Option will also
terminate and become void.
Adjusted EBIT: Adjusted EBIT shall be defined as the
after-tax income from operations of Carnival
adjusted to remove the incremental or
decremental effects of changes in the relative
value of the Brazilian Real and the US dollar.
Fees due to Charger from Carnival for the
respective period in excess of component cost
savings will be added back to the above income
figure to determine Adjusted EBIT.
Consideration: Cash offer of $14.00 per share of Carnival
Common Stock or exchange of Carnival common
stock for New Stock.
Accounting Treatment: Purchase accounting.
Treatment of Options and All options and warrants for capital stock of
Warrants: Carnival not exercised into Carnival Common
Stock will be converted into new options or
warrants for New Stock consistent with their
original vesting period and strike prices.
Representations & Warranties Consistent with those for similar
transactions.
Page 3
Summary of Terms
Conduct of Business: Prior to closing, Carnival shall conduct its
business only in the normal and ordinary
course and shall use its best efforts to
preserve its business intact, to retain the
services of its present employees, to preserve
the goodwill of its customers and suppliers.
Carnival shall adhere to covenants consistent
with those for similar transactions, including
restrictions on (i) changes to capital
structure, (ii) accounting policies, (iii)
changes in benefit plans and executive
compensation, etc.
As long as non-Charger stockholders are in
managerial positions, the business shall be
conducted in an ordinary manner consistent
with the long-term development of the business
and past practice. No trade loading will
occur.
The Put and Call provisions described above
shall terminate and become void, at Charger's
election, in the event that the following
catastrophic events occur: (a) the authorities
close down the business of Carnival; (b) the
authorities seize all or substantially all of
the assets of Carnival preventing the conduct
of business; (c) the authorities claim taxes
or other similar levies that are in a
cumulative amount of $30 million or more, and
are claimed for periods prior to the closing;
and (d) other catastrophic events that render
Carnival unable to carry on its business.
Page 4
Summary of Terms
Merger Agreement: The Merger will be subject to, among other
things, approval of the Boards of Directors of
Charger and Carnival, Charger's satisfactory
completion of due diligence, appropriate
execution of management employment agreements,
and absence of material adverse change and
other customary conditions. The Convertible
Note agreement will be attached to the
definitive Merger Agreement. Both of the above
referenced agreements shall be drafted by
Charger's counsel, and shall contain customary
representations and warranties by each Charger
and Carnival and other terms, provisions and
conditions customary in similar transactions.
Convertible Note: Purchase price of Convertible Note will be $70
million (which includes amounts already
outstanding to Charger of $31 million pursuant
to the Convertible Loan Agreement) with a
coupon of 10.0% and a three-year maturity.
Charger will net its current term loan and a
1% origination fee from the proceeds. Interest
on the Note will be payable on a quarterly
basis. The Convertible Note will be
convertible any time during its term at
Charger's discretion for a price of $13.00 per
share, except that prior to the third
anniversary of the Closing, Charger shall not
convert the note, partially or fully, if such
conversion would result in Charger holding an
equity position in Carnival greater than 50%.
In the event the merger is not consummated by
the four month anniversary of the issuance of
the Convertible Note, the Convertible Note
will become immediately due and payable in an
amount equal to the principal plus the accrued
amount of unpaid interest. In the event that
Charger does not exercise the full conversion
of this note into stock within the 3 year
term, the note will become subordinated debt
with an additional two year term carrying an
appropriate market rate of interest.
Right of First Refusal: In the future, should Carnival desire to raise
capital, either debt or equity, it will
provide a Capital Proposal to Charger. Charger
will have fifteen business days to accept or
waive its rights to supply such capital.
Immaterial commercial financing arrangements
will be excluded from such obligation on the
part of Carnival. Charger will have a similar
right with regards to any third party offer to
acquire Carnival.
Page 5
Summary of Terms
Corporate Governance: Charger will be entitled to name two members
to the Board of Directors, but in no case, a
greater number than in proportion to its
implied ownership from the Merger and the
Convertible Note. Certain major decisions
affecting Carnival shall require the unanimous
approval of the Board of Directors, including
the following: (i) capital expenditures or
borrowings in excess of $500,000, (ii)
material changes in Carnival's business plans,
(iii) hiring or termination of senior
management, (iv) mergers and acquisitions,
joint ventures, or other material
transactions, (v) advances to third parties in
excess of $500,000; (vi) issuance of equity
securities of Carnival; (vii) the sale, lease,
exchange or transfer of material assets of
Carnival; (viii) the repurchase or redemption
of the equity securities of Carnival; (ix)
amendment of the Articles of Incorporation or
Bylaws of Carnival; (x) dissolution of
Carnival; and (xi) establishment of any
material changes in the stock-based
compensation programs of Carnival.
No-Shop Provision: Carnival will not solicit, encourage or
facilitate inquiries or the making of a
proposal or offer relating to a business
combination or similar transaction. If, and
only if, fiduciary duties require and Carnival
determines that an unsolicited proposal or
offer from a third party is a "Superior
Proposal", Carnival can (i) provide
information to such third party (provided the
third party has entered into an equivalent
confidentiality agreement), (ii) engage in
negotiations with respect to such proposal or
offer and (iii) recommend such proposal or
offer. Carnival must cease any current
discussions with respect to acquisition
proposals and notify Charger of receipt of any
acquisition proposal and give Charger an
opportunity to revise its offer within 10 days
of such notice to Charger before accepting a
Superior Proposal.
Recommendations: Carnival Board must submit the Merger
Agreement to all Carnival stockholders and
recommend stockholder approval unless
otherwise required by directors' fiduciary
duties.
Page 6
Summary of Terms
Brand License and Related Charger will grant Carnival a license to brand
Arrangements: specifically identified products manufactured
by Carnival in Brazil with Charger trademarks
and trade names. The license will establish
specific quality controls, component
requirements, branding rules, manufacturing
standards, and engineering standards.
Carnival and Charger will coordinate their
sales and marketing efforts to use Carnival's
distribution channels in Brazil to sell
Charger-branded products not competitive with
Carnival. The parties will investigate
co-branding of products and/or the phasing in
of Charger-branded products, consistent with
market conditions. The territory of the
trademark license shall be Brazil initially
and thereafter extend to other parts of South
America, as may be mutually agreed by the
parties.
Charger will also grant Carnival a technology
and know-how license to use the
state-of-the-art manufacturing and assembly
techniques used by Charger in its own
manufacturing operations. Charger will provide
expert technical assistance, in the form of
experienced manufacturing and quality control
personnel, who will advise and assist
Carnival. All Carnival employees and agents
exposed to any of Charger's confidential
information, materials or data or any of
Charger's proprietary interests or rights
shall be required to execute confidentiality
agreements with terms that are consistent with
the confidentiality agreements executed by
Charger's own employees.
Charger will provide Carnival design and
engineering blueprints and technical
assistance to permit Carnival to manufacture
computer products equivalent or identical to
Charger designs.
Charger will undertake to provide procurement
assistance to Carnival in connection with the
purchase of product parts and components, so
as to permit Carnival to benefit from the
favorable pricing, quality and other terms and
conditions that Charger can obtain from
suppliers and vendors.
In consideration for the above agreements
(which shall be embodied in multiple
agreements that may, but will not necessarily,
include a territorial rights agreement, a
trademark/brand license agreement, a
technology and manufacturing license
agreement, a component purchase or supply
agreement, a marketing assistance agreement
and/or a transportation/logistics agreement),
Carnival will pay to Charger, subject to the
limitations set forth below, aggregate fees on
total revenue as follows:
Months 1 -12 3.5%
Months 13-24 5.0%
Thereafter 6.5%
The first $200 million of annual fees
generated by Carnival in Brazil will be
excluded from this fee structure. Fees on
revenues generated in other countries will
begin the scale again and not be subject to a
revenue threshold.
Charger will have the right to terminate the
foregoing licenses / arrangements under
certain circumstances common in such
arrangements (e.g. change of control, breach
in quality standards, etc.).
Page 7
Summary of Terms
Expenses; Break-Up Fees: Each party shall bear its own expenses in
connection with the preparation for and
consummation of the transactions contemplated
by this term sheet. Carnival will pay Charger
a break-up fee of $6 million in the event that
Charger or Carnival terminates the Merger
Agreement under the following circumstances i)
any other entity or group becomes the
beneficial owner of 20% or more of the
outstanding shares of capital stock of
Carnival, ii) the board of directors of
Carnival withdraws or modifies its approval or
recommendation of the Merger agreement, iii)
the board of directors of Carnival solicits
approves or recommends a competing transaction
or iv) the stockholders of Carnival fail to
vote in favor of the merger or v) Carnival
breaches the no-shop provision.
Employment Matters: (a) At Closing, certain key employees of
Carnival (approximately 10 people) to be
identified by Charger will enter into
noncompetition agreements in a form reasonably
acceptable to Charger agreeing not to compete
with Charger or its subsidiaries with respect
to the business of Carnival for a period of
three years after the merger
(b) After execution of the Merger Agreement
but prior to consummation of the merger,
approximately 10 key employees of Carnival to
be identified by Charger will enter into
confidentiality and non-competition agreements
similar to those described in (a) above; and
(c) When appropriate, Charger will take steps
necessary to make available to those employees
of Carnival who will become employees of
Charger all employee benefits then offered to
Charger employees of like position and
responsibilities.
(d) Certain key employees of Carnival will be
granted additional options which will total in
aggregate up to 6 - 8% of New Stock based upon
meeting or exceeding specific performance
objectives to include but not limited to (i)
the expansion of business and operations into
certain specified countries, and (ii)
development of a suitable executive management
succession plan and identification/training of
key executive successors.
Confidentiality/Exclusivity: This Summary of Terms will not be made public
by either party and the information contained
herein is solely for review by the Carnival
Board, senior management team and advisors. In
the event that the existence or terms of this
document become known publicly or by any other
party interested in consummating a transaction
with Carnival, these discussions will be
immediately terminated.
Termination: The transaction may be terminated by the
mutual agreement of Carnival and Charger.
Page 8
Annex A
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Adjusted EBIT Call Option
CAGR Adjusted EBIT Multiple
------------------ ---------------------------
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less than 13% Call & Put are void
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13% 6.6
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14% 6.8
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15% 7.0
------------------ ---------------------------
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16% 7.2
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17% 7.4
------------------ ---------------------------
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18% 7.6
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19% 7.8
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20% 8.0
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21% 8.2
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22% 8.4
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23% 8.6
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24% 8.8
------------------ ---------------------------
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25% 9.0
------------------ ---------------------------
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26% 9.2
------------------ ---------------------------
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27% 9.4
------------------ ---------------------------
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28% 9.6
------------------ ---------------------------
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29% 9.8
------------------ ---------------------------
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30% 10.0
------------------ ---------------------------
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31% 10.2
------------------ ---------------------------
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32% 10.4
------------------ ---------------------------
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33% 10.6
------------------ ---------------------------
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34% 10.8
------------------ ---------------------------
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35% 11.0
------------------ ---------------------------
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36% 11.2
------------------ ---------------------------
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37% 11.4
------------------ ---------------------------
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38% 11.6
------------------ ---------------------------
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39% 11.8
------------------ ---------------------------
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40+% 12.0
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