EXHIBIT 10.5
SENIOR CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
BY AND AMONG
RIVER CITIES CAPITAL GROUP II LIMITED PARTNERSHIP,
DPEC, INC.
AND
▇▇▇▇▇ ▇. ▇▇▇▇▇
SEPTEMBER 15, 1998
TABLE OF CONTENTS
PAGE
1. Sale and Issuance of Senior Convertible Preferred Stock. . . . . . . . 1
2. Closings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Closing Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5. Further Assurances.. . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Representations and Warranties of the Company and ▇▇▇▇▇. . . . . . . . 5
6.1 Corporate Standing. . . . . . . . . . . . . . . . . . . . . . . . 5
6.2 Authorization.. . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.4 Validly Issued Shares.. . . . . . . . . . . . . . . . . . . . . . 7
6.5 No Conflict.. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.6 Contracts and Other Commitments: Compliance.. . . . . . . . . . . 7
6.7 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.8 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.9 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 8
6.10 Indebtedness for Borrowed Money; No Undisclosed Liabilities. . . 8
6.11 Title to Property and Assets: Leases. . . . . . . . . . . . . . . 8
6.12 Legal Proceedings.. . . . . . . . . . . . . . . . . . . . . . . . 9
6.13 Environmental Matters.. . . . . . . . . . . . . . . . . . . . . . 9
6.14 Licenses and Permits: Compliance with Laws.. . . . . . . . . . . 9
6.15 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . 9
6.16 Labor Relations.. . . . . . . . . . . . . . . . . . . . . . . . . 10
6.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.18 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.19 Changes in Circumstances. . . . . . . . . . . . . . . . . . . . . 11
6.20 Patents and Trade Names, Etc. . . . . . . . . . . . . . . . . . . 12
6.21 Affiliated Transactions . . . . . . . . . . . . . . . . . . . . . 14
6.22 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.23 Brokers' and Finders' Fees. . . . . . . . . . . . . . . . . . . . 14
6.24 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . 14
6.25 Small Business Concern. . . . . . . . . . . . . . . . . . . . . . 14
6.26 Material Facts. . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.27 ▇▇▇▇▇ Debt Repayment Obligations. . . . . . . . . . . . . . . . . 15
7. Representations and Warranties of the Investor . . . . . . . . . . . . 15
7.1 Authorization; Binding Agreement. . . . . . . . . . . . . . . . . 15
7.2 Investment Representations. . . . . . . . . . . . . . . . . . . . 15
7.3 Accredited Investor; Residence. . . . . . . . . . . . . . . . . . 15
7.4 Receipt of Information; Restricted Securities . . . . . . . . . . 15
7.5 Investment Experience . . . . . . . . . . . . . . . . . . . . . . 16
8. Survival of Representations and Warranties . . . . . . . . . . . . . . 16
9. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
i
9.1 Indemnification by the Company and ▇▇▇▇▇. . . . . . . . . . . . . 16
9.2 Indemnification by the Investor . . . . . . . . . . . . . . . . . 17
10. Covenants of the Company and ▇▇▇▇▇ . . . . . . . . . . . . . . . . . . 17
10.1 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.2 Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . 17
10.3 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . 18
10.4 Reservation of Shares . . . . . . . . . . . . . . . . . . . . . . 19
10.5 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.6 ▇▇▇▇▇ Debt Repayment Obligations. . . . . . . . . . . . . . . . . 19
10.7 Compliance with Small Business Investment Act . . . . . . . . . . 19
10.8 Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . 19
10.9 Definition of a Qualified Sale. . . . . . . . . . . . . . . . . . 20
11. Restrictions of Transfers. . . . . . . . . . . . . . . . . . . . . . . 20
11.1 Notice of Sale by ▇▇▇▇▇ . . . . . . . . . . . . . . . . . . . . . 20
11.2 Definition of Qualified IPO . . . . . . . . . . . . . . . . . . . 21
11.3 Co-Sale Right . . . . . . . . . . . . . . . . . . . . . . . . . . 21
11.4 Rights of Refusal . . . . . . . . . . . . . . . . . . . . . . . . 21
11.5 Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.6 Right of First Refusal. . . . . . . . . . . . . . . . . . . . . . 22
11.7 Right of First Offer. . . . . . . . . . . . . . . . . . . . . . . 22
11.8 Restrictive Legend. . . . . . . . . . . . . . . . . . . . . . . . 23
11.9 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . 23
12. Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . 24
12.2 Remedy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.3 Diversion of Proceeds . . . . . . . . . . . . . . . . . . . . . . 25
12.4 Loss of ▇▇▇▇▇ . . . . . . . . . . . . . . . . . . . . . . . . . . 25
13. Public Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
14. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
15. Parties in Interest; Assignment . . . . . . . . . . . . . . . . . . . 26
16. Construction; Governing Law. . . . . . . . . . . . . . . . . . . . . . 27
17. Entire Agreement; Amendment and Waiver . . . . . . . . . . . . . . . . 27
18. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
19. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
20. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
21. Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
22. Confidentiality Agreement. . . . . . . . . . . . . . . . . . . . . . . 28
23. Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
24. Rights of the Investor . . . . . . . . . . . . . . . . . . . . . . . . 28
25. Termination Upon a Qualified IPO . . . . . . . . . . . . . . . . . . . 28
ii
SENIOR CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
THIS SENIOR CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is
made and entered into as of the 15th day of September, 1998, by and among RIVER
CITIES CAPITAL GROUP II LIMITED PARTNERSHIP, a Delaware limited partnership (the
"Investor"), DPEC, INC., an Ohio corporation (the "Company"), and ▇▇▇▇▇ ▇.
▇▇▇▇▇ ("▇▇▇▇▇").
WITNESSETH:
The Company desires to sell and issue, and the Investor desires to purchase
and acquire, up to $3,000,000 of shares of the Company's authorized but unissued
Senior Convertible Preferred Stock upon the terms and subject to the conditions
contained herein.
NOW, THEREFORE, in consideration of the mutual covenants, representations
and warranties herein contained, and intending to be legally bound, the Company,
▇▇▇▇▇ and the Investor agree as follows:
1. SALE AND ISSUANCE OF SENIOR CONVERTIBLE PREFERRED STOCK.
1.1 The Company shall adopt and file with the Secretary of State of
Ohio on or before the First Closing (as defined below) the Certificate of
Amendment of Articles of Incorporation in the form attached hereto as EXHIBIT A
(the "Amended Articles"). The Senior Convertible Preferred Stock, no par value
per share (the "Senior Preferred Stock"), will have the rights, preferences and
privileges and restrictions set forth in the Amended Articles.
1.2 Subject to the terms and conditions of this Agreement, at the
First Closing the Investor agrees to purchase from the Company, and the Company
agrees to sell, issue and deliver to the Investor, 5,123 shares of the Senior
Preferred Stock at the price of $390.40 per share resulting in a total purchase
price at the First Closing of $2,000,000.
1.3 Subject to the terms and conditions of this Agreement, the
Company may, at any time after January 1, 1999 and until December 31, 1999,
determine to sell, issue and deliver to the Investor at up to two Subsequent
Closings (as defined below) additional shares of Senior Preferred Stock at a
price per share equal to the quotient of (i) 1.5 times the Company's trailing 12
month revenue determined in accordance with generally accepted accounting
principles ("GAAP")) through the most recently ended calendar month preceding
the Subsequent Closing (subject to verification and possible adjustment by any
subsequent audit(s)) divided by (ii) the fully diluted number of the Company's
shares outstanding (including conversion shares and shares subject to granted
options) at the time of the Subsequent Closing resulting in an additional
aggregate purchase price of up to $1,000,000. The Company is free to issue
additional equity or debt securities to third parties instead of selling
additional shares of Senior Preferred Stock to the Investor, as the Company's
Board of Directors may approve, subject to the Investor's preemptive and
anti-dilution rights provided in this Agreement and the Amended
Articles. The Investor agrees to purchase such additional shares of the Senior
Preferred Stock if the following conditions are satisfied prior to each closing
of such subsequent purchase transactions ("Subsequent Closing"):
1.3.1 the Investor has received, at least 30 days prior to
the Subsequent Closing, a written notice of the date of such Subsequent Closing
and a certified copy of the resolution of the Company's Board of Directors
determining to issue such additional shares of the Senior Preferred Stock to the
Investor; and
1.3.2 in the reasonable judgment of the Investor, the Company
has met at least 85% of each of its projected sales and earnings before interest
and taxes ("EBIT") aggregate targets for, in the case of a Subsequent Closing
occurring on or after August 1, 1999, the preceding trailing 12 month period or,
in the case of a Subsequent Closing occurring prior to August 1, 1999, the
period of time commencing on August 1, 1998, as set forth on SCHEDULE 1.3.2
attached hereto.
1.4 Effective upon the First Closing, the Company shall grant to the
Investor registration rights under the Securities Act of 1933, as amended (the
"Securities Act"), on the terms and subject to the conditions of the
Registration Rights Agreement in the form attached hereto as EXHIBIT B
("Registration Rights Agreement").
2. CLOSINGS. The first closing of the transactions contemplated by this
Agreement (the "First Closing") will occur simultaneously with the execution of
this Agreement and shall take place on or before September 15, 1998, either by
facsimile or at the offices of ▇▇▇▇▇▇▇, Head & ▇▇▇▇▇▇▇, counsel to the Investor,
1900 Fifth Third Center, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, or at such
other time, date, or place as shall be mutually agreed upon by the parties
hereto in writing (the "First Closing Date"); provided, however, that the
deliveries of the purchase price and the certificates evidencing the Senior
Preferred Stock may occur after the First Closing Date but prior to or on
September 15, 1998, or such other date as shall be mutually agreed upon by the
parties hereto in writing (the "Funding Date"). Each Subsequent Closing, if
any, shall take place at the time, date and place specified in the notice given
pursuant to Section 1.3.1 above. No such Subsequent Closing shall take place
after December 31, 1999.
3. CLOSING ITEMS.
3.1 At the First Closing, the Company shall deliver, or cause to be
delivered, the following items:
3.1.1 the Amended Articles as file stamped by the Ohio
Secretary of State;
3.1.2 the Amended and Restated Code of Regulations in the
form attached hereto as EXHIBIT C ("Restated Regulations"), certified as to
their adoption by the Secretary of the Company;
2
3.1.3 the Employment Agreement between the Company and ▇▇▇▇▇
in the form attached hereto as EXHIBIT D, duly executed by the Company and
▇▇▇▇▇;
3.1.4 the Registration Rights Agreement duly executed by the
Company;
3.1.5 the Third Amended and Restated Shareholders Agreement
between the Company, ▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇▇ ("▇▇▇▇▇▇▇▇") in the form attached
hereto as EXHIBIT E duly executed by each of the Company, ▇▇▇▇▇ and Papalios
(the "Shareholders Agreement");
3.1.6 the opinion of Vorys, ▇▇▇▇▇, ▇▇▇▇▇▇▇ and ▇▇▇▇▇ LLP,
counsel to the Company, in the form attached hereto as EXHIBIT F;
3.1.7 resolutions of the Board of Directors and shareholders
of the Company authorizing the execution, delivery and consummation of this
Agreement, the filing of the Amended Articles, the issuance of the shares of
Senior Preferred Stock, the adoption of the Restated Regulations, and the other
matters contemplated hereby, certified as to their due adoption and continued
validity by the Secretary of the Company; and
3.1.8 the completed United States Small Business
Administration ("SBA") Form 480, Form 652 and Parts A and B of Form 1031.
3.2 At the First Closing, the Investor shall deliver, or cause to be
delivered, the Registration Rights Agreement, duly executed by the Investor.
3.3 On the Funding Date, the Company shall deliver, or cause to be
delivered, the following items:
3.3.1 a certificate in the Investor's name representing the
5,123 shares of Senior Preferred Stock that such Investor is purchasing; and
3.3.2 a certificate, in form reasonably acceptable to the
Investor and dated as of the Funding Date, from the Company, duly executed by
the President of the Company and by ▇▇▇▇▇, individually, as follows (but, in the
case of ▇▇▇▇▇, each of the following shall be subject to her reasonable
knowledge): (i) except for changes expressly contemplated by the terms of this
Agreement or approved by the Investor, the representations and warranties of the
Company and ▇▇▇▇▇ contained in this Agreement are true and complete in all
material respects on and as of the Funding Date as if made on and as of that
date; and (ii) the Company and ▇▇▇▇▇ have complied with or performed in all
material respects all terms, covenants and conditions to be complied with or
performed by them on or prior to the Funding Date.
3.4 On the Funding Date, the Investor shall deliver, or cause to be
delivered, the following items:
3.4.1 immediately available funds equal to the purchase price
of $2,000,000; and
3
3.4.2 a certificate, in form reasonably acceptable to the
Company and dated as of the Funding Date, from the Investor, duly executed by
the General Partner of the Investor, as follows: (i) except for changes
expressly contemplated by the terms of this Agreement or approved by the
Company, the representations and warranties of the Investor contained in this
Agreement are true and complete in all material respects on and as of the
Funding Date as if made on and as of that date; and (ii) the Investor has
complied with or performed in all material respects all terms, covenants and
conditions to be complied with or performed by it on or prior to the Funding
Date.
3.5 At each Subsequent Closing, if any, the Company shall deliver, or
cause to be delivered, the following items:
3.5.1 certificates representing the number of shares of
Senior Preferred Stock that the Investor is purchasing as specified in the
notice delivered pursuant to Section 1.3.1 hereof;
3.5.2 a certificate, in form reasonably acceptable to the
Investor and dated as of the Subsequent Closing, from the Company, duly executed
by the President of the Company and by ▇▇▇▇▇, individually, as follows (but, in
the case of ▇▇▇▇▇, each of the following shall be subject to her reasonable
knowledge): (i) except for changes expressly contemplated by the terms of this
Agreement or approved by the Investor, the representations and warranties of the
Company and ▇▇▇▇▇ contained in this Agreement are true and complete in all
material respects on and as of the Subsequent Closing as if made on and as of
that date; and (ii) the Company and ▇▇▇▇▇ have complied with or performed in all
material respects all terms, covenants and conditions to be complied with or
performed by them on or prior to the Subsequent Closing; and
3.5.3 a certificate, in form acceptable to the Investor,
regarding the Company's satisfaction of at least 85% of each of its applicable
projected sales and EBIT aggregate targets for, in the case of a Subsequent
Closing occurring on or after August 1, 1999, the preceding trailing 12 month
period or, in the case of a Subsequent Closing occurring prior to August 1,
1999, the period of time commencing on August 1, 1998, as set forth on SCHEDULE
1.3.2.
3.6 At each Subsequent Closing, if any, the Investor shall deliver,
or cause to be delivered, the following items:
3.6.1 payment of the purchase price in immediately available
funds for the shares of Senior Preferred Stock that the Investor is purchasing;
and
3.6.2 a certificate, in form reasonably acceptable to the
Company and dated as of the Subsequent Closing, from the Investor, duly executed
by the General Partner of the Investor, as follows: (i) except for changes
expressly contemplated by the terms of this Agreement or approved by the
Company, the representations and warranties of the Investor
4
contained in this Agreement are true and complete in all material respects on
and as of the Subsequent Closing as if made on and as of that date; and (ii) the
Investor has complied with or performed in all material respects all terms,
covenants and conditions to be complied with or performed by it on or prior to
the Subsequent Closing.
4. STOCK OPTIONS. Subsequent to the First Closing, senior management,
employees and non-employee directors may be granted options exercisable for up
to an aggregate of 2,000 shares of Common Stock, no par value per share (the
"Common Stock") under the 1998 Stock Option Plan in the form attached hereto as
EXHIBIT G (the "Plan"). Included in such number of options shall be the 345
outstanding "conditional options" previously issued to key employees by the
Company or options granted under the Plan in exchange for such conditional
options; provided, however, that the Company may exchange some or all of the 345
conditional options for options under the Plan. The exercise price per share of
Common Stock covered by an option granted under the Plan shall be not less than
the fair market value per share of the Common Stock at the time of grant. For
purposes of the shares of Common Stock authorized for issuance pursuant to the
Plan, the fair market value of the Common Stock at the time of option grant
shall be determined at least annually by the Board of Directors but shall in no
event be less than 60% of the most recent purchase price per share of the Senior
Preferred Stock on an as converted basis paid by the Investor to the Company.
The number of shares of Common Stock available for issuance under the Plan may
be increased after the first anniversary of the First Closing but in no event
may shares of Common Stock available for issuance under the Plan account for
more than 10% of the fully diluted shares of capital stock of the Company
(including the Senior Preferred Stock on an as converted basis and the shares of
Common Stock issued upon the exercise of outstanding options) without the prior
written consent of the Investor.
5. FURTHER ASSURANCES. Each party shall execute such additional
documents and take such other actions as the other party or parties may
reasonably request to consummate the transactions contemplated hereby and
otherwise as may be necessary to effectively carry out the terms and provisions
of this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND ▇▇▇▇▇. The Company
and ▇▇▇▇▇ hereby represent and warrant to the Investor as of the date hereof; as
of the Funding Date, and as of the date of any additional issuance of Senior
Preferred Stock to the Investor pursuant to a Subsequent Closing as follows;
provided, however, that the following representations and warranties by ▇▇▇▇▇
shall be qualified as to materiality and shall be made subject to her reasonable
knowledge.
6.1 CORPORATE STANDING. The Company is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Ohio. The
Company has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted and
as presently proposed to be conducted and to execute, deliver and perform this
Agreement, the Registration Rights Agreement and any other agreement to which
the Company is a party, the execution and delivery of which is contemplated
hereby (the "Ancillary Agreements"). The Company is duly licensed, authorized
and qualified to do business and is in good standing in all jurisdictions
(domestic or foreign) in which the conduct of
5
its business or the ownership or leasing of its properties requires it to be so
licensed, authorized or qualified, except where its failure to be so licensed,
authorized or qualified would not constitute a Material Adverse Effect. For
purposes of this Agreement, "Material Adverse Effect" means any event or
circumstance or any action taken or omitted to be taken by or on behalf of the
Company which has constituted, or with reasonable certainty will constitute, a
material adverse effect, singly or in the aggregate, on the condition (financial
or otherwise), properties, business, operations or prospects of the Company,
taken as a whole. True and accurate copies of the articles of incorporation
(and all amendments thereto), code of regulations (and all amendments thereto)
and minute book (containing the records of meetings and written consents of the
shareholders, the board of directors and any committees of the board of
directors) of the Company have previously been delivered to legal counsel to the
Investor.
6.2 AUTHORIZATION. The execution and delivery of this Agreement, the
Registration Rights Agreement and any Ancillary Agreement and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company. Each of this
Agreement, the Registration Rights Agreement and any Ancillary Agreement has
been duly executed and delivered by the Company and ▇▇▇▇▇, as applicable, and
constitutes the legal, valid and binding obligation of the Company and ▇▇▇▇▇, as
applicable, enforceable against each of them, as applicable, in accordance with
its terms, except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights generally and (ii) the availability of equitable remedies may be limited
by equitable principles of general applicability.
6.3 CAPITALIZATION. The authorized capital stock of the Company
consists of (i) 60,000 shares of Common Stock of which as of the date hereof
33,737 shares are validly issued and outstanding, fully paid and nonassessable
and 10,000 shares of which have been duly and validly reserved for issuance upon
conversion of the Senior Preferred Stock, and (ii) 10,000 shares of Senior
Preferred Stock, none of which are outstanding as of the date hereof. Except as
set forth on SCHEDULE 6.3 or as contemplated by this Agreement, the Amended
Articles, the Registration Rights Agreement and Ancillary Agreements, there are
outstanding no subscriptions, options, warrants, calls, commitments or rights
(including conversion or preemptive rights and rights of first refusal), proxy
or shareholder agreements or agreements of any character relating to shares of
the Company's capital stock or any instruments that can be converted into shares
of the Company's capital stock. None of the shares of the Company's capital
stock have been issued in violation of any preemptive right. All issuances,
transfers or purchases of the capital stock of the Company have been in
compliance with all applicable agreements and all applicable laws, including
federal and state securities laws, and all taxes thereon, if any, have been
paid. Except as set forth on SCHEDULE 6.3, no former or present holder of any
of the shares of capital stock of the Company has any legally cognizable claim
against the Company or ▇▇▇▇▇ based on any issuance, sale, purchase, redemption
or involvement in any transfer of any shares of capital stock by the Company.
Except as contemplated by this Agreement or as set forth on SCHEDULE 6.3, there
are no contractual obligations of the Company to repurchase, redeem or otherwise
acquire any shares of capital stock of the Company. No bonds, debentures, notes
or other indebtedness having the right to vote (or convertible into or
exercisable for securities having the right to vote) on any matters on which
shareholders of the
6
Company may vote are issued or outstanding. Except for this Agreement and the
Shareholders Agreement, the Company is not a party or subject to any agreement
or understanding, and, to the Company's and ▇▇▇▇▇'▇ best knowledge, there is no
agreement or understanding between any persons that affects or relates to the
voting or giving of written consents with respect to any security or the voting
by any director of the Company.
6.4 VALIDLY ISSUED SHARES. The shares of Senior Preferred Stock to
be issued, sold and delivered in accordance with the terms of this Agreement for
the consideration set out herein, will, upon issuance in accordance with the
terms hereof, be duly and validly issued, fully paid and nonassessable, free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable federal and state securities laws. The issuance
of the Senior Preferred Stock to the Investor pursuant to this Agreement will
comply with all applicable laws, including federal and state securities laws
(assuming the accuracy of the representations set forth in Sections 7.2 through
7.5 hereof), and will not violate the preemptive rights of any person. The
Common Stock issuable upon conversion of the Senior Preferred Stock being
purchased under this Agreement will be, upon issuance and delivery in accordance
with the terms of the Amended Articles, duly and validly issued, fully paid and
nonassessable and free of restrictions on transfer other than restrictions on
transfer under this Agreement and under applicable federal and state securities
laws. The issuance of the Common Stock upon conversion of the Senior Preferred
Stock will comply with all applicable laws, including federal and state
securities laws (assuming the accuracy of the representations set forth in
Sections 7.2 through 7.5 hereof as of the date of issuance of such Common Stock
and of such Senior Preferred Stock), and will not violate the preemptive rights
of any person.
6.5 NO CONFLICT. Except as set forth on SCHEDULE 6.5, the execution
and delivery of this Agreement, the Registration Rights Agreement and any
Ancillary Agreement do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in any
violation of; or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or the loss of a material benefit under, or the creation of a
lien, pledge, security interest, charge or other encumbrance on assets (any such
conflict, violation, default, right of termination, cancellation or
acceleration, loss or creation, a "Violation") pursuant to, any provision of the
Amended Articles or Restated Regulations, or result in any Violation of any
lease, agreement, obligation, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company, ▇▇▇▇▇ or the Company's properties or assets.
6.6 CONTRACTS AND OTHER COMMITMENTS: COMPLIANCE. Except as set forth
on SCHEDULE 6.6 or those which do not constitute a Material Adverse Effect, the
Company is not bound by any judgment, order, writ or decree, written or oral,
absolute or contingent. The Company has made available to the Investor for its
review prior to the date hereof a copy of all written contracts, agreements,
leases, loans, and commitments with a third party to which the Company is a
party (each a "Contract") and the Company has described to the Investor the
terms of any oral Contracts that are material to the condition (financial or
otherwise), properties, business, operations or prospects of the Company taken
as a whole. Except those which do not
7
constitute a Material Adverse Effect, the Company is not in violation or
default of any provision of its Amended Articles or Restated Regulations, any
provision of a written or oral Contract, or any provisions of any other items
listed on SCHEDULE 6.6.
6.7 SUBSIDIARIES. As of the date of this Agreement, the Company does
not own or control, directly or indirectly, any interest in any other
corporation, partnership, limited liability company, association or other
business entity and is not a participant in any joint venture, partnership or
similar arrangement.
6.8 CONSENTS. Except as set forth on SCHEDULE 6.8, no consent,
approval, qualification, order or authorization of, or registration, declaration
or filing with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, or other third
party is required by or with respect to the Company or ▇▇▇▇▇ in connection with
the execution and delivery of this Agreement, or the consummation by the Company
or ▇▇▇▇▇ of the transactions contemplated hereby, which has not already been
obtained, except for notices of sale required to be filed with the Securities
and Exchange Commission under Regulation D of the Securities Act or such post
closing filings as may be required under applicable state securities laws which
will be timely filed within the applicable periods therefor.
6.9 FINANCIAL STATEMENTS. The Company has delivered to the Investor
prior to the date hereof the Company's balance sheet as of July 31, 1998, and
the related statements of income and cash flows for the twelve months ended July
31, 1998, and SCHEDULE 6.9 related thereto (the "Financial Statements"). The
Financial Statements present fairly in all material respects the financial
condition and results of operations of the Company as of such date and the
period indicated and have been prepared in all material respects in accordance
with GAAP consistently applied during such period except for the omission of
footnote disclosures.
6.10 INDEBTEDNESS FOR BORROWED MONEY; NO UNDISCLOSED LIABILITIES.
Except as and to the extent reflected in the Financial Statements or on SCHEDULE
6.10, the Company has no direct or indirect indebtedness for borrowed money,
indebtedness by way of lease-purchase arrangements, guarantees, undertakings,
chattel mortgages or other security arrangements with any bank, financial
institution or other third party. Except as and to the extent reflected and
adequately reserved against in the Financial Statements or on SCHEDULE 6.10, as
of July 31, 1998, the Company had no liability or obligation whatsoever, whether
accrued, absolute, contingent or otherwise, other than liabilities or
obligations which in the aggregate do not exceed $550,000.
6.11 TITLE TO PROPERTY AND ASSETS: LEASES.
6.11.1 SCHEDULE 6.11.1 sets forth a complete and accurate list
and description of all the real property that the Company owns or leases and all
personal property that the Company owns or leases that the Company carries on
its books at a value of greater than $10,000. The Company is not bound or
committed to make any capital improvement or expenditure in excess of $10,000
with respect to any single piece of owned or leased real or personal property.
8
6.11.2 Except as set forth in SCHEDULE 6.11.2, the Company has
good, valid and marketable title to all the personal and mixed, tangible and
intangible properties and assets which it purports to own, free and clear of all
liens, restrictions, claims, charges, security interests, easements or other
encumbrances of any nature whatsoever, except for liens for current taxes not
yet due and payable and except for liens, claims or other encumbrances that do
not constitute a Material Adverse Effect. With respect to the property and
assets that it leases, the Company is in compliance with such leases and holds a
valid leasehold interest free and clear of any liens, claims and encumbrances
except for liens, claims or other encumbrances that do not constitute a Material
Adverse Effect. Except in accordance with a valid license or other agreement
with the Company, all properties and assets of the Company are in the possession
or control of the Company, and no other person is entitled to possession of any
such properties and assets.
6.12 LEGAL PROCEEDINGS. Except as set forth on SCHEDULE 6.12, there
are no claims of any kind or any actions, suits, proceedings, arbitrations or
investigations ("Legal Actions") pending or, to the Company's or ▇▇▇▇▇'▇
knowledge, threatened against or affecting the Company or ▇▇▇▇▇ or against any
asset, interest or right of any of them or which questions the validity of the
transactions contemplated by this Agreement and neither the Company nor ▇▇▇▇▇
know of any facts which may constitute a basis for Legal Actions which would
constitute a Material Adverse Effect.
6.13 ENVIRONMENTAL MATTERS. The Company is not in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety (the "Environmental Laws") except to the extent
that such violation does not constitute a Material Adverse Effect, and as of the
date hereof no material expenditures are required to be made by the Company in
order to comply with any of the Environmental Laws.
6.14 LICENSES AND PERMITS: COMPLIANCE WITH LAWS. Except as set forth
on SCHEDULE 6.14, the Company holds all franchises, permits, licenses,
variances, exemptions, orders and approvals of all governmental entities which
are required for the operation of the Company's business and is in compliance
with the terms thereof; except where the failure to so hold or to be in such
compliance would not constitute a Material Adverse Effect. The Company has
complied with and is not in any default under (and has not been charged with or
received notice with respect to, nor is threatened with or under investigation
with respect to, any charge concerning any violation of any provision of) any
federal, state or local law, regulation, ordinance, rule or order (whether
executive, judicial, legislative or administrative) or any order, writ,
injunction or decree of any court, agency or instrumentality, except where the
failure to be in compliance or where being in default would not constitute a
Material Adverse Effect, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against any of them alleging any failures to comply.
6.15 EMPLOYEE BENEFIT PLANS. Except as set forth on SCHEDULE 6.15,
the Company has no employee benefit plans including any profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other plan, arrangement or
9
understanding (whether or not legally binding) providing benefits to any current
or former employee, officer or director of the Company (collectively, the
"Benefit Plans"), or any employment, consulting, severance, termination or
indemnification agreement, arrangement or understanding between the Company and
any officer, director or employee of the Company. The Company has delivered to
the Investor true, complete and correct copies of each Benefit Plan, or, in the
case of any unwritten Benefit Plans, descriptions thereof. Each Benefit Plan
has been administered in compliance with its terms and all applicable laws
except where the failure to be in compliance would not constitute a Material
Adverse Effect.
6.16 LABOR RELATIONS.
6.16.1 The Company is in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours and occupational safety and health except where
the failure to be in compliance would not constitute a Material Adverse Effect.
6.16.2 There is no unfair labor practice charge or complaint
or any other matter against or involving the Company pending or, to the
Company's or ▇▇▇▇▇'▇ knowledge, threatened against the Company before the
National Labor Relations Board or any court of law.
6.16.3 There is no labor strike, dispute, slowdown or stoppage
actually pending or, to the Company's or ▇▇▇▇▇'▇ knowledge, threatened against
the Company.
6.16.4 The Company is not a party to or bound by any
collective bargaining agreement or any similar labor union arrangement.
6.16.5 There are no charges, investigations, administrative
proceedings or formal complaints of discrimination (including discrimination
based upon sex, age, marital status, race, color, religion, national origin,
sexual preference, disability, handicap or veteran status) pending or, to the
Company's best knowledge, threatened against the Company before the Equal
Employment Opportunity Commission or any federal, state or local agency or
court. There have been no governmental audits of the equal employment
opportunity practices of the Company and, to the Company's best knowledge, no
basis for any such claim of violation exists except where such violation would
not constitute a Material Adverse Effect.
6.16.6 The Company is in compliance with the requirements of
the Americans Wit Disabilities Act except where the failure to be in compliance
would not constitute a Material Adverse Effect.
6.17 INSURANCE. SCHEDULE 6.17 sets forth a list of all insurance
policies, including property, casualty, liability and other insurance maintained
with respect to the assets and business of the Company (the "Company
Insurance"). The Company is not liable for any material retroactive premium
adjustments with respect to any of its insurance policies or bonds. All such
policies and bonds are legal, valid and enforceable and in full force and effect
and the Company is not in breach or default (including with respect to the
payment of premiums or the
10
giving of notices) and no event has occurred which, with notice or the lapse of
time or both, would constitute such a breach or default, or permit termination,
modification or acceleration under the policy. The Company has not received any
notice of premium increases or cancellations with respect to any such policies
and bonds except in the ordinary course of business. The Company and ▇▇▇▇▇
believe the amount and type of the Company Insurance coverage is adequate for
the Company's business and is consistent with good business practice.
6.18 TAX MATTERS. Except as set forth on SCHEDULE 6.18, the Company
has timely filed or caused to be filed all federal, state, foreign and local
income, franchise, gross receipts, payroll, sales; use, withholding, occupancy,
excise, real and personal property, employment and other tax returns, tax
information returns and reports (the "Tax Returns") required to be filed and all
such Tax Returns were correct and complete in all respects, except where the
failure to file or to be correct and complete would not constitute a Material
Adverse Effect. The Company and ▇▇▇▇▇ have paid, or made adequate provisions
for the payment of, all taxes, duties or assessments of any nature whatsoever,
interest payments, penalties and additions (whether or not reflected in the
returns as filed) due and payable (and/or property accruable for all periods
ending on or before the date of this Agreement) to any city, county, state,
foreign country, the United States or any other taxing authority, except where
the failure to pay or make adequate provisions for payment would not constitute
a Material Adverse Effect. There are no security interests on any of the assets
of the Company that arise in connection with any failure (or alleged failure) to
pay timely any tax. The Company has withheld and paid all taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder or other third party,
except where the failure to withhold or pay would not constitute a Material
Adverse Effect. Except as set forth in SCHEDULE 6.18, no deficiencies for any
taxes have been asserted or assessed or, to the knowledge of the Company and
▇▇▇▇▇, proposed against the Company that are not adequately reserved for.
6.19 CHANGES IN CIRCUMSTANCES. Except as set forth in SCHEDULE 6.19
and except for any of the following actions which occur after the First Closing
and are authorized by the Company's Board of Directors, since July 31, 1998
there has not been:
6.19.1 any change in the condition (financial or otherwise),
properties, business, operations or prospects of the Company, or any event or
circumstance, which constitutes a Material Adverse Effect;
6.19.2 any indebtedness, liability or obligation (whether
absolute, accrued, contingent or otherwise and whether due or to become due)
incurred by the Company or any transaction entered into by the Company, other
than in the ordinary course of business and consistent with past practice, or
any guarantee by the Company of any indebtedness, liability or obligation of any
other person;
6.19.3 any declaration, setting aside or payment of any
dividend or other distribution in respect of any of the capital stock or other
securities of the Company other than the minimum amount of distributions
required by the Shareholders Agreement;
11
6.19.4 any obligation, liability, lien or encumbrance paid,
discharged or satisfied by or on behalf of the Company, other than in the
ordinary course of business and consistent with past practice;
6.19.5 any mortgage, lien, pledge, charge or encumbrance
affecting the properties of the Company (except liens for current taxes not yet
due and payable) created, suffered or assumed by or on behalf of the Company in
excess of $50,000;
6.19.6 any sale, transfer or other disposition of any tangible
asset of the Company or any cancellation of any debt or claim owed the Company,
except in the ordinary course of business and consistent with past practice, or
any sale, transfer or other disposition of any of the Company's intangible
properties, assets or rights, except in the ordinary course of business and
consistent with past practice;
6.19.7 any loan made or increased by the Company, including
any loan to any officer, director, employee or agent of the Company or to any
member of their families, except for advances to non-executive officers in the
ordinary course of business;
6.19.8 any action taken or omitted to be taken by or on behalf
of the Company that would cause (after lapse of time, notice or both) the
breach, default or acceleration of any right, contact or other obligation of the
Company except where the breach, default or, acceleration would not constitute a
Material Adverse Effect;
6.19.9 any material change in the compensation arrangement or
agreement with any officer, director, employee or agent of the Company except in
the ordinary course of business and consistent with past practice; or
6.19.10 any agreement or commitment by the Company to do any of
the foregoing.
6.20 PATENTS AND TRADE NAMES, ETC.
6.20.1 SCHEDULE 6.20.1 sets forth a complete list of all trade
names, trademark and service ▇▇▇▇ registrations, common law trademarks,
copyright registrations and copyright applications currently owned by the
Company and a complete list of all works of authorship licensed to the Company
and from which the Company has created a courseware product on the basis of such
license (which, together with any proprietary works of authorship, including
software, owned by the Company for which there is no current copyright
registration or application, are referred to herein as the "Intellectual
Property"). The Company does not own or license any patents. Except as set
forth on SCHEDULE 6.20.1, all of the Intellectual Property is owned by the
Company. SCHEDULE 6.20.1 also indicates whether any of the Intellectual
Property was acquired by assignment to the Company or is used by the Company
under authority of a license. Except as set forth in SCHEDULE 6.20.1, to the
knowledge of the Company and ▇▇▇▇▇, no employees of the Company, past or
present, claim or have claimed any interest in the Intellectual Property and no
basis for such claim exists. ▇▇▇▇▇ hereby acknowledges to and for the benefit
of
12
the Company and the Investor that she claims no independent interest in the
Intellectual Property of the Company or any such intellectual property
previously used in the business of the Company other than by virtue of any
ownership interest she may maintain in the Company.
6.20.2 Except as provided on SCHEDULE 6.20.1, with respect to
the Intellectual Property listed thereon:
6.20.2.1 the Intellectual Property and all rights
appurtenant thereto are free and clear of any and all liens, claims, security
interests and other encumbrances of any nature or kind except for those which do
not constitute a Material Adverse Effect;
6.20.2.2 no prior transfer, sale or assignment has been
made by the Company of any part of any item constituting part of the
Intellectual Property or any rights appurtenant thereto;
6.20.2.3 each item constituting part of the Intellectual
Property which is owned by the Company has been duly registered with, filed in
or issued by, as the case may be, the United States Patent and Trademark Office,
and such registrations, filings and issuances remain in full force and effect,
or is otherwise protected as unregistered under common law principles; and
6.20.2.4 the Intellectual Property constitutes all
intellectual property necessary for the Company to carry on its business as
presently conducted.
6.20.3 Except as set forth on SCHEDULE 6.20.3, there are no
pending or, to the knowledge of the Company and ▇▇▇▇▇, threatened proceedings or
litigation or other adverse claims affecting or with respect to the Intellectual
Property as currently used by the Company. Except as set forth on SCHEDULE
6.20.3, no person or entity is known to be infringing upon the Company's rights
with respect to the Intellectual Property. None of the operations, processes or
products of the Company are known to infringe upon or violate the rights of any
third party and the Company has not received any charge, complaint, claim or
notice alleging any such infringement or violation. The Company has not copied
in violation of the rights of others any proprietary feature of any competitive
product in designing the Company's products. Neither the Company nor ▇▇▇▇▇ has
knowingly misappropriated any trade secrets which are the property of a third
party.
6.20.4 There are no claims pending or, to the knowledge of the
Company and ▇▇▇▇▇, threatened to the effect that any shareholder, director,
employee or agent of the Company has, in respect of his or her activities to
date, violated any terms or conditions of any written or oral Contract, or
disclosed or utilized any trade secrets or proprietary information or
documentation of such third party, or interfered in the employment relationship
between such third party and any of its employees and, to the knowledge of the
Company, no basis for any such action exists except where such actions would not
constitute a Material Adverse Effect.
13
6.21 AFFILIATED TRANSACTIONS. Except as set forth on SCHEDULE 6.21,
to the knowledge of the Company and ▇▇▇▇▇, no affiliate of the Company has any
interest (other than as a non-controlling holder of securities of a
publicly-traded company), either directly or indirectly, in any person (whether
as an employee, officer, director, shareholder, agent, independent contractor,
security holder, creditor, consultant or otherwise) that currently (i) provides
any services or designs, produces and/or sells any products or product lines, or
engages in any activity which is the same, similar to or competitive with any
activity or business in which the Company is now engaged; (ii) is a supplier of,
customer of, creditor of, or has an existing contractual relationship with, the
Company; or (iii) has any direct or indirect interest in any asset or property
used by the Company or any property, real or personal, tangible or intangible,
that is necessary or desirable for the conduct of the business of the Company.
All transactions set forth on SCHEDULE 6.21 were negotiated and entered into on
an arms'-length basis.
6.22 BANK ACCOUNTS. SCHEDULE 6.22 sets forth a complete and accurate
list of each bank or financial institution in which the Company has an account
or safe deposit box (giving the address and account numbers) and the names of
the persons authorized to draw thereon or to have access thereto.
6.23 BROKERS' AND FINDERS' FEES. Except as set forth on SCHEDULE
6.23, neither the Company nor ▇▇▇▇▇ has employed any broker, finder or financial
advisor or incurred any liability for fees or commissions payable to any broker,
finder or financial advisor in connection with the negotiations relating to or
the transactions contemplated by this Agreement.
6.24 REGISTRATION RIGHTS. Except as provided in the Registration
Rights Agreement attached hereto as EXHIBIT B, the Registration Rights Agreement
between the Company, Papalios and ▇▇▇▇▇ dated May 10, 1996, or the Supplement to
Registration Rights Agreement between the Company and ▇▇▇▇ ▇▇▇▇▇▇▇▇ dated July
31, 1996, the Company is presently not under any obligation and has not granted
any rights to register under the Securities Act any of its outstanding
securities or any of its securities that may be subsequently issued.
6.25 SMALL BUSINESS CONCERN. The Company acknowledges that the
Investor is a Federal licensee under the Small Business Investment Act of 1958,
as amended (the "SBIA"). The Company, together with its "affiliates" (as that
term is defined in Title 13, Code of Federal Regulations, Section 121.103), is a
"small business concern" within the meaning of the SBIA, and the regulations
thereunder, including Title 13, Code of Federal Regulations, Section 121.101 ET
SEQ. The information regarding the Company and its affiliates set forth in the
SBA Forms 480, 652 and 1031 delivered at the First Closing is accurate and
complete. The Company does not presently engage in, and it shall not hereafter
engage in, any activities prohibited by the SBIA and the regulations thereunder,
nor shall the Company use, directly or indirectly, the proceeds from the sale of
the Senior Preferred Stock hereunder for any purpose for which a Small Business
Investment Company is prohibited from providing funds by the SBIA and such
regulations thereunder.
6.26 MATERIAL FACTS. To the knowledge of the Company and ▇▇▇▇▇, the
Company has provided the Investor with all the information reasonably available
to the
14
Company that the Investor has requested for deciding whether to purchase the
Senior Preferred Stock. This Agreement and the documents or written statements
furnished by the Company to the Investor in connection with the transactions
contemplated hereby, including the Company's business plan and projections as
set forth on SCHEDULE 6.26, do not contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading, except, with respect to assumptions, projections and
expressions of opinions or predictions contained in the documents or written
materials furnished by the Company, the Company and ▇▇▇▇▇ represent only that
such assumptions, projections and expressions of opinions and predictions were
made in good faith and the Company and ▇▇▇▇▇ believe that there is a reasonable
basis therefor.
6.27 ▇▇▇▇▇ DEBT REPAYMENT OBLIGATIONS. All payments due to date by
▇▇▇▇▇ to Huntington National Bank pursuant to that certain term note in the
original principal amount of $800,000 dated May 10, 1996 and as amended on June
25, 1998, and all payments due to date by the Company to ▇▇▇▇▇ pursuant to that
certain promissory note in the principal amount of $1,000,000 dated May 10,
1996, have been paid in full and when due.
7. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to the Company as of the date hereof, as of the Funding
Date, and as of the date of any additional issuance of Senior Preferred Stock to
the Investor pursuant to a Subsequent Closing, as follows:
7.1 AUTHORIZATION: BINDING AGREEMENT. This Agreement and the
Registration Rights Agreement have been duly authorized, executed and delivered
by the Investor and each constitutes the legal, valid and binding obligation of
the Investor enforceable against it in accordance with its terms; except as (i)
the enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting the enforcement of creditors' rights generally and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
7.2 INVESTMENT REPRESENTATIONS. The Investor is acquiring the Senior
Preferred Stock and the Common Stock issuable upon conversion thereof
(collectively the "Securities") solely for its own account as principal, for
investment purposes only and not with a view to resale or distribution thereof
in whole or in part, and the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the Securities. No
other person has a direct or indirect beneficial interest in the Securities to
be acquired by the Investor hereunder and the Investor does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participation to any third person, with respect to any of the
Securities.
7.3 ACCREDITED INVESTOR; RESIDENCE. The Investor is a resident of
the State of Ohio and is an "accredited investor" as such term is defined under
Regulation D of the Securities Act.
7.4 RECEIPT OF INFORMATION: RESTRICTED SECURITIES. The Investor
acknowledges that the Securities are not being and will not be registered under
the Securities Act or the
15
securities laws of any other jurisdiction in reliance on exemptions thereunder.
Accordingly, each certificate evidencing the Securities shall be imprinted with
the legend set forth in Article FOURTH of the Amended Articles. The Investor
acknowledges that the Securities have not been and will not be approved or
disapproved by the Securities and Exchange Commission or any other governmental
authority or agency of any jurisdiction. The Investor 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 Senior Preferred Stock
and the business, properties, prospects, and financial condition of the Company
and to obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to the Investor or
to which the Investor had access. The Investor's representations under this
Section 7, however, shall not limit or modify the representations and warranties
of the Company and ▇▇▇▇▇ in Section 6 of this Agreement or the right of the
Investor to rely thereon.
7.5 INVESTMENT EXPERIENCE. The Investor is experienced in evaluating
and investing in private placement transactions of securities of companies in a
similar stage of development and acknowledges that it can bear the economic risk
of the Investor's investment and has such knowledge and experience in financial
and business matters that the Investor is capable of evaluating the merits and
risks of the investment in the Securities. The Investor also represents that it
has not been organized for the purpose of acquiring the Senior Preferred Stock.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Agreement by the Company and the Investor and any
certificate or other instrument delivered by or on behalf of such party pursuant
to this Agreement shall survive the First Closing and each Subsequent Closing
and shall continue so long as the Preferred Holders (as defined in Section 15
hereof), individually or in the aggregate, hold capital stock of the Company in
the form of Senior Preferred Stock, Common Stock or a combination thereof equal
to a minimum of 1,000 shares (subject to adjustment for stock splits,
combinations, dividends and other similar events) of Common Stock (a "Minimum
Interest"). All representations and warranties contained in this Agreement by
▇▇▇▇▇ and any certificate or other instrument delivered by or on behalf of ▇▇▇▇▇
shall survive the First Closing and each Subsequent Closing and shall continue
until the second anniversary of the First Closing. Each party shall have the
right to rely on each other party's representations and warranties made herein,
notwithstanding any investigation conducted by such party.
9. INDEMNIFICATION.
9.1 INDEMNIFICATION BY THE COMPANY AND ▇▇▇▇▇. The Company and ▇▇▇▇▇
shall indemnify and reimburse the Investor for any and all claims, losses,
liabilities, damages (including, without limitation, fines, penalties, and
criminal or civil judgments and settlements), costs (including, without
limitation, court costs) and expenses (including, without limitation, reasonable
attorneys' and accountants' fees) (hereinafter "Loss" or "Losses") suffered or
incurred by the Investor or any successors or assigns thereto as a result of or
with respect to:
16
9.1.1 any breach or inaccuracy of any representation or
warranty of the Company or ▇▇▇▇▇ set forth in this Agreement and the Exhibits
hereto;
9.1.2 any breach of or noncompliance by the Company or ▇▇▇▇▇
with any covenant or agreement of the Company or ▇▇▇▇▇ contained in this
Agreement; and
9.1.3 any and all actions, suits, proceedings, claims,
demands, assessments and judgments incident to any of the foregoing.
The obligation of ▇▇▇▇▇ to indemnify and reimburse the Investor
for Losses shall be subordinate to the Company's obligation to indemnify and
reimburse the Investor for Losses and shall be limited in an amount not to
exceed the aggregate purchase price paid to the Company by the Investor for the
Senior Preferred Stock. In the case of any event giving rise to a claim of
indemnification by the Investor, the Investor shall first proceed against the
Company for indemnification and reimbursement and shall exhaust all of the
remedies it may have against the Company before it shall proceed against ▇▇▇▇▇
for indemnification and reimbursement. ▇▇▇▇▇ shall have a right of subrogation
with respect to any amounts paid by ▇▇▇▇▇ pursuant to the provisions of Section
9.1 hereof.
9.2 INDEMNIFICATION BY THE INVESTOR. The Investor shall indemnify
and reimburse the Company and ▇▇▇▇▇ for any and all Losses suffered or incurred
by the Company or ▇▇▇▇▇ or any successors or assigns thereto as a result of, or
with respect to:
9.2.1 any breach or inaccuracy of any representation or
warranty of the Investor set forth in this Agreement and the Exhibits hereto;
9.2.2 any breach of or noncompliance by the Investor with any
covenant or agreement of the Investor contained in this Agreement; and
9.2.3 any and all actions, suits, proceedings, claims,
demands, assessments and judgments incident to any of the foregoing.
10. COVENANTS OF THE COMPANY AND ▇▇▇▇▇.
10.1 INSURANCE. On or prior to the Funding Date, the Company will
have in full force and effect term life insurance on the life of ▇▇▇▇▇ in the
face amount of $2,000,000 naming the Company as loss payee and the Investor as
collateral assignee of the proceeds. Prior to each Subsequent Closing, the
Company will increase the face amount of that policy by, or obtain an additional
policy for, an amount equal to the aggregate purchase price delivered by the
Investor at each such Subsequent Closing, provided that such additional
insurance is obtainable by the Company at a reasonable cost. The Company shall
maintain such insurance for so long as the Preferred Holders hold a Minimum
Interest.
10.2 FINANCIAL REPORTING. For periods commencing on or after the
First Closing Date, the Company shall deliver or cause to be delivered to the
Investor monthly and
17
year-to-date balance sheets and income and cash flow statements (each as
compared to budget and the comparable prior year period), a brief monthly
written summary of operations and such other information and data with respect
to the Company as the Investor may reasonably request. Such monthly reports
shall be provided on or before 15 days following the end of each month. Prior
to the end of each fiscal year, the Company shall provide a business plan and
projections similar to that set forth on SCHEDULE 6.26 for the next fiscal year.
Annual audits of the Company's financial statements for periods commencing on or
after August 1, 1998 shall be performed by Deloitte & Touche or another
independent accounting firm reasonably acceptable to the Investor and copies
thereof shall be delivered to the Investor on or before the 120th day following
the end of the Company's fiscal year.
10.3 BOARD OF DIRECTORS.
10.3.1 The Restated Regulations of the Company provide for a
Board of Directors of five members, subject to increase as provided therein. So
long as the Preferred Holders hold a Minimum Interest and do not possess the
rights set forth in Section 12.2.2 below, ▇▇▇▇▇ and the Investor shall vote
their respective Securities in a manner intended to cause the following
composition of the Board of Directors: the Investor shall designate one
director, ▇▇▇▇▇ and the other holders of Common Stock shall designate three
directors (one of whom must be ▇▇▇▇▇ and, for so long as the Shareholders
Agreement requires Papalios to be elected as a director, one of whom must be
Papalios), and ▇▇▇▇▇ and the other holders of Common Stock shall designate one
director (who must be a non-employee (and not related to an employee)) who must
be reasonably acceptable to the Investor. The initial directors are currently
expected to include Clark, Papalios, ▇▇▇▇ ▇▇▇▇▇▇▇▇ (an employee director
designated by ▇▇▇▇▇ and the other holders of Common Stock), and ▇▇▇▇▇▇ ▇.
▇▇▇▇▇▇ (designated by and related to the Investor). The remaining vacancy on
the five member Board of Directors shall be filled by ▇▇▇▇▇ and the other
holders of Common Stock, with the reasonable acceptance by the Investor, prior
to December 31, 1998.
10.3.2 Pursuant to the Restated Regulations, the holders of a
majority of the voting power of the Company have the right to increase the size
of the Board of Directors to seven members. At such time, for so long as the
Preferred Holders hold a Minimum Interest and do not possess the rights set
forth in Section 12.2.2 below, ▇▇▇▇▇ and the Investor shall vote their
respective Securities in a manner intended to cause the following composition of
the Board of Directors: the Investor shall designate two directors (one of whom
must be unrelated to the Investor), ▇▇▇▇▇ and the other holders of Common Stock
shall designate four directors (one of whom must be ▇▇▇▇▇ and, for so long as
the Shareholders Agreement requires Papalios to be elected as a director, one of
whom must be Papalios, and one of whom shall be a non-employee (and not related
to an employee)) and ▇▇▇▇▇ and the Investor shall jointly designate one director
(who must be a non-employee (and not related to an employee)). The vacancies on
the seven member Board of Directors caused by the increase in the size of the
Board of Directors shall be promptly filled in accordance with this Section
10.3.2.
10.3.3 The Company shall reimburse the directors designated by
the Investor for their reasonable travel expenses incurred in connection with
meetings of the Board
18
of Directors. Pursuant to the Restated Regulations, the Board of Directors
shall also have a Compensation Committee and an Audit Committee, each of which
shall be comprised of three directors. So long as the Preferred Holders hold a
Minimum Interest, ▇▇▇▇▇ and the Investor shall use their best efforts to cause
at least two of the members to be non-employee (and not related to an employee)
directors and one of those two shall be designated by the Investor. The
Compensation Committee shall be responsible for initiating all decisions
regarding the compensation of the directors, executive officers and senior
management of the Company, including, but not limited to, all decisions
regarding salary increases, bonus awards, perquisites and stock option awards.
The Audit Committee shall supervise the annual audit of the Company and
undertake such other responsibilities and duties as the Board of Directors of
the Company may from time to time designate.
10.4 RESERVATION OF SHARES. On or prior to the First Closing Date,
the Company shall reserve and keep reserved at all times sufficient shares of
Common Stock for issuance upon conversion of the Senior Preferred Stock. Upon
conversion of any shares of Senior Preferred Stock, the Company shall promptly
issue and deliver the shares of Common Stock required to be delivered.
10.5 USE OF PROCEEDS. The proceeds from the sale of the Senior
Preferred Stock shall be used by the Company for working capital and/or the
payment of indebtedness.
10.6 ▇▇▇▇▇ DEBT REPAYMENT OBLIGATIONS. ▇▇▇▇▇ shall remain current in
her principal and interest payments to Huntington National Bank in accordance
with that certain term note in the original principal amount of $800,000 dated
May 10, 1996 and amended June 25, 1998, as such indebtedness maybe restructured
and/or refinanced from time to time.
10.7 COMPLIANCE WITH SMALL BUSINESS INVESTMENT ACT. The Company
agrees to provide the Investor with sufficient information to permit the
Investor to comply with its obligations under the SBIA and the regulations
thereunder. Upon reasonable request, the Company shall also provide Investor
with (i) reasonable access to the Company's properties, places of business,
records (including financial records) and offices during normal business hours
and (ii) the opportunity to discuss the affairs, finances and accounts of the
Company with the officers of the Company. Investor and representatives of the
SBA shall be given reasonable access to the Company's records to confirm that
the proceeds received by the Company in connection with the consummation of the
transactions contemplated by this Agreement are used for the purposes set forth
in Section 10.5 hereof. The President of the Company shall certify to the
Investor, within three months of the date of the First Closing Date and from
time to time thereafter, that the Company has used the proceeds in accordance
with the purposes set forth in Section 10.5 hereof.
10.8 NEGATIVE COVENANTS. So long as any Securities are outstanding,
the Company shall not, without the prior written consent of the Investor:
10.8.1 sell a material portion of the Company's assets;
19
10.8.2 merge or sell a controlling interest in the Company
(except in the case of a Qualified Sale (as defined below) and except that the
Company may, without the consent of the Investor, merge with another entity if
the Company (or its subsidiary) is the surviving corporation and the
consideration paid by the Company (or its subsidiary) for the merged entity's
securities is cash);
10.8.3 amend the Amended Articles or the Restated Regulations
in any manner, the Investor's consent to which shall not be unreasonably
withheld;
10.8.4 declare dividends or distributions (other than the
minimum tax distributions required by the Shareholders Agreement) to, and/or
redemptions or repurchases of any securities other than the Senior Preferred
Stock or pursuant to buy-sell agreements between the Company and its employees;
10.8.5 become a party to, modify, amend or restate the terms
of any agreement which restricts or would restrict the rights of the Senior
Preferred Stock; provided, however, that, without restricting or limiting the
Investor's ability to exercise its remedies pursuant to Section 12.2 or any
other section hereof, the Company may enter into credit agreements that restrict
the Company's ability to pay dividends on or repurchase the Securities if such
restrictions are required by the lender;
10.8.6 make any significant change in the fundamental nature
of the Company's business not contemplated in its existing business plan;
10.8.7 create a subsidiary or make an investment in any
entity;
10.8.8 enter into transactions with affiliates other than on
an arms'-length basis and on commercially reasonable terms; or
10.8.9 issue or sell Common Stock without consideration.
10.9 DEFINITION OF A QUALIFIED SALE. A Qualified Sale is a sale
transaction which yields the Investor at least an amount in cash equal to the
greater of: (i) return of the aggregate purchase price of the Senior Preferred
Stock purchased by the Investor from the Company, plus a compounded annual
return of 20% on such amount or (ii) two times the aggregate purchase price of
the Senior Preferred Stock purchased by the Investor from the Company.
11. RESTRICTIONS OF TRANSFERS.
11.1 NOTICE OF SALE BY ▇▇▇▇▇. In the absence of and until a Qualified
IPO (as defined below), ▇▇▇▇▇ shall give written notice to the Investor and the
Company if at any time she desires to sell or transfer any of her shares
("Notice of Sale"). The Notice of Sale shall set forth a description of the
proposed sale or transfer, including the name of the proposed purchaser or
transferee, the number of shares affected, the purchase price or consideration
and any other
20
conditions of the sale or transfer. For a period of ten days following receipt
of such Notice of Sale, the Investor shall have the right to prohibit such sale
or transfer by ▇▇▇▇▇. The Investor shall notify ▇▇▇▇▇ and the Company in
writing within ten days of receipt of the Notice of Sale of its intention to
either allow or prohibit the proposed sale or transfer ("Notice Reply").
11.2 DEFINITION OF QUALIFIED IPO. A Qualified IPO is an initial
public offering which yields net proceeds to the Company of at least $20,000,000
at a price per share indicating a total market equity capitalization
(post-money) of at least $60,000,000.
11.3 CO-SALE RIGHT. If the Investor does not prohibit the proposed
sale or transfer of shares by ▇▇▇▇▇ pursuant to Section 11.1, for a period of 30
days following the Investor's receipt of the Notice of Sale, the Investor shall
have the right to elect to participate in such sale or transfer with ▇▇▇▇▇ (on a
pro rata basis, I.E., if ▇▇▇▇▇ owns 75 shares of Common Stock and the Investor
owns 25 shares of Securities, the Investor may sell one-fourth of the shares
proposed to be sold by ▇▇▇▇▇) on the same terms and conditions and for the price
or consideration designated in the Notice of Sale. Notice of the Investor's
intention to participate in such sale or transfer shall be evidenced by a
writing signed by the Investor and delivered to ▇▇▇▇▇ prior to the end of the
30th day following the Investor's receipt of the Notice of Sale. If the
Investor fails to notify ▇▇▇▇▇ within such 30-day period of its intent to
participate in such sale, its rights under this Section 11.3 shall be waived
with respect to the proposed sale or transfer by ▇▇▇▇▇.
11.4 RIGHTS OF REFUSAL. If the Investor does not prohibit the
proposed sale or transfer of shares by ▇▇▇▇▇ pursuant to Section 11.1, for a
period of 30 days following the Company's receipt of the Notice of Sale, the
Company shall have the right to purchase all but not less than all of the shares
designated in the Notice of Sale on the same terms and conditions and for the
price or consideration designated therein (the "First Right of Refusal"). If
the Company does not exercise its First Right of Refusal, then, for a period of
30 days following the Investor's receipt of notice from the Company of the
Company's decision not to exercise its First Right of Refusal, the Investor
shall have the right to purchase all but not less than all of the shares from
▇▇▇▇▇ on the same terms and conditions and for the price or consideration
designated in the Notice of Sale (the "Second Right of Refusal"). At the sole
option of the Investor, the Company may be permitted to participate with the
Investor in the purchase of the shares pursuant to the Second Right of Refusal
so long as the Investor and the Company together purchase all but not less than
all of the shares.
Notice of the Company's intention to purchase the shares pursuant to its
First Right of Refusal shall be evidenced by a writing signed by the Company and
delivered to ▇▇▇▇▇ prior to the end of the 30th day following the Company's
receipt of the Notice of Sale. Notice of the Investor's intention to purchase
the shares evidenced by its Second Right of Refusal shall be evidenced by a
writing signed by the Investor and delivered to ▇▇▇▇▇ prior to the end of the
30th day following the later of the Investor's receipt of the Notice of Sale or
the Investor's receipt of the notice of the Company's decision not to exercise
its First Right of Refusal.
21
In the event the Investor does not exercise its Second Right of Refusal,
▇▇▇▇▇ shall have the right to sell or transfer the shares designated in the
Notice of Sale on the same terms and conditions and for the price or
consideration designated therein within 60 days from the expiration of the
period during which the Investor had the option to purchase the shares pursuant
to its Second Right of Refusal. After such 60 day period, ▇▇▇▇▇ shall not
transfer ▇▇▇▇▇'▇ shares again without complying with this Section 11.
11.5 EXCEPTIONS. Sections 11.1, 11.3, and 11.4 shall not apply (a) to
any sale or transfer by ▇▇▇▇▇ for estate planning purposes or to her ancestors,
siblings, descendants or spouse, (b) if the Preferred Holders no longer hold a
Minimum Interest, or (c) to sales or transfers of up to 2,000 shares in the
aggregate (subject to adjustment for stock splits, combinations, dividends and
other similar events) to employees of the Company.
11.6 RIGHT OF FIRST REFUSAL. In the absence of and until a Qualified
IPO, if the Investor desires to sell or transfer any of its Securities pursuant
to a bona fide offer, the Investor shall first give notice (the "Notice of
Intent") to the Company. The Notice of Intent shall set forth the terms of the
bona fide offer, including the name(s) of the proposed transferee(s), the type
and number of securities proposed to be transferred and the price or
consideration for the securities proposed to be transferred.
For a period of 30 days following receipt of such Notice of Intent, the
Company shall have the right to purchase all (but not less than all) of the
Securities designated in the Notice of Intent on the same terms and conditions
and for the price or consideration designated therein. Notice of the Company's
intention to purchase such Securities shall be evidenced by a writing signed by
the Company and delivered to the Investor prior to the end of the 30th day
following the Company's receipt of the Notice of Intent.
In the event the Company does not exercise its Right of First Refusal, the
Investor shall have the right to sell or transfer the Securities designated in
the Notice of Intent on the same terms and conditions and for the price or
consideration and to the proposed transferee designated therein within 60 days
from the expiration of the period during which the Company had the option to
purchase such Securities. Notwithstanding the foregoing, the Investor may not
transfer any Securities pursuant to this Section 11.6 to those persons
competitive with the Company which are described on SCHEDULE 11.6 without the
consent of the Company. This Section 11.6 shall not apply to any distribution
in kind by the Investor to its partners or shareholders pursuant to Section 15.
11.7 RIGHT OF FIRST OFFER. In the absence of and until a Qualified
IPO, if the Investor desires to sell or transfer any of its Securities (except
pursuant to a bona fide offer received by the Investor in accordance with
Section 11.6), the Investor shall first give a Notice of Intent to the Company.
The Notice of Intent shall set forth the number of shares of Securities which
the Investor desires to sell.
For a period of 30 days following receipt of such Notice of Intent, the
Company shall have the right to negotiate a transaction with the Investor
whereby the Company will purchase
22
for cash all (but not less than all) of the Securities designated in the Notice
of Intent at a price and upon other terms and conditions acceptable to the
Investor and the Company. Any such purchase shall be consummated on or prior to
the 60th day after the Company's receipt of the Notice of Intent.
If (a) the Company elects not to exercise the right provided in this
Section 11.7, (b) the Company and the Investor cannot agree on the terms and
conditions of a purchase by the Company during such 30 day period, or (c) the
Company and the Investor shall agree on the terms and conditions of such
purchase but the Company shall fail to pay the purchase price in a timely
manner, then the Investor may sell the Securities designated in the Notice of
Intent at a price and on terms not more favorable to the purchaser than the
price and terms offered to the Company. The Investor may sell such Securities
during the period ending on the 150th day following the later of the end of such
30 day period and the date on which the Company fails to pay such price. If the
Investor does not sell such Securities in such 150 day period, the Securities
shall again be subject to this Section 11.7. This Section 11.7 shall not apply
to any distribution in kind by the Investor to its partners or shareholders
pursuant to Section 15. Notwithstanding the foregoing, the Investor may not
transfer any Securities pursuant to this Section 11.7 to those persons
competitive with the Company which are described on SCHEDULE 11.6 without the
consent of the Company.
11.8 RESTRICTIVE LEGEND. The share certificates evidencing the shares
subject to the foregoing provisions of this Section 11 shall bear appropriate
legends referring to the restrictions on transfer.
11.9 PREEMPTIVE RIGHTS. In the absence of and until a Qualified IPO,
the Investor shall have the right of first refusal to purchase all or part of
its pro rata share (equal to its percentage ownership of the Company on a fully
diluted basis) of New Securities (as defined below) that the Company may, from
time to time, propose to sell and issue, subject to the terms and conditions set
forth below. "New Securities" shall mean any capital stock of the Company
whether now authorized or not, and rights, options, or warrants to purchase
capital stock, and securities of any type whatsoever that are, or may become,
convertible into capital stock, provided, however, that the term "New
Securities" does not include (i) the Senior Preferred Stock issuable under this
Agreement or the shares of Common Stock issuable upon conversion of the Senior
Preferred Stock; (ii) securities issued pursuant to an acquisition; (iii)
options granted or securities issued pursuant to an employee or director stock
option program; or (iv) securities issued as a result of any stock split, stock
dividend, or reclassification of Common Stock, distributable on a pro rata basis
to all holders of Common Stock. In the event the Company intends to issue New
Securities, it shall give written notice to the Investor ("Notice of Issuance")
which shall set forth the purchase price and any other conditions of the
issuance. The Investor shall have 30 days from the date of Notice of Issuance
to agree to purchase all or part of its pro rata share of such New Securities
for the price and upon the general terms and conditions specified in the Notice
of Issuance by giving written notice to the Company stating the quantity of New
Securities to be so purchased.
23
The Company shall have the right during the period expiring 150 days after
the giving of the Notice of Issuance to sell any or all of such New Securities
not purchased by the Investor at a price and upon general terms no more
favorable to the purchasers than specified in the Notice of Issuance. In the
event that the Company has not sold such New Securities within such 150 day
period, the Company shall not thereafter issue or sell any New Securities
without first offering such New Securities to the Investor in the manner
provided in this Section 11.9.
12. DEFAULT
12.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default":
12.1.1 a material breach of any representation, warranty or
covenant of the Company or ▇▇▇▇▇ contained herein or in the exhibits hereto;
12.1.2 any default in the performance by the Company or ▇▇▇▇▇
of any other material term of this Agreement or a declared event of default
under any loan agreement or financing agreement to which the Company is a party
(following any applicable cure period contained in such loan agreement or
financing agreement);
12.1.3 the adjudication of the insolvency of the Company or
the filing by or against the Company of any proceedings in bankruptcy,
reorganization or receivership (unless such proceedings are stayed or
dismissed), any assignment by the Company for the benefit of creditors or the
exercise of control rights by any secured lender of the Company; or
12.1.4 the failure of the Company to redeem or repurchase the
Investor's Senior Preferred Stock or converted shares in accordance with the
terms of this Agreement and the Amended Articles.
12.2 REMEDY. Upon the occurrence of any Event of Default, the
Investor may, at its option, elect either of the following rights and remedies:
12.2.1 require the Company to redeem all but not less than all
of the Senior Preferred Stock (including repurchase of conversion stock) at a
price equal to the greater of (i) the aggregate purchase price paid by the
Investor at the First Closing and any Subsequent Closing, plus any accrued and
unpaid dividends or (ii) the Fair Market Value (as defined below) thereof,
including any accrued and unpaid dividends; or
12.2.2 as authorized by the Amended Articles, the holders of the
shares of Preferred Stock shall have the right to elect a majority of the Board
of Directors of the Company and to vote two thirds (2/3) of the combined voting
power within the Company until the Event of Default is cured, and such majority
of the Board of Directors may vote to require the Company to redeem the
Securities in accordance with Section 12.2.1 above.
24
The "Fair Market Value" per share shall take into account the
liquidation preference of the Senior Preferred Stock provided in the Amended
Articles but not any discount for lack of marketability or for the minority
interest and shall be determined by a qualified, independent appraiser
experienced in valuation of shares of companies similar to the Company (the
"Qualified Appraiser") acceptable to both the Company (with the decision of the
Company being exercised by a majority of the directors who were not designated
by the Investor) and the Investor. If the Investor and the Company are unable
to agree upon a Qualified Appraiser, each of them shall separately designate a
person and those two persons shall jointly designate a Qualified Appraiser. The
Qualified Appraiser's determination of the Fair Market Value of the Securities
shall be conclusive and binding upon the parties. The fees and expenses of the
Qualified Appraiser shall be borne one-half by the Investor and one-half by the
Company.
12.3 DIVERSION OF PROCEEDS. In addition, any diversion by the Company
of the proceeds hereunder from the Use of Proceeds as set forth in Section 10.5
hereof shall constitute a default requiring the immediate redemption of the
Investor's interest in the Company and full refund of the purchase price, plus
interest at 14% per annum.
12.4 LOSS OF ▇▇▇▇▇. In addition, so long as the Preferred Holders
hold a Minimum Interest, in the event of the death, permanent disability or
termination of full time employment of ▇▇▇▇▇, except for a termination by the
Company other than for "cause" or a termination by ▇▇▇▇▇ for "good reason" (as
those terms are defined in the Employment Agreement between ▇▇▇▇▇ and the
Company), upon six months written notice to the Company, the Investor may
require the Company to redeem all but not less than all of the Senior Preferred
Stock (including the conversion stock) for the higher of (i) original aggregate
purchase price of the Senior Preferred Stock plus any accrued and unpaid
dividends or (ii) Fair Market Value of the Securities, as determined in
accordance with Section 12.2. Permanent disability shall occur whenever ▇▇▇▇▇,
due to ill health, physical or mental disability for a period of 180 consecutive
working days, is unable or otherwise fails to perform the essential functions of
her job. If the Investor and the Company are unable to agree as to whether
▇▇▇▇▇ is permanently disabled, the question of permanent disability shall be
submitted to three physicians, one of whom shall be appointed by the Investor,
one of whom shall be appointed by ▇▇▇▇▇'▇ representative and one of whom shall
be appointed by the first two appointed physicians. The decision of any two of
the three physicians shall be final and binding. If the question of permanent
disability is raised, ▇▇▇▇▇ shall submit to a medical examination by such
physicians and the Investor shall have access to the findings of the physicians.
13. PUBLIC STATEMENTS. Neither the Company, ▇▇▇▇▇ nor the Investor shall,
without the prior written approval of the other parties hereto, make any press
release or other public announcement concerning the transactions contemplated by
this Agreement, provided, however, that the Investor may issue a "tombstone"
advertisement stating the amount of its investment in the Company. The
Investor, the Company and ▇▇▇▇▇ may disclose additional information with respect
to the transactions contemplated hereby to their respective employees, agents,
consultants and third parties only to the extent such persons have a need to
know such information.
25
14. NOTICES. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be mailed by first class,
registered, or certified mail, postage prepaid, or sent via overnight courier
service, or delivered personally:
If to the Investor, to: River Cities Capital Group II Limited
Partnership
ATTN: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
With a copy to: ▇▇▇▇▇▇▇, Head & ▇▇▇▇▇▇▇
ATTN: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
If to the Company or
▇▇▇▇▇, to: DPEC, Inc.
ATTN: ▇▇▇▇▇ ▇. ▇▇▇▇▇
Building 3
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
With a copy to: Vorys, ▇▇▇▇▇, ▇▇▇▇▇▇▇ and ▇▇▇▇▇ LLP
ATTN: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
▇▇ ▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
or to such other address of which the addressee shall have notified the sender
in writing. Notices mailed in accordance with this section shall be deemed
given when mailed, and notices sent by overnight courier service shall be deemed
given when placed in the hands of a representative of such service.
15. PARTIES IN INTEREST; ASSIGNMENT. Except as otherwise provided herein,
all covenants and agreements contained in this Agreement by or on behalf of any
of the parties to this Agreement shall bind and inure to the benefit of their
respective heirs, executors, successors, and permitted assigns, whether so
expressed or not. Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto and their respective
successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement. This Agreement and the rights
and obligations under this Agreement are not assignable and any purported
assignment shall be null and void, provided that, subject to the provisions of
Sections 11.6 and 11.7, prior to the termination of the Investor's fund and the
resulting distribution in kind by the Investor to its partners or shareholders,
the Investor may assign its rights and obligations under this Agreement to River
Cities Capital Fund II Limited Partnership and/or a maximum of two unrelated
assignees, and, upon the termination of the Investor's fund and the resulting
distribution in kind by the Investor to its partners or
26
shareholders, the Investor may assign its rights and obligations under this
Agreement to any and all of its partners or shareholders (all of such permitted
assignees being collectively referred to as 'the "Preferred Holders").
Notwithstanding such permitted assignment, the Investor shall not be released
from its obligations hereunder.
16. CONSTRUCTION; GOVERNING LAW. The section headings contained in this
Agreement are inserted as a matter of convenience and shall not affect in any
way the construction of the terms of this Agreement. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of Ohio as
applied to agreements entered into and performed entirely within Ohio. The
parties agree that any actions brought in connection with this Agreement or the
transactions contemplated hereby shall be filed and heard in ▇▇▇▇▇▇▇▇ County,
Ohio, and each party submits to the jurisdiction of the Court of Common Pleas of
▇▇▇▇▇▇▇▇ County, Ohio, and to the United States District Court for the Southern
District of Ohio.
17. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement, including the
Schedules and Exhibits hereto, constitutes and contains the entire agreement
between the parties hereto with respect to the transactions contemplated hereby
and supersedes any prior writing by the parties. 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
Investor (or the holders of a majority of the shares of Senior Preferred Stock
then outstanding, as provided in Section 24 hereof, as the case may be). Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon the Investor, each other holder of any Securities purchased under this
Agreement at the time outstanding (including Securities into which such
Securities have been converted), each future holder of any such Securities,
▇▇▇▇▇ and the Company.
18. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions.
19. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same agreement.
20. EXPENSES. The Company agrees, upon consummation of the transactions
contemplated by this Agreement, to pay, against receipt of the documentation
therefor in reasonable detail, all reasonable legal and out-of-pocket expenses
incurred by the Investor in connection with this Agreement and the transactions
contemplated hereunder, including, without limitation, all fees and expenses of
legal counsel, accountants and other advisers engaged by the Investor in
connection with this Agreement and the transactions contemplated hereunder. The
aggregate obligation of the Company under this Section 20 shall not exceed
$40,000.
21. TIME OF ESSENCE. Time is of the essence to the performance of the
obligations set forth in this Agreement.
27
22. CONFIDENTIALITY AGREEMENT. At the request of the Company, the
Investor and any subsequent holder of the Senior Preferred Stock or the
conversion stock shall execute and deliver to the Company a confidentiality
letter in a form reasonably acceptable to the Investor.
23. ATTORNEYS' FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the Registration Rights
Agreement, any Ancillary Agreement or the Amended Articles, the prevailing party
shall be entitled to reasonable attorneys' fees, costs, and disbursements in
addition to any other relief to which such party may be entitled.
24. RIGHTS OF THE INVESTOR. The Investor, until the Investor has
transferred any Securities, and the holders of a majority of the shares of
Senior Preferred Stock then outstanding, after the Investor has transferred any
Securities, shall have the absolute right to exercise or refrain from exercising
any rights that the Investor may have by reason of this Agreement or any Senior
Preferred Stock including without limitation the right to consent to the waiver
of any obligation of Company under this Agreement and to enter into an agreement
with Company for the purpose of modifying this Agreement or any agreement
effecting any such modification, and shall not incur any liability to any other
holder or holders of Securities with respect to exercising or refraining from
exercising any such rights and all other holders of Securities shall be bound by
such exercising or refraining from exercising any such rights.
25. TERMINATION UPON A QUALIFIED IPO. Notwithstanding anything to the
contrary contained in this Agreement, this Agreement shall terminate upon the
closing of a Qualified IPO.
28
IN WITNESS WHEREOF, the Company, ▇▇▇▇▇ and the Investor have caused this
Agreement to be executed as of the day and year first above written.
INVESTOR
RIVER CITIES CAPITAL GROUP II
LIMITED PARTNERSHIP
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, President of ▇▇▇▇▇▇ ▇▇, Inc.,
The General Partner of River Cities Management
II Limited Partnership, the General Partner of River
Cities Capital Group II Limited Partnership
Address: Suite 2250
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
COMPANY
DPEC, INC.
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇, President
------------------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇, President
Address: ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇
----------------------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇
Address: ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
29