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Exhibit 10.4
THE PRINCETON REVIEW, INC.
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INVESTOR RIGHTS AGREEMENT
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This Investor Rights Agreement (the "Agreement") is entered into as of
April 18th, 2000, by and among The Princeton Review, Inc., a Delaware
corporation (the "Company"), with its principal office at ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇, and the holders of the Company's Series A Preferred Stock (the
"Series A Preferred Stock" and the holders of such stock being referred to as
the "Series A Investors").
WHEREAS, in connection with the issuance and sale of Series A Preferred
Stock to the Series A Investors pursuant to that certain Series A Preferred
Stock Purchase Agreement, dated as of the date hereof, by and among the Company
and the Series A Investors (the "Series A Agreement") the Company desires to
provide the Series A Investors certain rights with respect to registration of
the shares of stock held by them and certain other rights with respect to such
shares as an inducement to the Series A Investors to purchase shares of the
Series A Preferred Stock;
NOW, THEREFORE, in consideration of the mutual agreements, covenants
and conditions contained herein, the Company and the Series A Investors hereby
agree as follows:
Section 1.
RESTRICTIONS ON TRANSFER
1.1 Restrictive Legend. Each certificate representing (a) the Preferred
Stock, (b) the Company's Class A Common Stock issued upon conversion of the
Preferred Stock and (c) any other securities issued in respect of the Preferred
Stock or Class A Common Stock issued upon conversion of the Preferred Stock upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall (unless otherwise permitted by the terms hereof) be stamped
or otherwise imprinted with a legend in substantially the following form (in
addition to any legend required under applicable state securities laws).
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT
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FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
ANY APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN
EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF
1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS. COPIES OF THE
STOCK PURCHASE AGREEMENT, STOCKHOLDER'S AGREEMENT, INVESTOR RIGHTS
AGREEMENT AND BYLAWS, AS AMENDED, PROVIDING FOR RESTRICTIONS ON
TRANSFER OF THESE SECURITIES MAY BE OBTAINED UPON WRITTEN REQUEST BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
Each Holder (as defined below) consents to the Company making a
notation on its records and giving instructions to any transfer agent of the
Preferred Stock or the Class A Common Stock in order to implement the
restrictions on transfer established in this Section 1. The requirement that the
above securities legend be placed upon certificates evidencing shares of Stock
shall cease and terminate upon the earliest of the following events: (i) when
such shares are transferred in an underwritten public offering, (ii) when such
shares are transferred pursuant to Rule 144 under the Securities Act or (iii)
when such shares are transferred in any other transaction if the seller delivers
to the Company an opinion of its counsel, which counsel and opinion shall be
reasonably satisfactory to the Company, to the effect that such legend is no
longer necessary in order to protect the Company against a violation by it of
the Securities Act upon any sale or other disposition of such shares without
registration thereunder. Upon the consummation of any event requiring the
removal of a legend hereunder, the Company, upon the surrender of certificates
containing such legend, shall, at its own expense, deliver to the holder of any
such shares as to which the requirement for such legend shall have terminated,
one or more new certificates evidencing such shares not bearing such legend.
Section 2.
REGISTRATION RIGHTS
The Company hereby grants to each of the Holders (as defined below) the
registration rights set forth in this Section 2, with respect to the Registrable
Securities (as defined below) owned by such Holders. The Company and the Holders
agree that the registration rights provided herein set forth the sole and entire
agreement, and supersede any prior agreement, between the Company and the
Holders with respect to registration rights for the Company's securities.
2.1 Certain Definitions. As used in this Section 2:
(a) The term "Affiliate" means, with respect to any
individual, partnership or entity, any individual, partnership or entity that
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such individual, partnership or
entity.
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(b) The terms "register," "registered" and "registration"
refer to a registration effected by filing with the SEC a registration statement
(the "Registration Statement") in compliance with the 1933 Act, and the
declaration or ordering by the SEC of the effectiveness of such Registration
Statement.
(c) The term "Common Stock" means the total number of
authorized Class A Voting Common Stock ("Class A Common Stock") together with
the total number of authorized Class B Non-Voting Common Stock ("Class B Common
Stock").
(d) The term "Registrable Securities" means (i) shares of
Class A Common Stock of the Company issued or issuable upon conversion of the
shares of Preferred Stock held by Series A Investors or any transferee in a
Permitted Transfer (as defined in Section 2.8 below) and (ii) any shares of
Class A Common Stock issued as (or issuable upon the conversion or exercise of
any warrant, right or other security that is issued as) a dividend or other
distribution with respect to, or in exchange or in replacement of, such
Registrable Securities; provided, however, that shares of Class A Common Stock
or other securities shall only be treated as Registrable Securities if and so
long as (A) they have not been sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, (B)
they have not been sold in a transaction exempt from the registration and
prospectus delivery requirements of the 1933 Act under Section 4(l) thereof so
that all transfer restrictions and restrictive legends with respect thereto are
removed upon the consummation of such sale, (C) they are held by a Holder who
cannot sell all Registrable Securities held by such Holder in any three month
period except in a private transaction exempt from registration pursuant to Rule
144, provided however that such shares of Class A Common Stock or other
securities shall continue to be treated as Registrable Securities with respect
to any Holder owning more than two percent (2%) of the Company's outstanding
Common Stock of the Company until such time as such Holder owns less than two
percent (2%) of the outstanding Common Stock of the Company, and (D) the
registration rights associated with such securities have not been terminated
pursuant to Section 2.15 hereof.
(e) The term "Holder" (collectively, "Holders") means any
Series A Investor (and any transferee as permitted by Section 2.8 hereof)
holding Registrable Securities, securities exercisable or convertible into
Registrable Securities or securities exercisable for securities convertible into
Registrable Securities.
(f) The term "Initiating Preferred Holders" means any Series A
Investor(s) holding at least fifteen percent (15%) of the Registrable Securities
then held by all Series A Investors and not registered at the time of any
request for registration made pursuant to Section 2.2 of this Agreement.
2.2 Demand Registration.
(a) Demand for Registration. If the Company shall receive from
Initiating Preferred Holders a written demand that the Company effect any
registration (a "Demand Registration") of the Registrable Securities (other than
a registration on Form S-3 or any related form of registration statement, such a
request being provided for under Section 2.9 hereof) having
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an anticipated net aggregate offering price (after deduction of underwriter
commissions and offering expenses) of at least $10,000,000, the Company will:
(i) promptly (but in any event within 10 days)
give written notice of the proposed registration to all other Holders; and
(ii) use its best efforts to effect such
registration as soon as practicable and as will permit or facilitate the sale
and distribution of all or such portion of such Initiating Holders' Registrable
Securities as are specified in such demand, together with all or such portion of
the Registrable Securities of any Holder or Holders joining in such demand as
are specified in a written demand received by the Company within 15 days after
such written notice is given, provided that the Company shall not be obligated
to take any action to effect any such registration, pursuant to this Section
2.2:
(A) with respect to any demand for
registration by Initiating Preferred Holders, after the Company has effected 3
such registrations initiated by Initiating Preferred Holders pursuant to this
Section 2.2; provided, however, that a registration requested pursuant to
Section 2.2 shall not be deemed to be a demand for registration by Initiating
Preferred Holders unless a Registration Statement covering at least eighty
percent (80%) of the Registrable Securities specified in the notices from the
Initiating Preferred Holders has become effective and all shares registered
thereunder have been sold;
(B) if the Company shall furnish to such
Holders a certificate signed by the President of the Company, stating that in
the good faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company and its shareholders for such Registration
Statement to be filed at the date filing would be required, in which case the
Company shall have an additional period of not more than sixty (60) days within
which to file such Registration Statement; provided, however, that the Company
shall not use this right more than once in any 12-month period; or
(C) within 180 days following the effective
date of a registered offering of the Company's securities to the general public,
or such lesser period as may be permitted by the underwriter or underwriters of
such registered offering, in which the Initiating Preferred Holders shall have
been able to register all Registrable Securities as to which they requested
registration at such time;
(D) during the period starting with the date
60 days prior to the Company's good faith estimate of the date of filing of, and
ending on a date 180 days following the effective date of a registration subject
to Section 2.3, or such lesser period as may be permitted by the underwriter or
underwriters of such registered offering; provided that the Company is actively
employing its good faith efforts to cause such registration statement to become
effective; and
(E) prior to the earlier of (a) the date
three and one half (32) years from the date of this Agreement or (b) the date
upon which any lock-up expires with respect to the initial, firmly underwritten
public offering of the Company's securities.
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(b) Underwriting. If the Initiating Preferred Holders intend
to distribute the Registrable Securities covered by their demand by means of an
underwriting, they shall so advise the Company as part of their demand made
pursuant to this Section 2.2; and the Company shall include such information in
the written notice referred to in Section 2.2(a)(i). In such event, the right of
any Holder to registration pursuant to this Section 2.2 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein.
The Company shall, together with all holders of capital stock of the
Company proposing to distribute their securities through such underwriting,
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected by a majority-in-interest of the Initiating Preferred
Holders and reasonably satisfactory to the Company. Notwithstanding any other
provision of this Section 2.2, if the underwriter shall advise the Company that
marketing factors (including, without limitation, an adverse effect on the per
share offering price) require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders of Registrable
Securities that have requested to participate in such offering, and the number
of shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated pro rata among such Holders thereof in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities requested to be registered and held by such Holders at the time of
filing the Registration Statement. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration.
If any Holder disapproves of the terms of the underwriting, such Holder
may elect to withdraw therefrom by written notice to the Company, the
underwriter and the Initiating Preferred Holders. The Registrable Securities so
withdrawn shall also be withdrawn from registration.
If the underwriter has not limited the number of Registrable Securities
to be underwritten, the Company may include securities for its own account (or
for the account of other shareholders) in such registration if the underwriter
so agrees and if the number of Registrable Securities would not thereby be
limited.
2.3 Piggyback Registration.
(a) Company Registration. If at any time or from time to time
the Company shall determine to register any of its securities (other than the
Company's initial public offering), either for its own account or for the
account of security holders, other than a registration relating solely to
employee benefit plans, a registration on Form S-4 relating solely to an SEC
Rule 145 transaction or a registration pursuant to Section 2.2 or 2.9 hereof,
the Company will:
(i) promptly (but in any event within 10 days)
give to each Holder written notice thereof; and
(ii) include in such registration (and any related
qualification under state securities laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within fifteen (15) days after receipt of
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such written notice from the Company, by any Holder or Holders, except as set
forth in Section 2.3(b) below.
Such Registrable Securities shall only be included to the extent that
inclusion will not diminish the number of securities included by the Company.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.3(a)(i). In such event the right of any Holder to
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their Registrable Securities
through such underwriting shall, together with the Company and the other parties
distributing their securities through such underwriting, enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 2.3, if the underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
underwriter may limit the number of Registrable Securities to be included in the
registration and underwriting, or may exclude Registrable Securities entirely
from such registration and underwriting subject to the terms of this Section
2.3. The Company shall so advise all holders of the Company's securities that
would otherwise be registered and underwritten pursuant hereto, and the number
of shares of such securities, including Registrable Securities, that may be
included in the registration and underwriting shall be allocated in the
following manner: shares, other than Registrable Securities and other securities
that have contractual rights with respect to registration similar to those
provided for in this Section 2.3 (provided that such rights existed prior to the
date of this agreement or the holders of Registrable Securities shall have
consented to the granting of such registration rights pursuant to Section 2.11
hereof), requested to be included in such registration by shareholders shall be
excluded, and if a limitation on the number of shares is still required, the
number of Registrable Securities and other securities that have contractual
rights with respect to registration that may be included shall be allocated
among the holders thereof in proportion, as nearly as practicable, to the
amounts of Registrable Securities requested to be registered and such other
securities requested to be registered and held by each such holder at the time
of filing the Registration Statement. For purposes of any such underwriter
cutback, all Registrable Securities and other securities held by any holder that
is a partnership or corporation, shall also include any Registrable Securities
held by the partners, retired partners, shareholders or affiliated entities of
such holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons, and
such holder and other persons shall be deemed to be a single "selling holder,"
and any pro rata reduction with respect to such "selling holder" shall be based
upon the aggregate amount of shares carrying registration rights and requested
to be registered owned by all entities and individuals included in such "selling
holder," as defined in this sentence. No securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. Nothing in this Section 2.3(b) is intended to
diminish the number of securities to be included by the Company in the
underwriting.
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If any Holder disapproves of the terms of the underwriting, it may
elect to withdraw therefrom by written notice to the Company and the
underwriter. The Registrable Securities so withdrawn shall also be withdrawn
from registration.
(c) Right to Terminate Registration. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 2.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
2.4 Expenses of Registration. All Registration Expenses (as defined
below) incurred in connection with all registrations effected pursuant to
Sections 2.2, 2.3 and 2.9, shall be borne by the Company; provided, however,
that the Company shall not be required to pay stock transfer taxes or
underwriters' discounts or selling commissions relating to Registrable
Securities. "Registration Expenses" means any and all expenses incident to
performance of or compliance with this Agreement, including without limitation,
(i) all registration and filing fees of the Commission, a stock exchange or the
National Association of Securities Dealers, Inc., (ii) all fees and expenses of
complying with securities or blue sky laws (including fees and disbursements of
counsel for the underwriters in connection with blue sky qualifications of the
Registrable Securities) unless paid by the underwriters, (iii) all printing,
messenger and delivery expenses, (iv) all fees and expenses incurred in
connection with the listing of the Registrable Securities on any securities
exchange, (v) the reasonable fees and disbursements of counsel for the Company
and of its independent public accountants, including the expenses of any special
audits and/or "cold comfort" letters required by or incident to such performance
and compliance (vi) the reasonable fees and disbursements of one counsel
selected by the Holders of a majority of the Registrable Securities being
registered to represent all Holders of the Registrable Securities being
registered in connection with each such registration, (vii) any fees and
disbursements of underwriters customarily paid by the issuers or sellers of
securities, including fees and disbursements of counsel for the underwriters,
but excluding underwriting discounts and commissions, (viii) liability insurance
if the Company so desires or if the underwriters so require, and (ix) the fees
and expenses of any special experts retained by the Company in connection with
the requested registration. Notwithstanding anything to the contrary above, the
Company shall not be required to pay for any Registration Expenses of any
registration proceeding under Section 2.2 and the Holders shall retain their
rights pursuant to Section 2.2 if the registration request is subsequently
withdrawn at the request of (i) a majority of the Initiating Holders and (ii) a
majority of the Holders of the Registrable Securities to have been registered,
provided, however, that in the event that Holders holding at least a majority of
the Registrable Securities held by the Series A Investors agree to forfeit their
right to one demand registration pursuant to Section 2.2, then the Company shall
be required to pay the expenses of such withdrawn registration. In the absence
of such an agreement to forfeit, the Holders of Registrable Securities to have
been registered shall bear all such expenses pro rata on the basis of the
Registrable Securities to have been registered. Notwithstanding the preceding
sentence, however, if at the time of the withdrawal, the Holders have learned of
a materially adverse change in the condition, business or prospects of the
Company from that known to the Holders at the time of their request, then the
Holders shall not be required to pay any of said expenses and shall retain their
rights pursuant to Section 2.2.
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2.5 Obligations of the Company. Whenever required under this Section 2
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) use its best efforts to prepare and file, within sixty
(60) days after the period within which a request for registration may be given
to the Company, with the SEC a Registration Statement with respect to such
Registrable Securities and use its reasonable best efforts to cause such
Registration Statement to become effective, and keep such Registration Statement
effective for the lesser of 120 days or until the Holder or Holders have
completed the distribution relating thereto.
(b) 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 keep such Registration
Statement effective and to comply with the provisions of the 1933 Act with
respect to the disposition of all securities covered by such registration
statement in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such Registration Statement; provided that
before filing a Registration Statement or prospectus, or any amendments or
supplements thereto, the Company will furnish to one counsel selected by the
Holders of a majority of the Registrable Securities covered by such Registration
Statement to represent all Holders of Registrable Securities covered by such
Registration Statement, copies of all documents proposed to be filed, which
documents will be subject to the review of such counsel.
(c) furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable Securities owned
by them.
(d) use its reasonable best efforts to register or otherwise
qualify the securities covered by such Registration Statement under such other
securities laws of such states and other jurisdictions as shall be reasonably
requested by the Holders or the managing underwriter, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions where, but for the requirements of this paragraph
(d), it would not be obligated to be so qualified.
(e) 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 of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) 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 1933 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 at
the request of any such seller, promptly prepare and promptly furnish to such
seller a reasonable number of copies of an amended or supplemental prospectus as
may be necessary so that, as thereafter delivered to the sellers of such
Registrable
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Securities, such prospectus shall not include an untrue statement of a material
fact or omit 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.
(g) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable after the effective date
of the Registration Statement, an earnings statement that shall satisfy the
provisions of Section 11 (a) of the Securities Act and the rules and regulations
promulgated thereunder.
(h) obtain a "cold comfort" letter or letters from the
Company's independent public accountants in customary form and covering matters
of the type customarily covered by "cold comfort" letters as the seller or
sellers of a majority of such Registrable Securities shall reasonably request.
(i) obtain an opinion of counsel for the Company in customary
form and covering matters of the type customarily covered in opinions of
issuer's counsel as the sellers shall reasonably request.
(j) use its best efforts to list the Registrable Securities
covered by such Registration Statement with any securities exchange or NASDAQ on
which the Common Stock is then listed.
(k) make available for inspection by each Holder including
Registrable Securities in such registration, any underwriter participating in
any distribution pursuant to such registration, and any attorney, accountant or
other agent retained by such Holder or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, as such
parties may reasonably request, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Holder,
underwriter, attorney, accountant or agent in connection with such Registration
Statement.
(l) cooperate with Holders including Registrable Securities in
such registration and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold, such certificates to be in such denominations and
registered in such names as such Holders or the managing underwriters may
request at least two business days prior to any sale of Registrable Securities.
(m) permit any Holder which Holder, in the sole and exclusive
judgment, exercised in good faith, of such Holder, might be deemed to be a
controlling person of the Company, to participate in good faith in the
preparation of such Registration Statement and to require the insertion therein
of material, furnished to the Company in writing, that in the reasonable
judgment of such Holder and its counsel should be included.
2.6 Indemnification.
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(a) The Company will, and does hereby undertake to, indemnify
and hold harmless each Holder of Registrable Securities, each of such Holder's
officers, directors, partners and agents, and each person controlling such
Holder, with respect to any registration, qualification or compliance effected
pursuant to this Section 2, and each underwriter, if any, and each person who
controls any underwriter, of the Registrable Securities held by or issuable to
such Holder, against all claims, losses, damages and liabilities (or actions in
respect thereto) to which they may become subject under the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), or other federal
or state law arising out of or based on (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other similar document (including any related Registration
Statement, notification, or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances in which
they were made, (ii) any violation or alleged violation by the Company of any
federal, state or common law rule or regulation applicable to the Company in
connection with any such registration, qualification or compliance, or (iii) any
failure to register or qualify Registrable Securities in any state where the
Company or its agents have affirmatively undertaken or agreed in writing that
the Company (the undertaking of any underwriter chosen by the Company being
attributed to the Company) will undertake such registration or qualification on
behalf of the Holders of such Registrable Securities (provided that in such
instance the Company shall not be so liable if it has undertaken its reasonable
best efforts to so register or qualify such Registrable Securities) and will
reimburse, as incurred, each such Holder, each such underwriter and each such
director, officer, partner, agent and controlling person, for any legal and any
other expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability or action in accordance with Section
2.6(c); provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission made in conformity with written
information furnished to the Company by such Holder or underwriter specifically
for use therein provided, further, that this indemnity agreement shall not inure
to the benefit of any Holder of Registrable Securities, each of such Holders,
officers, directors, partners and agents and each person controlling such
Holder, or to the benefit of any Underwriter and any person who controls any
Underwriter in connection with any claim, loss, damage or liability arising out
of or based upon any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other similar
document or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statement
therein not misleading in light of the circumstances under which they were made
if each such Holder (to the extent such Holder is required to deliver a
prospectus) or Underwriter failed to send or give a copy of the prospectus,
offering circular or similar document, as the same may be amended or
supplemented, in a timely manner and the untrue statement or alleged untrue
statement of a material fact or omission (or alleged omission) to state a
material fact in such earlier prospectus, offering circular or similar document,
was corrected in the final prospectus, offering circular or similar document,
unless such failure resulted from non-compliance by the Company with its
obligation to prepare and deliver a final prospectus.
(b) Each Holder will, and if Registrable Securities held by or
issuable to such Holder are included in such registration, qualification or
compliance pursuant to this Section 2, does hereby undertake to indemnify and
hold harmless the Company, each of its directors, partners,
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agents, officers, and each person controlling the Company, each underwriter, if
any, and each person who controls any underwriter, of the Company's securities
covered by such a Registration Statement, and each other Holder, each of such
other Holder's officers, partners, directors and agents and each person
controlling such other Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such Registration Statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made, and will
reimburse, as incurred, the Company, each such underwriter, each such other
Holder, and each such director, officer, agent, partner and controlling person
of the foregoing, for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action in accordance with Section 2.6(c), in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) was made in such Registration
Statement, prospectus, offering circular or other document, in reliance upon and
in conformity with written information furnished to the Company by such Holder
specifically for use therein; provided, however, that the liability of each
Holder hereunder shall be limited to the proportion of any such claim, loss,
damage or liability that is equal to the proportion that the public offering
price of the shares sold by such Holder under such Registration Statement bears
to the total public offering price of all securities sold thereunder, but in any
event not to exceed the net proceeds received by such Holder from the sale of
securities under such Registration Statement.
(c) Each party entitled to indemnification under this Section
2.6 (the "Indemnified Party") shall give notice to the party required to provide
such indemnification (the "Indemnifying Party") of any claim as to which
indemnification may be sought promptly after such Indemnified Party has actual
knowledge thereof, and shall permit the Indemnifying Party to assume the defense
of any such claim or any litigation resulting therefrom; provided that counsel
for the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be subject to approval by the Indemnified Party (whose
approval shall not be unreasonably withheld) and the Indemnified Party may
participate in such defense at the Indemnifying Party's expense if
representation of such Indemnified Party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding; and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 2, except
to the extent that such failure to give notice shall materially adversely affect
the Indemnifying Party in the defense of any such claim or any such litigation.
An Indemnifying Party, in the defense of any such claim or litigation, may,
without the consent of each Indemnified Party, consent to entry of any judgment
or enter into any settlement that includes as an unconditional term thereof the
giving by the claimant or plaintiff therein, to such Indemnified Party, of a
release from all liability with respect to such claim or litigation.
(d) In order to provide for just and equitable contribution to
joint liability under the 1933 Act in any case in which either (i) any
indemnified party under this Agreement, or any controlling person of any such
indemnified party, makes a claim for indemnification pursuant to this Section
2.6 but it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal)
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that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 2.6 provides for indemnification in such case, or (ii)
contribution under the 1933 Act may be required on the part of any such Holder
or any such controlling person in circumstances for which indemnification is
provided under this Section 2.6; then, and in each such case, the Company and
such Holder will contribute to the aggregate claims, losses, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that such Holder is responsible for the portion represented
by the percentage that the public offering price of the securities offered by
such Holder pursuant to the Registration Statement bears to the public offering
price of all securities offered by such Registration Statement, and the Company
will be responsible for the remaining portion; provided, however, that, in any
case, (A) no such Holder will be required to contribute any amount in excess of
the public offering price of all securities offered by it pursuant to such
Registration Statement, after deduction of underwriting discounts and
commissions; and (B) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the ▇▇▇▇ ▇▇▇) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.
(e) The indemnities provided in this Section 2.6 shall survive
the transfer of any Registrable Securities by such Holder.
2.7 Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may reasonably request in writing and as
shall be required in connection with any registration, qualification or
compliance referred to in this Section 2.
2.8 Transfer of Registration Rights.
(a) The rights, contained in Sections 2.2, 2.3 and 2.9 hereof,
to cause the Company to register the Registrable Securities, may be assigned or
otherwise conveyed to a transferee or assignee of Registrable Securities, who
shall be considered a "Holder" for purposes of this Section 2, provided that (i)
any such transfer by a Series A Investor is effected in compliance with Section
1.1 hereof; and (ii) such transfer is a "Permitted Transfer" as defined herein.
(b) For purposes of this Agreement, a "Permitted Transfer"
shall mean: (i) a transaction not involving a change in beneficial ownership;
(ii) transactions involving distribution without consideration by a shareholder
that is a partnership to any of its partners, retired partners, or to the estate
of any of its partners; (iii) transactions involving distribution without
consideration by a shareholder that is a corporation or limited liability
company to any of its shareholders or members, as applicable; (iv) transfers by
any shareholder who is an individual to a trust for the benefit of such
shareholder or his family; (v) a transfer in which the transferee acquires at
least 100,000 shares of Registrable Securities, or Securities convertible into
or exercisable for such number of shares, subject to adjustment for
combinations, consolidations, recapitalizations, stock splits, stock dividends
and the like; or (vi) transfers by gift, will or intestate succession to the
spouse, lineal descendants or ancestors of any shareholder or spouse of a
shareholder, or (vii) transfer by any Holder to any of its Affiliates.
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2.9 Form S-3. If the Company's stock becomes publicly traded, the
Company shall use its reasonable best efforts to qualify for registration on
Form S-3 and to that end the Company shall register the Common Stock under the
1934 Act within twelve (12) months following the effective date of the first
registration of any securities of the Company on Form S-1. After the Company has
qualified for the use of Form S-3, the Initiating Preferred Holders of
Registrable Securities shall have the right to request registrations on Form S-3
thereafter under this Section 2.9. If the Company shall receive from Initiating
Preferred Holders a written demand that the Company effect a registration
pursuant to this Section 2.9, the Company shall promptly give notice to all
Holders of Registrable Securities of the receipt of a request for registration
pursuant to this Section 2.9 and shall provide a reasonable opportunity for
other Holders to participate in the registration. Subject to the foregoing, the
Company will use its reasonable best efforts to effect such registration as soon
as practicable on Form S-3 to the extent requested by the Initiating Holders or
Holders, as the case may be; provided, however, that the Company shall not be
obligated to effect any such registration if (a) the Initiating Holders or
Holders, as the case may be, together with the holders of any other securities
of the Company 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 $1,000,000, or (b) the Company shall have already
made two registrations on Form S-3 within the 12-month period immediately
preceding the request, (c) or the Company shall have already made one Demand
Registration pursuant to Section 2.2 within a 6-month period immediately
preceding the request. Notwithstanding the foregoing, nothing herein shall
restrict, prohibit, or limit in any way a Holder's ability to exercise its
registration rights under Sections 2.2 or 2.3 hereof. The Company shall have no
obligation to take any action to effect any registration pursuant to this
Section 2.9 in case of any of the circumstances referred to in Section
2.2(a)(ii)(A), (B), (C), (D) or (E) (which shall be deemed to apply to the
obligations under this Section 2.9 with equal force). In addition, any
registration pursuant to this Section 2.9 shall be subject to the provisions of
Section 2.2(b), which shall be deemed to apply to the obligations under this
Section 2.9 with equal force, except that any reference therein to Section 2.2
or a subsection thereof shall, for these purposes only, be deemed to be a
reference to this Section 2.9.
2.10 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 2.
2.11 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of seventy-five percent (75%) of the Registrable Securities then
outstanding and not registered, enter into any agreement with any holder or
prospective holder of any securities of the Company that would allow such holder
or prospective holder to (a) require the Company to effect a registration or (b)
include any securities in any registration filed under Section 2.2, 2.3 or 2.9
hereof, unless, under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of such securities will not diminish the amount of
Registrable Securities that are included in such registration.
2.12 Rule 144 Reporting. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC that may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to:
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(a) make and keep current public information available, within
the meaning of SEC Rule 144 or any similar or analogous rule promulgated under
the 1933 Act, at all times after it has become subject to the reporting
requirements of the 1934 Act;
(b) file with the SEC, in a timely manner, all reports and
other documents required of the Company under the 1933 Act and 1934 Act (after
it has become subject to such reporting requirements);
(c) so long as a Holder owns any Registrable Securities,
furnish to such Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time commencing 90 days after the effective date of the first registration filed
by the Company for an offering of its securities to the general public), the
1933 Act and the 1934 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 Company; 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.
2.13 "Market Stand-Off" Agreement. Each Holder that is a "One Percent
Shareholder," as defined below, hereby agrees that during a period, not to
exceed 180 days, following the effective date of a registration statement of the
Company filed under the 1933 Act, it shall not, to the extent requested by the
Company and any underwriter, sell, pledge, transfer, make any short sale of,
loan, grant any option for the purchase of, or otherwise transfer or dispose of
(other than to donees who agree to be similarly bound) any Common Stock held by
it at any time during such period except Common Stock included in such
registration; provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company that covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering
unless otherwise required by the underwriter in connection with a subsequent
registration in which case the maximum period shall be 90 days rather than 180
days; and
(b) all other "One Percent Shareholders" with registration
rights (whether or not pursuant to this Agreement) and all officers and
directors of the Company enter into similar agreements.
For purposes of this Section 2.13, the term "One Percent Shareholder"
shall mean a shareholder of the Company who holds at least one percent of the
outstanding Common Stock of the Company (assuming conversion of all outstanding
Preferred Stock of the Company).
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
2.14 Amendment of Registration Rights. Any provision of this Section 2
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either
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retroactively or prospectively), only with the written consent of the Company
and the Holders of at least seventy-five percent (75%) of the Registrable
Securities then outstanding and not registered. Any amendment or waiver effected
in accordance with this Section shall be binding upon each Holder, each future
Holder of Registrable Securities and the Company.
2.15 Termination of Registration Rights. The rights of any particular
Holder to cause the Company to register securities under Sections 2.2, 2.3 or
2.9 hereof shall terminate as to any Holder on the date such Holder is able to
dispose of all of its Registrable Securities in any 90-day period pursuant to
SEC Rule 144 (or any similar or analogous rule promulgated under the 1933 Act),
provided, however that such rights shall not terminate with respect to any
Holder owning more than two percent (2%) of the Company's outstanding Common
Stock of the Company until such time as such Holder owns less than two percent
(2%) of the outstanding Common Stock of the Company.
Section 3.
COMPANY COVENANTS
The Company hereby covenants and agrees as follows.
3.1 Affirmative Covenants.
(a) Financial Statements and Information. The Company will
keep books of account and prepare financial statements and will take the
following actions with respect to such information (all of the foregoing and
following to be kept and prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis).
(i) As soon as practicable, but in any event
within ninety (90) days after the end of each fiscal year of the Company,
beginning with the fiscal year ended December 31, 1999, the Company will furnish
to each Series A Investor (1) a copy of the financial statements of the Company
for such fiscal year containing a consolidated and consolidating balance sheet,
statement of income, statement of shareholders' equity, and statement of cash
flows, each as at the end of such fiscal year and for the period then ended and
in each case setting forth in comparative form the figures for the preceding
fiscal year, all in reasonable detail and audited and certified by independent
public accountants of recognized standing selected by the Company's Board of
Directors, and containing an opinion that such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a basis consistent with prior years (except as otherwise specified in such
report) and (2) a statement from the principal financial or accounting officer
of the Company (or, upon the request of the the holders of a majority of the
Class A Common Stock issued or issuable upon conversion of the Preferred Stock
or exercise of the Warrants, a statement from the auditors of the Company)
discussing whether the Company is in material compliance with this Agreement and
all its other material agreements. In addition to the foregoing, upon the
request of any Series A Investor who holds no less than 100,000 shares of Class
A Common Stock issued or issuable upon conversion of the Preferred Stock,
subject to adjustment for stock splits, stock dividends and the like, the
Company shall use its best efforts to cause the auditors of the Company
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to meet with such Series A Investor for purposes of reviewing the Company's
financial statements and condition.
(ii) As soon as practicable after the end of each of
the first three quarters of the fiscal year, but in any event within thirty (30)
days after the end of each such quarter, the Company will furnish to each Series
A Investor the unaudited consolidated balance sheets of the Company and its
subsidiaries, if any, as of the end of such quarter, and its unaudited
consolidated statements of income and losses, shareholders' equity and cash
flows for such quarter, setting forth in each case in comparative form the
figures for the corresponding period of the preceding fiscal year, all in
reasonable detail and prepared in accordance with generally accepted accounting
principles, except that such financial statements may not contain notes and will
be subject to year-end adjustment, and certified by the principal financial or
accounting officer of the Company. Such quarterly report shall include, or the
Company shall provide each Series A Investor within forty-five (45) days after
the end of each quarter, a narrative, summary description of the Company's
operations for such quarter from the Chief Executive or Operating Officer,
indicating whether the Company is materially in compliance with this Agreement
and other material agreements and discussing any variances in excess of $25,000
from the Company's operating plan, accompanied by an updated forecast of
financial performance for the next four (4) quarters and notice of any material
events during such quarter, including without limitation acquisitions and new
product developments.
(iii) As soon as practicable after the end of each
month, but in any event within thirty (30) business days thereafter, the Company
will furnish to each Series A Investor the unaudited consolidated balance sheet
of the Company and its subsidiaries, if any, as of the end of such month and its
unaudited statement of income and losses, shareholders' equity and cash flows
for such month, discussing any variances in excess of $10,000 between the
Company's actual results and the Company's plan for such month, setting forth in
each case in comparative form the figures for the corresponding period of the
preceding fiscal year and a summary discussion of the Company's principal
functional areas (provided, that in alternate months the Company shall have the
right to provide an interim letter regarding significant developments in lieu of
such summary discussion), all in reasonable detail and prepared in accordance
with generally accepted accounting principles, except that such financial
statements may not contain notes and will be subject to year end adjustment, and
certified by the principal financial or accounting officer of the Company.
(iv) As soon as practicable after the end of each
quarter of the fiscal year, the Company will furnish to each Series A Investor a
copy of each (1) financial statement, report, notice, or proxy statement sent by
the Company to its shareholders generally; (2) regular, periodic, or special
report, registration statement, or prospectus filed by the Company with any
securities exchange, state securities regulator, or the Securities and Exchange
Commission; (3) press release or other statement made available by the Company
or its officers to the public generally concerning material developments in the
business of the Company; (4) material report prepared for the Company by an
outside consultant; and (5) agreement, letter of intent or proposal from or with
any entity proposing to acquire the Company or form any potentially material
strategic relationship.
(v) The Company covenants that promptly
after the occurrence of any material default (with or without notice or lapse of
time or both) under, or material breach of, this
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Agreement or any other material agreement or obligation, it shall deliver to
each member of the Board a certificate of an officer of the Company specifying
in detail the nature and period of existence thereof and what actions the
Company has taken and proposes to take with respect thereto. The Series A
Investors shall be entitled to participate in any discussions with the Company's
lenders regarding any such default.
(vi) With reasonable promptness, the Company will
furnish to each Series A Investor such other information regarding the business,
properties, condition and affairs, financial or other, of the Company or any
subsidiary as any Holder may from time to time reasonably request.
(b) Inspection. The Company shall permit each Series A
Investor and each transferee in a Permitted Transfer (as defined in Section
2.8(b) hereof), its attorney or its other representative to visit and inspect
the Company's properties, to examine the Company's books of account and other
records and agreements, to make copies or extracts therefrom and to discuss the
Company's affairs, finances and accounts with its officers, management employees
and independent auditors all at such reasonable times and as often as such
Series A Investor or transferee may reasonably request; provided, however, that
such Series A Investor shall bear any costs or expenses of such investigations
or inquiries; provided, further, that the Company shall not be obligated
pursuant to this Section 3.2(b) to provide trade secrets or confidential
information or to provide information to any person whom the Company reasonably
believes is a competitor of the Company unless (i) such person or its affiliates
purchased its shares of capital stock directly from the Company, and (ii) such
person enters into a reasonable and customary confidentiality agreement with the
Company concerning such trade secrets or confidential information and agrees to
use such information solely for purposes directly related to such person's
investment in the Company. Each Series A Investor shall be entitled to
participate in discussions and consult with, and make proposals and furnish
advice to management of the Company.
(c) Budget. The Company will prepare and submit to the Board
of Directors and Series A Investors an operating budget (the "Budget") for each
fiscal year at least thirty (30) days prior to the beginning of such fiscal year
of the Company, and such Budget will contain forecasts for the next three (3)
fiscal years projected on a quarterly basis and include balance sheets, income
statements, and statements of cash flow. The Budget will be accepted as the
Budget for such fiscal year when it has been approved by the Board of Directors
and the Board designee of SG Capital Partners, L.L.C. The Budget shall be
reviewed by the Company periodically, and in any event not less frequently than
every six months after the adoption thereof, and all changes therein and all
material deviations therefrom shall be resubmitted to the Board of Directors for
approval by the Board designee of SG Capital Partners, L.L.C.
(d) Prompt Payment of Taxes. The Company and its subsidiaries,
if any, will timely pay and discharge, or cause to be paid and discharged, all
lawful taxes, assessments and governmental charges or levies imposed upon any of
their income, profits, properties or businesses; provided, however, that any
such tax, assessment, charge or levy need not be paid if the validity thereof
shall currently be contested in good faith by appropriate proceedings: and
provided, further, that the Company and its subsidiaries will pay all such
taxes, assessments, charges or levies forthwith upon the commencement of
proceedings to foreclose any tax lien that may have attached as security
therefor or with respect thereto.
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(e) Observation Rights. As long as any Series A Investor owns
any shares of capital stock of the Company, the Company shall invite two
representatives of the Series A Investors to attend all meetings of its Board of
Directors in a nonvoting-observer capacity and, in this respect, shall give such
representative copies of all notices, minutes, consents and other materials it
provides to its directors, provided, however, that such representative shall
agree to hold such in confidence. Such non-voting observers shall be entitled to
participate in discussions and consult with, and make proposals and furnish
advice to, the Board, without voting. SG Capital Partners, L.L.C. and Olympus
shall each designate one representative to serve as a non-voting observer
pursuant to this Section 3.1(e).
(f) Maintenance of Insurance. The Company shall maintain, and
cause each subsidiary to maintain, insurance (including directors and officers
insurance) with responsible and reputable insurance companies or associations in
such amounts and covering such risks as is customarily carried by companies
engaged in similar businesses and owning similar properties in the same general
areas in which the Company or such subsidiary operates.
(g) Material Changes and Other Notices. The Company shall
promptly notify each member of the Board of (a) any materially adverse changes
in the assets, properties, financial condition, operating results, prospects or
business of the Company and its subsidiaries, and (b) any lawsuit, claim,
proceeding or investigation pending or, to the knowledge of the Company,
threatened, or any judgment, order or decree involving the Company or its
subsidiaries that would have a materially adverse effect on the Company's
business, condition or results of operations.
(h) Compliance with Applicable Laws. The Company shall comply
in all material respect with all applicable statutes, laws, ordinances, rules
and regulations of any governmental authority (whether now in effect or
hereinafter enacted) and any filing requirements relating thereto including
without limitation, the U.S. Foreign Corrupt Practices Act and environmental
laws and regulations. The Company shall do all things necessary to preserve,
renew and keep in full force and effect and in good standing its corporate
existence and authority necessary to continue its business.
(i) Key Man Insurance. The Company shall maintain a policy of
"key man" insurance on the life of ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, with minimum coverage of
$1,000,000, unless otherwise directed by the Board of Directors. The proceeds
from such policies shall be payable to the Company.
(j) Use of Proceeds. The Company shall expend the proceeds
from the sale of the Series A Preferred Stock substantially in accordance with
the Schedule 3.1(j) attached hereto.
(k) Directors' and Officers' Insurance Policy. Within ninety
(90) days of the Closing, the Company shall obtain and maintain a valid policy
of Directors' and Officers' insurance covering each member of the Board with a
financially sound and reputable insurer in the amount of $3,000,000 per
occurrence and $5,000,000 aggregate in any one year. The Restated Articles of
Incorporation, as amended, Bylaws and other organizational documents of the
Company and each of its subsidiaries shall at all times to the fullest extent
permitted by law, provide for indemnification
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or, advancement of expenses to, and limitation of the personal liability of, the
members of the Board and the members of the boards of directors or other similar
managing bodies of each of the Company's subsidiaries. Any Board observer shall
be entitled to indemnification from the Company to the maximum extent permitted
by law as though he or she were a director of the Company and any of its
Subsidiaries. Such provisions may not be amended, repealed or otherwise modified
in any manner materially adverse to any member of the Board or any member of the
boards of directors or other similar managing bodies of any of the Company's
subsidiaries, until at least six years following the date on which none of the
Series A Investors are entitled to nominate a designee to the Board. Each of the
members of the Board (including the Series A Investors' designees and each Board
observer is intended to be a third-party beneficiary of the obligations of the
Company pursuant to this Section 3.1(k) and the obligations of the Company
pursuant to this Section 3.1(k) shall be enforceable by each such individual.
3.2 Negative Covenants. Without the prior written consent of at least
seventy-five percent (75%) of the Series A Investors, the Company covenants and
agrees as follows.
(a) Declaration of Bankruptcy. The Company shall not
voluntarily declare bankruptcy.
(b) Limit on Indebtedness. The Company and its subsidiaries
shall not, directly or indirectly, create, incur, assume or be or remain liable
with respect to, any indebtedness or obligations in excess of $750,000 in the
aggregate, other than borrowings (i) outstanding on the date hereof, (ii)
incurred for inventory financing; (iii) currently budgeted or contemplated by a
subsequently approved budget; or (iv) arising in the ordinary course of the
Company's business that are approved by the Company's Board of Directors.
(c) Limitation on Liens. The Company and its subsidiaries
shall not create, incur, permit to exist or suffer to be created or incurred any
lien upon any of its property, whether now owned or hereafter acquired in excess
of $750,000, other that liens (i) outstanding on the date hereof; (ii) incurred
for inventory financing; or (iii) arising in the ordinary course of the
Company's business that are approved by the Company's Board of Directors.
(d) Issuances, Offerings and Dividends. Except as otherwise
permitted in the Restated Articles of Incorporation of the Company, as amended
from time to time, or this Agreement, the Company shall not (i) issue, offer or
sell any securities of the Company senior to or on a parity with the Series A
Preferred Stock, (ii) declare or make any dividends or distributions of its
cash, stock, property or assets other than Stock dividends, or (iii) repurchase
any securities of the Company.
(e) Merger; Change in Control; Acquisition of Assets. The
Company will not (a) sell, lease or otherwise dispose of (whether in one
transaction or a series of related transactions) all or substantially all of its
assets, (b) merge with or into or consolidate with another entity (except into
or with a wholly-owned subsidiary of the Company with the requisite shareholder
- approval) in which the shareholders of the Company immediately prior to such
merger or consolidation possess a minority of the acquiring entity immediately
following such merger or consolidation, (c) voluntarily liquidate or wind up its
operations, or (d) acquire assets of another entity (not including
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acquisitions from vendors in the ordinary course of business or currently
budgeted or contemplated by a subsequently approved budget) with an aggregate
value greater than $750,000.
(f) Sale of Assets. The Company shall not effect any sale,
lease, assignment, transfer, or other conveyance of any material portion of the
assets or operations or the revenue or income generating capacity of the Company
with an aggregate value greater than $750,000 (other than inventory in the
ordinary course of business and other assets reasonably and in good faith
determined by the Company to be obsolete or no longer necessary to the business
of the Company), or to take any such action that has the effect of any of the
foregoing.
(g) Executive Compensation. The Company shall not increase the
compensation paid to any of its executive officers by more than five percent
(5%) of their current compensation amounts, whether by means of salary, bonus,
profit sharing, options, dividends or any other means.
(h) Related Party Transactions. The Company shall not enter
into any material agreement, transaction or relationship with any person that
controls, is controlled by, or is under common control with, the Company or with
any officer, director, shareholder or employee of the Company, including any
member of any of their immediate families (other than transactions entered into
in the ordinary course with Random House, Inc. or its affiliates pursuant to
various publishing, distributing and editing agreements), unless such agreement,
transaction or relationship is (i) substantially on terms that would be offered
by an unaffiliated party and (ii) approved by the Board of Directors if such
agreement, transaction or relationship exceeds $10,000.
(i) Business Purpose. The Company shall not engage in any
business other than businesses of the type and nature in which the Company is
currently engaged and described on Schedule 3.2(i) and extensions thereof
reasonably related thereto.
(j) Series A Preferred Stock Voting Rights. The Company shall
not take any corporate action in violation of the voting rights of the holders
of Series A Preferred Stock of the Company contained in the Restated Articles of
Incorporation of the Company, as amended from time to time.
(k) ▇▇▇▇ ▇▇▇▇▇▇▇▇ Litigation. The Company shall not approve
any settlement of ▇▇▇▇ ▇▇▇▇▇▇▇▇'▇ claims against the Company equal to or in
excess of $3,000,000. For purposes of determining the amount of any payment to
▇▇▇▇ ▇▇▇▇▇▇▇▇ the following shall be excluded: (i) the amount of any royalty
obligation acknowledged by the Company as of the date hereof and (ii) any
warrant granted with a strike price per share equal to or greater than the fair
market value per share of the Common Stock underlying the warrant at the time of
grant. The fair market value per share of the Common Stock underlying the
warrant shall be determined by mutual agreement of the Company and seventy-five
percent (75%) of the Series A Investors. In the event the Company and
seventy-five percent (75%) of the Series A Investors fail to agree to a fair
market value, the fair market value per share of the Common Stock underlying any
warrant shall be determined as follows:
(i) if the Common Stock is not then traded on a
national securities exchange, the average of the closing
prices quoted on the National Association of Securities
Dealers, Inc. Automated Quotation National Market System, if
applicable,
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or the average of the last bid and asked prices of the Common
Stock quoted in the over-the-counter-market for the twenty
(20) trading days (or such other reasonable number of days
consistent with the methodology agreed to in the warrant)
immediately preceding the time of grant or, if such date is
not a business day on which shares are traded, the next
immediately preceding trading day; or
(ii) if the Common Stock is then traded on a national
securities exchange, the average of the high and low prices of
the Common Stock listed on the principal national securities
exchange on which the Common Stock is so traded for the twenty
(20) trading days (or such other reasonable number of days
consistent with the methodology agreed to in the warrant)
immediately preceding the time of grant or, if such date is
not a business day on which shares are traded, the next
immediately preceding trading day; or
(iii) if the Common Stock is not then publicly
traded, as evidenced by a written opinion from an independent
investment banking firm of nationally recognized standing
mutually agreeable to the Company and seventy-five percent
(75%) of the Series A Investors.
3.3 Adjustment of Series A Multiple Upon Breach of Covenants. If it is
determined in accordance with the procedure outlined in this Section 3.3 that
the Company has breached any of the covenants contained in Section 3.1 or 3.2
herein, the Series A Multiple (as defined in the Restated Articles) shall be
increased as provided therein, it being understood, however, that such increase
shall not be the sole or exclusive remedy of the Series A Investors and that the
Series A Investors shall be entitled to pursue remedies at law, including
injunctive relief or other equitable remedies, in the event of any such breach;
it is further understood that no remedy is exclusive of any other remedy and
that all available remedies are cumulative to the extent permitted by law. A
"Breach Occurrence" shall refer to a breach by the Company that has been
determined as follows.
(a) Notice of Breach. The Series A Investors shall give
written notice to the President of the Company, with a copy to the Secretary of
the Company, of any claim of breach of any covenant contained in Section 3.1 or
3.2 herein, including in such notice a brief description of the facts upon which
such breach is based (the "Breach Notice") within a reasonable period of time
following the date on which the Series A Investors obtain knowledge thereof. The
Company will have the right to make such investigation of the Series A
Investors' claim as the Company may deem necessary or desirable. The Company
shall have thirty (30) days from the date of receipt of the Breach Notice to
cure such breach or obtain a waiver thereof in accordance with the provisions
hereto.
(b) Dispute of Breach Notice. If the Company disputes the
breach described in the Breach Notice, within thirty (30) days after receipt of
the Breach Notice it shall give written notice to the Series A Investors setting
forth with reasonable specificity the reasons for objecting thereto, whereupon
the Company and Series A Investors shall promptly and in good faith attempt to
resolve such dispute. If no such resolution can be reached after good faith
negotiation, either party may demand arbitration of the matter, and in any such
event the matter shall be settled by arbitration conducted by three arbitrators.
The Company and Series A Investors shall each select one arbitrator,
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and the two arbitrators so selected shall select a third arbitrator. The
decision of the arbitrators so selected as to the validity of any breach in such
Breach Notice shall be binding and conclusive upon the parties to this
Agreement, and the parties shall act promptly in accordance with such decision.
Any such arbitration shall be held in New York City, New York. Any such
arbitration shall be conducted under the rules then in effect of the American
Arbitration Association.
(c) Determination of Breach. Any such breach shall be deemed
to be a Breach Occurrence triggering adjustment of the Series A Multiple if (i)
the Company fails to cure such breach, obtain a waiver thereof or invoke the
dispute resolution procedures of Section 3.3(b) within thirty (30) days after
the date of receipt of the Breach Notice or (ii) the arbitrators fail to make a
final determination in accordance with Section 3.3(b) that such breach has not
occurred.
3.4 Expiration of Covenants. The covenants set forth in this Section 3
shall expire and be of no further force or effect upon the closing of an
underwritten public offering of shares of Common Stock of the Company resulting
in gross proceeds to the Company in excess of $30,000,000. After such time, the
Series A Investors shall be entitled to receive such annual and quarterly
reports as the Company shall distribute to its shareholders generally.
Section 4.
MISCELLANEOUS
4.1 Governing Law. This Agreement shall be governed by, and construed
and interpreted in accordance with the laws of the State of New York.
4.2 Jurisdiction. Each party hereto hereby irrevocably and
unconditionally submits to the exclusive jurisdiction of the state and federal
courts located in the State of New York, County of New York, for any actions,
suits, or proceedings arising out of or relating to this agreement and the
transactions contemplated hereby. Each party hereto agrees not to commence any
action, suit or proceeding relating thereto except in such courts. Each of the
parties hereto hereby irrevocably and unconditionally waives any objection to
the laying of venue of any action, suit or proceeding arising out of this
agreement or the transactions contemplated hereby, in such state or federal
courts as aforesaid and hereby further irrevocably and unconditionally waives
and agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
4.3 Waiver of Jury Trial. The parties hereby waive trial by jury in any
judicial proceeding to which they are parties involving, directly or indirectly,
any matter in any way arising out of, related to or connected with this
Agreement.
4.4 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
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4.5 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement among the parties with regard to the subjects
hereof. Nothing in this Agreement, express or implied, is intended to confer
upon any party, other than the parties hereto and their successors and assigns,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
4.6 Severability. Any invalidity, illegality or limitation of the
enforceability with respect to any Series A Investor of any one or more of the
provisions of this Agreement, or any part thereof, whether arising by reason of
the law of any such person's domicile or otherwise, shall in no way affect or
impair the validity, legality or enforceability of this Agreement with respect
to other Series A Investors. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, it shall to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable the intent of the parties, and the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
4.7 Amendment and Waiver. Except as otherwise expressly provided
herein, 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,
either retroactively or prospectively and either for a specified period of time
or indefinitely) with the written consent of the Company and Series A Investors
(or their transferees) holding at least seventy-five percent (75%) of the shares
of Series A Stock, voting together as a single group (treating Preferred Stock
as if converted at the conversion rate then in effect and including, for such
purposes, shares of Common Stock into which any shares of Preferred Stock shall
have been converted); provided, however, that no such amendment or waiver shall
reduce the aforesaid percentage of Registrable Securities, the holders of which
are required to consent to any waiver or supplemental agreement, without the
consent of the holders of all of such Registrable Securities. Any amendment or
waiver effected in accordance with this Section 4.7 shall be binding upon each
Series A Investor and each transferee of the Registrable Securities. Upon the
effectuation of each such amendment or waiver, the Company shall promptly give
written notice thereof to the Series A Investors who have not previously
consented thereto in writing.
4.8 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to the Company, any Series A Investor, or any
transferees upon any breach, default or noncompliance of any Series A Investor
or any transferee or the Company under this Agreement, shall impair any such
right, power or remedy, nor shall it be construed to be a waiver of any such
breach, default or noncompliance, or any acquiescence therein, or of any similar
breach, default or noncompliance thereafter occurring. It is further agreed that
any waiver, permit, consent or approval of any kind or character on the part of
the Company or the Series A Investors of any breach, default or noncompliance
under this Agreement or any waiver on the Company's or the Series A Investors'
part of any provisions or conditions of this Agreement must be in writing and
shall be effective only to the extent specifically set forth in such writing and
that all remedies, either under this Agreement, by law, or otherwise afforded to
the Company and the Series A Investors, shall be cumulative and not alternative.
4.9 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon confirmed delivery by facsimile or telecopy, or
on the fifth day (or the tenth day if to a party with an address
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outside of the United States) following mailing by registered or certified mail,
return receipt requested, postage prepaid, addressed: (a) if to an Series A
Investor, at such address as such Series A Investor shall have furnished to the
Company in writing, or (b) if to the Company, at its address first above
written, or at such other address as the Company shall have furnished to the
Series A Investors in writing.
4.10 Titles and Subtitles. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
4.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties as of the date first above written.
THE COMPANY: THE PRINCETON REVIEW, INC.
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇
------------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: President and Chief Executive Officer
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SERIES A INVESTORS: SGC PARTNERS II, LLC
By: SG MERCHANT BANKING FUND L.P.,
its managing member
By: SG CAPITAL PARTNERS L.L.C.,
its general partner
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇
------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇
Title: Managing Director
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SERIES A INVESTORS: OLYMPUS GROWTH FUND III, L.P.
By: OGP III, LLC, its general partner
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
----------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Title: Member
OLYMPUS EXECUTIVE FUND, L.P.
By: OEF, L.P., its general partner
By: LJM, L.L.C., a general partner
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
----------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Title: Member
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Schedule 3.1(j)
USE OF PROCEEDS
The proceeds will be used for working capital, acquisitions and
transaction expenses.
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Schedule 3.2(j)
BUSINESS PURPOSE
The Company is a provider of test preparation, school selection and
other related educational products and services.