Exhibit 10.4
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT dated October 27, 1999 (the "Agreement")
by and among InFlow, Inc., a Delaware corporation (the "Company"), and Meritage
Private Equity Fund, L.P., Meritage Private Equity Parallel Fund, L.P. and
Meritage Entrepreneurs Fund, L.P. (each, an "Investor" and collectively, the
"Investors").
1. Purchase and Sale of Stock.
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1.1 Sale and Issuance of Series B Preferred Stock.
(a) Prior to or concurrently with the date hereof, the Company
has adopted and filed with the Secretary of State of Delaware the Second Amended
and Restated Certificate of Incorporation in the form attached hereto as
Exhibit A (the "Restated Certificate").
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally but not jointly, to purchase from the Company at the
Closing, and the Company agrees to sell and issue to each Investor at the
Closing, that number of shares of the Company's Series B Preferred Stock set
forth opposite such Investor's name on Schedule A hereto for the purchse
price of $8.70 per share.
1.2 Closing. The purchase and sale of the Series B Preferred Stock
shall take place at the Company's offices located at ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇
▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ at 10:00 a.m. on October 28, 1999, or at such other
time and place as the Company and the Investors mutually agree upon orally or in
writing (which time and place are designated as the "Closing"). At the Closing,
the Company shall deliver to each Investor a certificate representing the Series
B Preferred Stock that such Investor is purchasing against payment of the
purchase price therefor by wire transfer of immediately available funds.
1.3 Subsequent Sale of Series B Preferred Stock. The Company may
sell up to an additional 3,448,276 shares of Series B Preferred Stock at a price
of not less than $8.70 per share prior to November 30, 1999 to one or more
additional purchasers selected by the Company. Any such additional purchaser
shall execute a purchase agreement in substantially the form of this Agreement
and shall become a party to the Amended and Restated Investors' Rights Agreement
in the form attached hereto as Exhibit B (the "Investors' Rights Agreement") and
the Amended and Restated Stockholders' Agreement in the form attached hereto as
Exhibit C (the "Stockholders' Agreement").
1.4 Post-Closing Obligations. In the event that, at any time, the
Company's representation and warranty in Section 2.2 is determined not to have
been true when made, the Company shall promptly issue to the Investors, on a pro
rata basis as an adjustment to the purchase price paid for the shares of Series
B Preferred Stock purchased hereunder and without the payment of additional
consideration by the Investors, an additional number of shares of Series B
Preferred Stock such that each Investor would own the same economic interest and
voting power as it would have owned had such representation and warranty been
true and correct in all respects when made. If at the time of an adjustment
pursuant to the preceding sentence any shares of Series B Preferred Stock
purchased hereunder have been converted into Common Stock, the Company shall
issue additional shares of Common Stock with respect to such converted shares of
Series B Preferred Stock based on the conversion ratio that would have been in
effect if such shares had remained outstanding. Any additional shares issued
pursuant to this Section 1.4 shall be treated as if they were issued at the
Closing and shall reflect any anti-dilution adjustments arising from the date of
Closing through the date of such issuance. Concurrently with each such
issuance, the Company shall pay or accrue all dividends or other distributions
which would have been paid or accrued with respect to such additional shares
from the date of Closing through the date of such issuance.
2. Representations and Warranties of the Company. The Company hereby
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represents and warrants to each Investor that, except as set forth on the
Schedule of Exceptions (the "Schedule of Exceptions") attached hereto as
Schedule B, which exceptions shall be deemed to be representations and
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warranties as if made hereunder:
2.1 Organization, Good Standing, Power and Qualification. The
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Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company has all requisite corporate
power and authority to own and operate its property, to lease the property it
operates as lessee and to conduct the business in which it is currently, or is
currently proposed to be, engaged and has the power and authority to execute,
deliver and perform its obligations under this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business,
assets or financial condition of the Company (an "MAE").
2.2 Capitalization and Voting Rights. (a) The authorized, issued
and outstanding capital stock of the Company will consist immediately prior to
the Closing of:
(i) Preferred Stock. 10,310,000 shares of Preferred
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Stock, par value $0.001 (the "Preferred Stock"), of which (i) 3,310,000
shares have been designated Series A Preferred Stock (the "Series A
Preferred Stock"), of which 3,309,953 shares are outstanding, and (ii)
7,000,000 shares have been designated Series B Preferred Stock (the "Series
B Preferred Stock"), none of which are outstanding. The rights, privileges
and preferences of the Series A and Series B Preferred Stock are as stated
in the Restated Certificate.
(ii) Common Stock. 20,000,000 shares of common stock, par
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value $0.001 ("Common Stock"), of which 3,060,000 shares are issued and
outstanding.
(b) The outstanding shares of Series A Preferred Stock and
Common Stock are owned by the stockholders and in the numbers specified in
Exhibit D hereto.
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(c) The outstanding shares of Series A Preferred Stock and
Common Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) Except for (A) the conversion privileges of the Series A and
Series B Preferred Stock, (B) the rights provided in Section 3 of the
Stockholders' Agreement, and (C) currently outstanding options to purchase
572,700 shares of Common Stock granted to employees pursuant to the Company's
1997 Stock Option Plan, as amended (the "Option Plan"), there are no outstanding
options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. In addition to the aforementioned options, the Company will
reserve an additional 1,112,300 shares of its Common Stock for purchase upon
exercise of options to be granted in the future under the Option Plan. The
Company is not a party or subject to any agreement or understanding which
affects or relates to the voting or giving of written consents with respect to
any security or other ownership interest in the Company or by a director of the
Company.
2.3 Subsidiaries. The Company does not presently own or control,
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directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement, and
the Stockholders' Agreement, the performance of all obligations of the Company
hereunder and thereunder, and the authorization (or, in the case of the Common
Stock, reservation for issuance), sale and issuance of the Series B Preferred
Stock being sold hereunder and the Common Stock issuable upon conversion of the
Series B Preferred Stock has been taken or will be taken prior to the Closing.
This Agreement, the Investors' Rights Agreement, and the Stockholders' Agreement
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series B
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Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens and other encumbrances and will be
free of restrictions on transfer, other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement and
under applicable state and federal securities laws. The Common Stock issuable
upon conversion of the Series B Preferred Stock purchased under this Agreement
has been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Restated Certificate, will be duly and validly issued,
fully paid and nonassessable, free and clear of all liens and other
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encumbrances and will be free of restrictions on transfer, other than
restrictions on transfer under this Agreement, the Investors' Rights Agreement,
the Stockholders' Agreement and under applicable state and federal securities
laws.
2.6 Consents. No consent, approval, order or authorization of, or
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registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or any individual, firm,
corporation, partnership, trust, limited liability company, incorporated or
unincorporated association, joint venture, joint stock company or other entity
of any kind (each, a "Person") on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement, except for filings required pursuant to applicable federal and state
securities laws and blue sky laws, which filings will be effected within the
required statutory period.
2.7 Offering. No form of general solicitation or general advertising
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was used by the Company or its representatives in connection with the offer or
sale of the Series B Preferred Stock or other securities. Assuming the truth and
accuracy of each Investor's representations set forth in Section 3 of this
Agreement, the offer, sale and issuance of the Series B Preferred Stock as
contemplated by this Agreement are exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act").
2.8 Litigation. There is no action, suit, proceeding or
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investigation pending, or to the Company's knowledge currently threatened,
against the Company that questions the validity of this Agreement, the
Investors' Rights Agreement or the Stockholders' Agreement or the right of the
Company to enter into any of the foregoing or to consummate the transactions
contemplated hereby or thereby, or that would have, either individually or in
the aggregate, an MAE. The Company is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information Agreements. Each employee and officer of
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the Company has executed a Proprietary Information and Inventions Agreement in
substantially the form provided to the Investors.
2.10 Patents and Trademarks. Schedule 2.10 sets forth a complete and
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accurate list and description of all franchises, licenses, patents, patent
rights, patent applications, trademarks, trademark rights, service marks,
service ▇▇▇▇ rights, trade names, trade name rights, copyrights and rights with
respect to any of the foregoing (collectively, "Intellectual Property")
presently owned or held by the Company. The Company owns the right to use all of
the Intellectual Property. To the actual knowledge of the Company (without
independent investigation), the Intellectual Property is all that is necessary
for the Company to conduct its business as presently conducted. To its knowledge
(but without having conducted any special investigation or patent search), no
Intellectual Property conflicts with or infringes on the valid rights of others
and the Company has not received any notice of infringement upon or conflict
with the asserted rights of others. No event has occurred which permits, or
after notice or lapse of time would permit, the revocation or termination of any
of the Intellectual Property. The Company has a valuable body of trade secrets,
including know-how, concepts, computer
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programs and other technical data (the "Proprietary Information"). To its
knowledge, the Company has the right to use the Proprietary Information free and
clear of any rights, liens, encumbrances or claims of others, except that the
possibility exists that other persons may have independently developed trade
secrets or technical information similar or identical to those of the Company.
The Company is not aware of any such independent development nor of any
misappropriation of its Proprietary Information. The Company 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 the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business. The Company does
not believe it is or will be necessary to utilize any inventions of any of its
employees (or people it currently intends to hire) made prior to their
employment by the Company, except for inventions that have been assigned or
licensed to the Company as of the date hereof.
2.11 Compliance with Other Instruments. The Company is not in
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violation of any provision of its Restated Certificate or Bylaws or any
securities issued by the Company, any indenture, credit agreement, contract,
agreement, instrument or other undertaking ("Contractual Obligations") or any
judgment, order, writ, decree or contract, statute, rule or regulation to which
the Company or its assets or property is subject ("Requirements of Law"), a
violation of which would have an MAE. The execution, delivery and performance of
this Agreement, the Investors' Rights Agreement and the Stockholders' Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in any such violation, or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
Contractual Obligation or Requirement of Law or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
2.12 Agreements; Action.
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(a) Except for agreements explicitly contemplated hereby,
there are no agreements, understandings or proposed transactions between the
Company and any of its officers, directors, affiliates or any affiliate thereof.
(b) Except for this Agreement, the Investors' Rights Agreement
and the Stockholders' Agreement, Schedule 2.12 hereto sets forth a complete and
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accurate list of all material Contractual Obligations of the Company in effect
on and as of the Closing. Each such Contractual Obligation is valid and
enforceable by the Company against any other party thereto in accordance with
its terms except to the extent that such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, and by
laws relating to the availability of specific performance, injunctive relief or
other equitable remedies. The Company has performed and is in compliance with
all of the terms of such Contractual Obligations and all instruments and
agreements relating thereto and no default or event of default, or event or
condition which with notice or lapse of time or both would constitute such a
default or event of default, on its part or on the part of any other party
thereto exists with respect to any material Contractual Obligation of the
Company. The Company has no actual knowledge that any such Contractual
Obligation contains any contractual requirement with which there is a reasonable
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likelihood the Company will be unable to comply and such failure to comply would
likely result in an MAE or the Company's compliance is reasonably likely to
result in an MAE.
(c) There are no judgments, orders, writs or decrees to which the
Company is a party or by which it is bound that involve obligations (contingent
or otherwise) of, or payments to the Company, in excess of $25,000.
(d) The Company 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 individually in excess of $100,000 or, in the case of
indebtedness and/or liabilities individually less than $100,000, in excess of
$250,000 in the aggregate, (iii) made any loans or advances to any Person, other
than advances in the ordinary course of business, 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.
(e) For the purposes of subsections (c) and (d) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons the
Company has reason to believe are affiliated therewith) shall be aggregated for
the purpose of meeting the individual minimum dollar amounts of such
subsections.
2.13 Related-Party Transactions. No employee, officer or director of
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the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material Contractual
Obligation with the Company.
2.14 Financial Statements. The Company has delivered to each
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Investor its audited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows,
including notes thereto) at December 31, 1998 and for the fiscal year then ended
and its unaudited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows) at
September 30, 1999 and for the nine-month period then ended (the "Financial
Statements"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and with each other, except that unaudited
Financial Statements may not contain all footnotes required by generally
accepted accounting principles. The Financial Statements fairly present the
assets, liabilities, financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject in the case of
unaudited Financial Statements to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no liabilities or
obligations, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of
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business subsequent to September 30, 1999 and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company and
which the Company has satisfied as they have become due. Except as disclosed in
the Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other Person. The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
2.15 Changes. Since September 30, 1999, there has not been:
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(a) any change in the assets, liabilities, financial condition
or operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business consistent with
past practice that are not reasonably likely to have an MAE;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company;
(c) any waiver by the Company of a material right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business consistent with past practice and not material to the assets,
properties, financial condition, operating results or business of the Company;
(e) any material change or amendment to a contract or
arrangement required to be set forth on Schedule 2.12 by which the Company or
any of its assets or properties is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee; or
(g) any agreement or commitment by the Company to do any of the
things described in this Section 2.15.
2.16 Tax Returns. The Company has timely filed all federal, state,
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county, local and foreign income and other tax returns, reports and declarations
(collectively, "Returns") relating to all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, or other taxes of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority (domestic or foreign) upon the Company
("Taxes") which are required by applicable law to be filed except where the
failure to do so would not be reasonably likely to have an MAE. No audits of
federal income tax Returns of the Company have been conducted at
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any time since its formation and the Company has not been advised that any of
its returns have been or are being audited. The Company has paid, or where
payment is not required to be made, has made adequate provision on its books and
financial statements for the payment of, all Taxes in respect of all periods
covered by the Returns and any other taxable period ending on or before the date
hereof except where the failure to do so would not be reasonably likely to have
an MAE. No deficiencies for any Tax, assessment or governmental charge have been
asserted or assessed against the Company which have not been paid, settled or
adequately provided for and there is no basis therefor.
2.17 Permits. The Company (i) has all material governmental or other
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regulatory approvals, licenses, permits and other authorizations in accordance
with all Requirements of Law for it to conduct its business, each of which is in
full force and effect, is final and not subject to review on appeal and is not
the subject of any pending or, to the best of its knowledge, threatened attack
by direct or collateral proceeding, and (ii) is in compliance in all respects
with each governmental approval, license, permit and authorization relating to
it or any of its properties under all applicable Requirements of Law except
where the failure to do so would not be reasonably likely to have an MAE. Since
its date of organization, the Company has not, to its knowledge, been the
subject of any investigation conducted by any grand jury, administrative agency
or other governmental authority. The Company has not, directly or indirectly,
made or authorized any payment, contribution or gift of money, property, or
services, in violation of applicable law, (i) as a kickback or bribe to any
Person or (ii) to any political organization or the holder of, or any aspirant
to, any elective or appointive office of any governmental authority.
2.18 Environmental and Safety Laws. To its knowledge, the Company is
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not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.
2.19 Disclosure. Neither this Agreement (including all the exhibits
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and schedules hereto) nor any other certificates or agreements made or delivered
in connection herewith contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements herein or therein not
misleading in light of the circumstances under which they were made.
2.20 Registration Rights. Except as provided in the Investors' Rights
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Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.21 Corporate Documents. The Restated Certificate and Bylaws of the
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Company are in the forms previously provided to the Investors. The minute books
of the Company have been made available to the Investors for their review in
connection with the purchase of the Series B Preferred Stock; such minute books
are current and contain correct and complete copies of all minutes of meetings,
resolutions and other actions and proceedings of the board of directors and
shareholders and all committees of the Company. The record books relating to the
equity interests of the Company have been made available to the Investors for
their review in connection with the purchase of the Series B Preferred Stock;
such record books
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are current, correct and complete and reflect the issuance, sale or exchange of
all of capital stock and other ownership and equity interests in the Company.
2.22 Title to Property and Assets. Schedule 2.22 sets forth a
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complete and accurate list of all real property and improvements (collectively
"Real Property") owned or leased by the Company. The Company has good and
marketable, indefeasible fee simple title to the Real Property described in
Schedule 2.22 as being owned by it, and valid and subsisting leasehold rights in
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the Real Property described in Schedule 2.22 as being leased by it, free and
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clear of all liens and other encumbrances. Schedule 2.22 also sets forth a
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complete and accurate list of all of the material items of equipment, machinery,
computers, chattels, tools, parts, machine tools, furniture, furnishings,
fixtures and supplies of every nature owned or leased by the Company in
connection with its business as of September 30, 1999. The Company has good and
marketable fee simple title to such items described in Schedule 2.22 as being
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owned by it, and valid and subsisting leasehold rights in such items described
in Schedule 2.22 as being leased by it, free and clear of all liens and other
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encumbrances.
2.23 Labor Agreements and Actions. The Company is not bound by or
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subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the
Company pending, or to the Company's knowledge, threatened, that would have an
MAE. The Company is not aware that any officer or key employee, or that any
group of key employees, intends to terminate their employment with the Company,
nor does the Company have a present intention to terminate the employment of any
of the foregoing. The employment of each officer and employee of the Company is
terminable at the will of the Company. The Company is not a party to or bound by
any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation agreement. To its knowledge, the Company has complied in
all material respects with all applicable state and federal equal employment
opportunity and other laws related to employment. To its knowledge, the Company
has withheld all amounts required by law or agreement to be withheld by it from
the wages, salaries and other payments to its employees and is not liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. There are no pending, threatened or anticipated (i) employment
discrimination charges or complaints against or involving the Company before any
federal, state, or local board, department, commission or agency, (ii) unfair
labor practice charges or complaints, disputes or grievances affecting the
Company, or (iii) strikes, slow downs, work stoppages, or lockouts or threats
thereof affecting the Company.
2.24 Insurance. The Company maintains insurance policies (i) insuring
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the properties, assets and operations of its business in such amounts and
against such liabilities to the extent required by applicable law or regulations
and (ii) insuring against interruptions in its business. Such policies are in
full force and effect and have been underwritten by unaffiliated insurers. To
its knowledge, the Company has not done anything by way of action or inaction
that invalidates any of such policies in whole or in part.
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2.25 Year 2000 Compliance. The Company has initiated a review of its
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operations with a view to assessing whether its business or operations will, in
the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data, be vulnerable to any significant
risk that computer hardware or software used in its business or operations will
not, in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000. Based on such review and as of the date
hereof, the Company has no reason to believe that any such risk could have an
MAE.
2.26 Governmental Regulations. The Company is not a "registered
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investment company" or an "affiliated person" or a "principal underwriter" of a
"registered investment company" as such terms are defined in the Investment
Company Act of 1940, as amended.
2.27 Certain Tax Matters. The Company's capital stock does not
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constitute a United States real property interest as that term is defined in
Section 897(c)(1)(A)(ii) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company is not and has not been a "United States real property
holding corporation" as defined in Section 897(c)(2) of the Code (a "USRPHC").
No Investor shall, solely by virtue of its purchase and ownership of the Series
B Preferred Stock and the underlying Common Stock, (i) be deemed to have
received "unrelated business taxable income" as defined in Section 512 of the
Code ("UBTI") as a result of the Company's operations, or (ii) be deemed to be
engaged in the conduct of a "trade or business within the United States" within
the meaning of Section 864(b) of the Code, and the Company shall exercise its
reasonable best efforts consistent with prudent business practices to ensure
that the Investors do not receive UBTI and are not deemed to be engaged in a
U.S. trade or business solely as a result of their ownership of the Company's
securities. From time to time upon request of any Investor, the Company shall
make a determination as to the Company's status as a USRPHC and as to the
accuracy of the foregoing representations and warranties and shall notify each
Investor of and change in circumstances that could result in any of the
foregoing representations and warranties no longer being true and correct as
soon as practicable after the Company obtains knowledge of such change in
circumstances.
3. Representations and Warranties of the Investors. Each Investor,
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severally but not jointly, hereby represents, warrants and covenants that:
3.1 Authorization. Such Investor has full power and authority to
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enter into this Agreement, the Investors' Rights Agreement and the Stockholders'
Agreement, and each such agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may be
limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
such Investor in reliance upon such Investor's representation to the Company,
which by such
10
Investor's execution of this Agreement such Investor hereby confirms, that the
Series B Preferred Stock to be received by such Investor and the Common Stock
issuable upon conversion thereof (collectively, the "Securities") will be
acquired for investment for such Investor's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof in
violation of applicable securities laws, and that such Investor has no present
intention of selling, granting any participation in or otherwise distributing
the same in violation of applicable securities laws. By executing this
Agreement, such Investor further represents that such Investor does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities.
3.3 Disclosure of Information. Such Investor believes it has
-------------------------
received all the information it considers necessary or appropriate for deciding
whether to purchase the Series B Preferred Stock. Such Investor further
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of the
Series B Preferred Stock and the business, properties, prospects and financial
condition of the Company.
3.4 Investment Experience. Such Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it can
bear the economic risk of its investment, and has such knowledge and experience
in financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Series B Preferred Stock. If other than an
individual, such Investor also represents it has not been organized for the
purpose of acquiring the Series B Preferred Stock.
3.5 Restricted Securities. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Series B Preferred Stock (or the Common
Stock issued on conversion thereof) or an available exemption from registration
under the Act, the Series B Preferred Stock (and any Common Stock issued on
conversion thereof) must be held indefinitely. In this connection, such Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act, including
without limitation the Rule 144 condition that current information about the
Company be available to the public. Such information is not now available and
the Company has no present plans to make such information available.
3.6 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless:
(a) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
11
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act. It is agreed that
the Company will not require opinions of counsel for transactions made pursuant
to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of subsections (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were an original Investor hereunder.
3.7 Legends. It is understood that the certificates evidencing the
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Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an applicable exemption
therefrom."
(b) Any legend required by the Investors' Rights Agreement and
the Stockholders' Agreement.
The Company agrees, upon the request of any Investor or its transferee, to
remove the legend required by paragraph (a) above at such time as all Securities
held by such person may be freely transferred pursuant to SEC Rule 144(k), and
to remove the legend required by paragraph (b) above at such time as the
restrictions of the Investors' Rights Agreement and the Stockholders' Agreement
are no longer applicable to such Securities.
3.8 Tax Advisors. Such Investor has reviewed with such Investor's own
------------
tax advisors the federal, state and local tax consequences of this investment,
where applicable, and the transactions contemplated by this Agreement. With
respect to matters related to the tax consequences of the transactions
contemplated by this Agreement, each such Investor is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents and understands that each such Investor (and not the Company) shall
be responsible for such Investor's own tax liability that may arise as a result
of this investment or the transactions contemplated by this Agreement.
3.9 Investor Counsel. Such Investor acknowledges that such Investor
----------------
has had the opportunity to review this Agreement, the exhibits and the schedules
attached hereto and the transactions contemplated by this Agreement with such
Investor's own legal counsel.
12
Each such Investor is relying solely on such Investor's legal counsel
and not on E*Law Group or ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ LLP for legal advice with
respect to this investment or the transactions contemplated by this Agreement.
4. Conditions of Investor's Obligations at Closing. The obligations of
-----------------------------------------------
each Investor under Section 5 of this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions, the waiver of
which shall not be effective against any Investor who does not consent thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state or any Person that are required in connection with the consummation of
the transactions contemplated by this Agreement, including the lawful issuance
and sale of the Securities pursuant to this Agreement, shall be duly obtained
and effective as of the Closing.
4.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investors, and they shall have received all such counterpart original and
certified or other copies of such documents as they may reasonably request.
4.6 Proprietary Information Agreements. Each employee of the Company
----------------------------------
shall have entered into a Proprietary Information and Inventions Agreement in
the form previously provided to special counsel for the Investors.
4.7 Board of Directors. The Company shall have taken all necessary
------------------
corporate action such that immediately following the Closing, the directors of
the Company shall be Art Zeile, ▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇▇▇ and ▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, Jr.
4.8 Investors' Rights Agreement. The Company, First Union Capital
---------------------------
Partners, Inc., Art Zeile and ▇▇▇▇ ▇▇▇▇ shall have entered into the Investors'
Rights Agreement in the form attached as Exhibit B.
---------
13
4.9 Stockholders' Agreement. The Company, First Union Capital
-----------------------
Partners, Inc., Art Zeile and ▇▇▇▇ ▇▇▇▇ shall have entered into the
Stockholders' Agreement in the form attached as Exhibit C.
---------
4.10 No Material Adverse Change. On and prior to the Closing, there
shall have occurred no material adverse change in the business, assets or
financial condition of the Company.
4.11 No Litigation or Other Proceedings. There shall be no pending or
threatened litigation, bankruptcy, insolvency, injunction, order, suit,
investigation or claim against or affecting the Company, any of its properties
or rights, any of its executive officers or with respect to any of the
transactions contemplated by this Agreement, the Investors' Rights Agreement or
the Stockholders' Agreement which would be reasonably likely to have an MAE.
4.12 Legal Opinion. The Investors shall have received the opinion of
-------------
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ LLP, legal counsel to the Company, dated as of the
Closing in the form of Exhibit E hereto.
---------
5. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to each Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by that
Investor:
5.1 Representations and Warranties. The representations and
warranties of the Investors contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have delivered the
-------------------------
purchase price specified in Section 1.1.
5.3 Investors' Rights Agreement. Each Investor shall have entered
into the Investors' Rights Agreement in the form attached as Exhibit B.
---------
5.4 Stockholders' Agreement. Each Investor shall have entered into
the Stockholders' Agreement in the form attached as Exhibit C.
---------
6. Miscellaneous.
-------------
6.1 Survival. The warranties, representations and covenants of the
--------
Company and the Investors contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than
14
the parties hereto or their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.3 Governing Law. This Agreement shall be governed by
-------------
and construed under the laws of the State of Colorado as applied to agreements
among Colorado residents entered into and to be performed entirely within
Colorado, without giving effect to such state's conflict of laws principles.
6.4 Titles and Subtitles. The titles and subtitles used in
--------------------
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. All notices required or permitted hereunder
-------
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed facsimile if
sent during normal business hours of the recipient, if not, then on the next
business day; or (iii) one day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of
receipt. All communications shall be sent to the address as set forth on the
signature page hereof or at such other address as such party may designate by
ten days advance written notice to the other parties hereto.
6.6 Finder's Fee. finders' fee or commission in connection
------------
with this transaction. Each Investor agrees to indemnify and to hold harmless
the Company from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which such Investor or any of its officers,
partners, employees or representatives is responsible. The Company agrees to
indemnify and hold harmless each Investor from any liability for any commission
or compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
6.7 Expenses. Irrespective of whether the Closing is
--------
effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If the Closing is effected, the Company shall, at the Closing,
reimburse the Investors for all reasonable expenses of the Investors incurred in
connection with the negotiation, execution, delivery and performance of this
Agreement in an amount not to exceed $10,000. If any action at law or in equity
is necessary to enforce or interpret the terms of this Agreement, the Investors'
Rights Agreement, the Stockholders' Agreement or the Restated Certificate, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
6.8 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock not previously sold to the public that is issued
or issuable upon conversion of the Series B Preferred Stock. Any
15
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are convertible),
each future holder of all such securities and the Company.
6.9 Effect of Amendment or Waiver. Each Investor
-----------------------------
acknowledges that by the operation of Section 6.8 hereof the holders of a
majority of the Common Stock not previously sold to the public that is issued or
issuable upon conversion of the Series B Preferred Stock will have the power to
diminish or eliminate all rights of such Investor under this Agreement.
6.10 Severability. If one or more provisions of this
------------
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
6.11 Aggregation of Stock. All shares of the Series B
--------------------
Preferred Stock or Common Stock issued upon conversion thereof held or acquired
by affiliated entities or persons shall be aggregated together for the purpose
of determining the availability of any rights under this Agreement.
6.12 Entire Agreement. This Agreement and the documents
----------------
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein.
6.13 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE(S) TO FOLLOW]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INFLOW, INC.
By: /s/ Art Zeile
___________________________________
Art Zeile
President and Chief Executive Officer
Address: ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
MERITAGE PRIVATE EQUITY FUND, L.P.
MERITAGE PRIVATE EQUITY PARALLEL FUND, L.P.
MERITAGE ENTREPRENEURS FUND, L.P.
By Meritage Investment Partners, LLC
General Partner
By: /s/ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, Jr.
___________________________________
▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, Jr.
Managing Member
Address: ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
17